Been here before
Despite all the speculation (including our own), the result of the last week in China is very similar to the experience of Qcoin in China a few years back. Fundamentally, a competitive currency (or whatever you like to call it if you don’t consider bitcoin a currency) came along with the potential for disruption, risk and loss of control, and the People’s Bank of China (PBOC) put the hammer down.
We have talked about Qcoin before. The main difference between the two virtual currencies was the fact that the central bank had the ‘issuing authority’, which in this case was Tencent, to regulate directly. With a company to regulate, the whole process was much more straightforward, and we saw that in the Qcoin regulation from before.
The Qcoin regulation didn’t cover Bitcoin though as it referred to online-gaming virtual currency rather than ‘general’ virtual currency like Bitcoin. As we all know, the China bitcoin regulation is a bit more challenging, so the PBOC focused on Chinese Bitcoin exchanges where fiat money was exchanged for coins. On December 5th, the PBOC put the first stake in the ground with an announcement that financial institutions and 3rd party payment companies were not to do business with Bitcoin exchanges and then reinforced that stake by calling the 3rd party companies in and telling them to stop as soon as possible.
If you haven’t been following the news, although technically the regulations don’t fully kick in until the 31st of January, the result was basically that BTC China and nearly all the rest of the Chinese based exchanges within a couple of days lost any 3rd party payment company cooperation and shortly after that were no longer able to fund or withdraw accounts. This effectively meant that users could move Bitcoin off the Chinese platforms to other platforms or wallets, but moving Chinese Yuan on or off the platform was strictly verboten.
BTCChina was likely one of the most 'regulator-engaged' exchanges out there. Their management team realised the role that the government would play in the future of bitcoin in China, so had previously approached regulators in the hopes of opening a dialogue with them to both educate and hopefully find a sensible way to regulate bitcoin. Although they are the biggest so obviously attract the most regulatory attention, their lack of being able to find a solution is likely a precursor to all the remainder of the exchanges being in very similar positions.
We were in touch with a Chinese bitcoin exchange last week and asked them how they were managing. If you think about the typical exchange (BTCchina, Coinbase, itbit), you go onto the platform and either just pick your bank account or whatever details you need to enter, and then buy/sell the bitcoins - relatively automatic. What this exchange was doing was that you could now login to your Alipay / Tenpay account and send money to an Alipay / Tenpay account associated with the exchange (typically either a personal or their corporate account) and then the money would be credited to your account manually. I would say this is a very 'grey' activity and likely won't continue, but an example of how some exchanges are looking for temporary fixes.
So that’s it then?
I think it may be difficult to call this the end of bitcoin in China and certainly virtual currency as a whole, but certainly a bit of a set-back. The regulators were pretty clear in their stated and unstated actions that they 1. recognize that virtual currency is something that is big enough to warrant attention and 2. that they didn't want to introduce additional systemic risk into the financial industry at this point. China's financial industry, including both banking and capital markets, has changed dramatically over the past year and although a lot has been fixed, there are still challenges. Introducing and allowing a competing currency that the government has little control over was likely a bit much for the industry to handle without having some well-thought out regulation.
We also don't think that we've heard the last from the PBOC on this topic though. Although other countries globally have indicated that bitcoin is not a currency, even if it is a commodity, bitcoin can still achieve many of the global benefits that it was designed to achieve in the space of micropayments, merchant payments, and remittance as examples. For any of those, it doesn't need to be a government-accepted currency, it just needs to have enough people accept it such that there is value.
Mining in China will certainly continue as well. We can't see the government getting that specific in any future regulation, but it's not out of the realm of possibility. Many Chinese mining manufacturers, service providers and private miners have ridden the Bitcoin wave to riches. Although they may have wanted to keep their money in Chinese Yuan, we have heard from other off-shore exchanges, that the number of Chinese customers they are seeing is picking up. So although the small time Bitcoin investor in China might have gotten the short end of the stick, there are many that aren't hugely affected by the regulations beyond the sudden price dip.
Where do we go now?
So if you are a Bitcoin related business and are interested or already in China, what does this mean for you? Well, it is a risky market to say the least. Exchanges and merchants that were once trading in Bitcoin are sometimes using the ‘bartering’ approach saying that they are just exchanging one commodity for another, so not violating the PBOC’s regulations. Whilst this might work in the short term, this is likely not a very long-term solution.
If you have a choice, wait-and-see is definitely the right approach. Bitcoin acceptance and opinions about the currency are solidifying rapidly all around the world and if the US continues on the same track and/or regulates sensibly, there still may be a future for very tailored Bitcoin products or services in the Chinese market, but again, very tailored and very specific. Chinese regulators are not known for reversing course rapidly on any issue and we can’t see them changing their positioning on Bitcoin anytime soon even if global acceptance and usage picks up. So the business models would need to function globally, but with concern for local regulations – challenging to say the least, but not the end.