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May 6, 2014
China

The Big Picture Behind the News of China’s Bitcoin Bans

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  3. The Big Picture Behind the News of China’s Bitcoin Bans
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This is a guest post by Li Runxi translated by Mr Caizhuoiy and provided courtesy of Velaciela Realdos of Yibite Digital Tech.

Plenty of news and rumors have surrounded Bitcoin in China recently. This kind of news has prompted worries among global investors, who are fearful that the attitude of the authorities toward bitcoin has changed or even become negative.

Although the People’s Bank of China (PBOC, China’s central bank) was quick to refute the rumors later, the market is worrying about the next action that the authorities may take. Let’s take a look at the whole picture of what is happening in China regarding Bitcoin.

Rumored Ban of Bitcoin Denied by PBOC

On March 21st, a news story broke out from a self-proclaimed financial media account on Sina Weibo, a popular twitter-like micro-blogging site in China, claiming that the Chinese authorities were going to ban Bitcoin transactions by April 15th. The story was promptly copied by other major news websites in China.

Later that night, the official Sina Weibo account of PBOC released a statement refuting the authenticity of the news. “Reports from the media claiming that PBOC has released an official announcement on March 18th to ban bitcoin transactions by April 15th are untrue. The attitude of PBOC to bitcoin has been clearly stated in the Notice: Prevention of Risks Associated with bitcoin by PBOC and five associated ministries.

Media Claimed that Banks Were to Stop Dealing with Bitcoin Exchanges

After PBOC’s denial of the rumor, Caixin, an influential news agency in China, released a report that the regulatory authority of China required banks to shut down bank accounts of Bitcoin exchanges.

Caixin is famous for its inside information. It has reported several sensitive cases in China exclusively, including the recent high-profile arrests of senior politicians and advanced release of official policies. It is commonly believed by investors that this agency is able to acquire inside information from the Chinese authorities.

The news evoked a strong response in the community. Global investors were worried leading to the intense fluctuation of the market. Regulatory departments and banks were probed, but no positive response was given. Li Xiaoxiao, the journalist from Caixin who wrote the report, guaranteed the authenticity of the report and the reliability of the source in her individual capacity.

Some Banks Closed Accounts of Bitcoin Exchange

One week later, Li Xiaoxiao’s prophecy turned out to be true, at least to a certain extent. Several banks in China, including some large state-owned banks and some local banks, stopped providing services to bitcoin exchanges.

Below are details about banks which have stopped Bitcoin exchanges from using their bank accounts:

ExchangeBankCorporate Account Shut Down?Third Party Payment Shut DownDate to Release StatementDate to Stop Recharges
Btc38CCB, CMBYesYesApril 2nd 2014Midnight April 3rd 2014
FXBTCSeveral commercial banksYesn/aApril 10th 2014Midnight April 3rd 2014
BtcTradeABCYesn/aApril 10th 2014Midnight April 15th 2014
HuobiICBCYesn/aApril 10th 2014April 14th 2014
BTC100Minsheng Banking CorpYesn/aApril 10th 2014Midnight April 10th 2014
BTERn/an/aYesMarch 31st 2014March 31st 2014
nuibtcICBC, CCBYesn/aApril 10th 2014April 11th 2014
OKCoinCMBYesYesApril 11th 2014April 14th 2014
BTCChinaNo information yetn/aYesApril 2nd 2014April 2nd 2014
CHBTCNo information yetn/aYesApril 3rd 2014April 2nd 2014

PBOC Told Third-Party Payment Service Provider to Stop Offering Clearing Services to Bitcoin Exchanges

In the notice released in Dec 5, 2013, PBOC has prohibited financial institutions and third-party payment service providers from offering services to bitcoin exchanges. Those third-party payment service providers refer to PayPal-like online payment companies, which provides an alternative way of payment.

Subsequently, the third-party service providers stopped offering services according to the memo. It is believed that the authority banned the service in the light of problems like money laundering and lack of financial supervision may allow hiding under these third-party payment services.

Stay Away from Supervision?

Although the services were banned from the regulation, some providers didn’t plan to implement the ban, as they obtained considerable transaction fees (amount to 0.2% – 0.3% of the transaction amount) from these services.

Bitcoin exchanges in China later came out with a number of solutions. They issued their own recharge vouchers, which could be sold by another commissioned company, to whom the third-party payment service providers offered clearing service. Investors could then purchase the recharge vouchers from a so-called recharge voucher shop by using the third-party payment services. Such an act was in essence cheating the authority, leading to a possible exacerbation of money laundering. The notice from PBOC previously required bitcoin exchanges to keep the identities of their clients in record for the sake of anti-money-laundering (AML) administration. The recharge vouchers, however, made this regulation dysfunctional, as personal identity was not required during the purchase of the vouchers, making it extremely difficult to trace the source of the money.

The authority soon noticed this problem and banned it again. Two weeks ago, several third-party providers claimed that they received phone calls from the authority, telling them to stop providing clearing services for shops of recharge vouchers.

Governor of PBOC Denied Banning Bitcoin

During the days after some banks stopped providing services to bitcoin exchanges, investors had been nervous. In a high-level economic forum held in China on April 11, however, Mr. Zhou Xiaochuan, the governor of PBOC, expressed his opinion towards bitcoin, declaring that bitcoin wouldn’t be banned. On April 11, Mr. Zhou Xiaochuan attended a sub-forum named the future of central banks in Bo’ao Forum for Asia (BFA) held in Hainan. The BFA is a high-profile platform in the field of Chinese economy, providing opportunities for dialog among senior officials in Chinese government and leaders in the financial industry.

In the forum, Mr. Zhou offered his opinion that it is out of question to ban bitcoin as it was not created by the central bank. He also expressed his concern that bitcoin is more a kind of tradable and collectible asset, such as stamps rather than a payment currency. The market soared in response to his speech.

China’s Attitude Towards Bitcoin has Changed

After the governor’s denial of banning bitcoin, the market saw a rise in price. But the statement didn’t solve those problems faced by bitcoin in China.

The ban issued by PBOC which prevents all the third-party payment service providers to deal with bitcoin business is still valid. Some banks still have a tough attitude towards Bitcoin. Many people still think bitcoin is a scam, over-speculated, high-risky or crime-related.

In the notice released by PBOC last year, it was stated that bitcoin could be legally traded in the form of a commodity. At the same time, bitcoin exchanges were required to register their clients’ ID and add supervision for money-laundering. It was believed that the notice and the following actions admitted bitcoin’s legal status, yet meanwhile prohibited financial institutions and third-party payment services providers from dealing with bitcoin business.

The attitude of the authority has changed since the beginning of this year. Some banks shut down the account of bitcoin exchanges, while recharge code from third-party payment services providers is also banned. At the same time, other officials from PBOC, including some bureau chiefs, wrote essays to criticize bitcoin, claiming that it is not a currency and does not function as a currency.

PBOC Official Who Used to Purchase Bitcoin

Mr. Zhang Niannian, one Chinese central bank official who is also the contact person listed in the notice release by PBOC last December, debated with bitcoin investors online in his individual capacity. He admitted that he has done a long-term research into bitcoin and even traded with bitcoin.

Mr. Zhang said that the bitcoin exchanges in China lack a necessary procedure to make them secured and regulated. Investors may bear a great loss, as what has happened when Mt.Gox went bankrupt. He also commented that bitcoin investors in China lack knowledge and they over-speculate with leverage, making the investment more like a gamble. He concluded that in the end, individual investors should think twice about the risk and trade bitcoin with caution, as he himself was very pessimistic about the future of bitcoin exchanges in China.

Vague Regulatory Policy And Rumors

Generally speaking, the attitude from the authorities is still vague, as they don’t admit the plan to ban bitcoin while essentially restrain bitcoin trading, producing confusion among investors. It is hard for Chinese investors to figure out the intention of the authorities, so they try to make decisions based on inside information and rumors instead.

A similar situation happens in China’s stock market. Due to lack of transparent information and low efficiency in terms of supervision, there is lots of insider trading in this market, where investors tend to believe all kinds of rumors. (Many bitcoin investors in China have trading experience in the stock market.)

While at the same time, investors think the statement from the Chinese authority could not be trusted. In 2007, there was a rumor that China was to raise the stamp tax on stock trading, which was later denied by some officials. One week later, the Ministry of Finance announced that the stamp tax be tripled at 12 o’clock midnight, leading to a great loss from investors.

Since Bitcoin can not be regulated due to its decentralized nature, it challenges the authority of the Chinese government. Many people believe that it is very likely that China is to ban the trading of bitcoin. And since the process of policy making is not transparent, rumors seem to be the only source for information.

Rumors that China is to ban bitcoin won’t be silenced unless they become true.

Investors are Still Passionate

Although the risk of bitcoin being banned is looming at large, the enthusiasm of Chinese investors and enterprises is immense. Driven by great profits, a considerable amount of capital is flowing into this industry. The mining ASIC hardware industry, for example, has grown into a big one. Due to the low cost of mining, this industry in China is profitable, as investors mine bitcoin by producing mining hardware or renting mining power.

Besides ASICminer, the well-known bitcoin mining hardware company, there are other Chinese companies who are also leading the industry in the field of Litecoin ASIC mining. Among them is SFminer.com, a newly-established one, which just released the first Scrypt algorithm chip in the world, making it possible to run the Scrypt algorithm with huge calculating power and low consumption of electric power. The hardware could mine crypto-currencies based on Scrypt algorithm, like Litecoin and DogeCoin, outperforming the current GPU-miners by 100 times. The company has invested multi-million dollars in the R&D, and has obtained orders from bitcoin investors.

Mr. Mao Shixing, the CEO of SFminer, who is also the owner of Discus Fish, the second largest mining pool in the world, is confident about the future of bitcoin. He sticks to the business plan in spite of the current policy risks. He thinks that China is much more open than before. Plus many officials from the authority have an academic background, and expects them to take the global impact into consideration and keeps them from banning the bitcoin trade out of nowhere.

For further information about bitcoin investment in China, visit www.yibite.com, the most professional Chinese bitcoin media.

Feature image used vectors from Aleksandar Mijatovic via shutterstock.