On December 5, 2013, the People’s Bank of China, Ministry of Information Industry, China Banking Regulatory Commission, China Securities Regulatory Commission, and China Insurance Regulatory Commission jointly issued a notice warning citizens about the risks of Bitcoin. The immediate response was a steep drop in the bitcoin price, led by the Chinese exchanges.
The reaction from foreign commentators ranged from panic to measured optimism. Posts on Bitcointalk ranged in title from “China Bans Bitcoin” (a post that has since been deleted), to discussions regarding the extent of the restrictions. Gigaom reports that the government is calling for the registration of all Bitcoin transaction services and their users, Bloomberg declares that China has banned financial companies from Bitcoin transactions, and Reuters adds that while China will act to prevent illegal activities with Bitcoin, individuals remain free to use it.
Rather than providing a full translation of the notice, the five main points are, in summary:
- Bitcoin is not a currency;
- Financial institutions and payment companies may not engage in Bitcoin-related businesses;
- The government will exercise increased oversight of Bitcoin-related websites;
- The government will act to prevent money laundering risks associated with Bitcoin; and
- The public should increase its awareness of and education regarding currencies and investments and their inherent risks.
As with most official government notice in China, the wording establishes the grounds on which the government will place any actions it takes against Bitcoin-related businesses or individuals, but stops short of providing specific guidance. Immediately after the announcement, I saw my social networks and media feeds explode with speculation about what this really means for bitcoin holders as well as startup founders in China. As a Bitcoin entrepreneur in China, here’s my account of the reaction from some members of China’s Bitcoin community.
What does China think?
The notice resulted in panicked selling that caused a precipitous drop in Bitcoin’s price. Nevertheless, steadfast Bitcoin believers (including large holders) in China did not seem perturbed. Many regarded it as inevitable. One commented obliquely that this has “been in the making,” and another is simply gleeful because this announcement is “as positive as it can be given the circumstances.”
A well-regarded Bitcoin expert known online as Baozougongqinwang (his name can only be loosely translated as Rampaging Prince Gong and whose real name is Ming Gong) provided one particularly well-articulated perspective. Prince is a self-proclaimed cross-disciplinary IT and finance professional who has made bitcoin education his full-time “hobby,” and who regularly writes for sites such as 8btc and was recently interviewed by IT Times. According to him, the contents of the notice can be synthesized accordingly (Sina Weibo login required, editorialized version here):
- Bitcoin is not considered a currency in China, but a virtual good. Such goods are legal, and considered personal (private) property.
- As long as citizens are taking full responsibility for the risks involved in such transactions, they may transact freely.
- Banks and all other financial institutions are banned from entering into any sort of Bitcoin-related transactions, in order to prevent systemic risk.
- Bitcoin exchanges can operate legally within certain regulatory confines, including using real-name registration, which means that the government acknowledges the website user’s personal property and is interested in protecting such property. Having a legalized process for opening accounts is equivalent to [the government] acknowledging that Bitcoin is a legal personal property. Using an analogy, if a citizen was to speculate in paper gold, and the bank opens an account for him, this signifies that the gold he has entrusted to the bank’s keeping is his legal asset, and cannot be taken from him by either the bank or other people.
Prince further commented that the decision to not declare Bitcoin as currency is a definite plus for the industry. His logic is that if the cryptocurrency is recognized as a currency, this would trigger all sorts of regulatory hurdles for the nascent startups in the country. For one, they would all have to be registered as financial institutions, a category of doing business with extraordinarily high startup costs.
Regulation a good sign
In designating Bitcoin as a virtual product, Bitcoin businesses have effectively skirted these regulatory hurdles, do not need to apply for “licenses that effectively cannot ever be granted,” and can operate in a much more flexible manner. Indeed, at this moment, a fellow Bitcoin enthusiast, one of the ones I interviewed for this earlier article, joined in and said: “This is actually not unlike what the US has decreed.”
This view is shared by others in the Bitcoin industry who expected regulation to be handed down. Indeed, for the Chinese government to have done nothing would have been the bigger shock. Kevin Pan, my co-founder (and a well-known Bitcoin expert who just this week discussed Bitcoin with an audience of 500 at 3W Coffee, a popular geek hangout in Beijing), viewed the announcement optimistically, seeing the lack of an outright ban as an indication of the government’s willingness to allow Bitcoin to develop, albeit under its watchful eye. He drew an analogy to the early days of the internet, which was also unregulated in the early days, but became increasingly regulated over time, with different rules for different industries.
More factual “interpretative analyses” were provided on various websites. On coin888, a commentator emphasized that in line with item 4, money laundering was specifically pointed out by the government as a key risk associated with Bitcoin. With the possibility of corrupt officials using the cross-border nature of bitcoin as a channel to move their assets offshore, it is a given that the government had to keep a close eye.
The analysis also claims that point 3 regarding the closer monitoring of Bitcoin websites likely means that some sites will be shut down in the near future as the industry is pushed towards higher standards of compliance. It reiterates that the Central Bank is explicitly allowing for citizens to engage in Bitcoin-related transactions, and thus is in no way banning the currency.
So in the aftermath of the first official statement by the Chinese government regarding Bitcoin, the entrepreneurs in China’s Bitcoin industry are optimistic. As is common in China, the actual extent of these regulations will be worked out over time as the Bitcoin industry develops, giving the government room to respond to new threats.
My view is that this notice represents an expected development that encouragingly stops short of more stringent restrictions or an outright ban on Bitcoin’s use, and tomorrow China will still be the biggest potential Bitcoin market in the world.
(Editing by Terence Lee and Vanessa Tan, image credit: Antana)