Bitcoin, a virtual stored-value system not regulated by any country or banking authority, has been a huge phenomenon this year and much of the action has been driven out of China.
Nearly 60 per cent of global trading in bitcoin is in the yuan, followed mainly by the US dollar.
There are three major reasons for bitcoin’s popularity in China – it circumvents capital controls, which are still strict; China dominates the “algorithm mining market”, which introduces new bitcoins to the system; and it is a very attractive investment for online traders and speculators.
Massive speculative gains
Those that have timed their entry in the market well have made massive speculative gains in recent months, far surpassing real estate, which used to be the best-performing asset.
Balanced against these attractions are many risks that were realised this month when the People’s Bank of China (PBOC) issued a statement with four ministerial departments. This pointed out that bitcoins are a virtual commodity, not a currency or a virtual currency, so it cannot be used directly or indirectly in currency-related services such as trading, clearing or settlement.
However, the public is allowed to continue trading on the Internet using bitcoins and businesses are also allowed to use them as long as they comply with the usual regulations, the PBOC said.
New regulations require exchanges to apply for a government licence and identify all users by their real names and ID card numbers. They must immediately report any suspicious transaction of virtual goods and cooperate with the central bank’s money laundering investigations.
The value of bitcoins plunged immediately from its high of US$1,147 to $670 in two days – a dramatic illustration of China’s influence on the global market.
Several Chinese institutions – Baidu, China Telecom and a real estate agency – stopped accepting bitcoins. It was unclear whether this was a temporary measure in response to the volatility or a permanent move.
However, the bitcoin market rebounded within a week, almost recovering to earlier levels by mid-month and, at close to $1,000, it was still at a price that was almost tenfold the levels of two months ago.
The growing use of bitcoin is an intriguing story and China is clearly a major player in its development.
With growing interest in the idea of alternative trading platforms, including virtual currencies, China’s experience with bitcoin is useful.
On the one hand, it is amassing a great store of skill and experience with its armies of traders and algorithm miners, and this will give it an advantage when new systems eventually emerge.
On the other, it has taken an important step towards developing a framework that will allow for new types of trading systems while protecting against criminal activities and avoidance of regulatory controls.
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