Bitcoin trading recently bounced back to US$7,000, recovering after a historic dip in value following Beijing’s crackdown on cryptocurrencies in September. Bitcoin is both a digital currency and payment system that is managed by decentralized computer networks.
The ten-fold increase in bitcoin’s value over last year reflects a level of market optimism that is puzzling for independent observers. This has not gone unnoticed by the country’s regulators, which recently banned all initial coin offerings (ICOs), or fund raising activities, for new cryptocurrency ventures.
Bitcoin mining in China
Bitcoin was created in 2009 by Satoshi Nakamoto, whose identity remains disputed, as a form of electronic peer-to-peer cash system. Since then, the technology behind the cryptocurrency has become even more sophisticated and secure – its origins after the global recession of 2008 driving its innovation.
Cryptocurrencies, such as bitcoin, operate through blockchain technology: encrypted and linked transaction data that include time stamps. New bitcoins get released through a process called mining – where transactions are verified, and added to the public ledger, known as the blockchain.
To be profitable, cryptocurrency mining requires an advanced degree of computer processing power, making China an ideal base for such operations. China is the world’s leading electricity producer and provides important energy subsidies – bitcoin mining is an electricity-intensive operation.
Bitcoin mines are established through giant warehouses that host thousands of custom-designed computing machines to check transactions and release new bitcoin. This is why China has consistently accounted for over 75 percent of the world’s bitcoin trade, aside from the drop in September.
Bitcoin still popular despite ban
The digital and encrypted structure of bitcoin makes it secure and beyond currency manipulation. Its anonymity also brings it outside the purview of central banks, allowing it to exist independent of state control such as via audits or regulation. These characteristics make it popular among diverse groups of people, including speculators, investors, and entrepreneurs.
Traders, for one, look at returns that are much higher than from speculating on derivatives, commodities, or bonds. An increasing number of China-based investors also appreciate the security of bitcoin as alternative financial assets in a saturated Chinese market. Finally, entrepreneurs are keen on the industrial application of blockchain technology, which forms the basis of bitcoin – across sectors as diverse as logistics and banking to the Internet of Things.
It is no wonder, then, that as regulators made cryptocurrency exchange illegal on the mainland, these operations shifted offshore – to Hong Kong, Singapore, London, and Estonia. Many China-based bitcoin or other cryptocurrency exchanges refused to shut down, choosing instead to move their servers abroad.
Alternately, fund transfers are also taking place through local currency on peer-to-peer lending platforms. It remains to be seen how long these arrangements escape the state crackdown.
Motivation behind crackdown
The sudden ban on cryptocurrency trade and exchange comes as regulators clamp down on the larger malaise of money laundering and financial crimes: dubious loans, trusts, and lending to non-banking institutions, as well as tax evasion. This has led some to feel that bitcoin and its peers are merely the incidental victims of tightening financial regulation.
Nevertheless, as bitcoin has become popular, so have criminal activities begun to emerge around it. Authorities, for instance, point to a high-profile case in China where scammers collected US$1.82 billion through a pyramid scheme advertising a product they described as the next great cryptocurrency.
In addition to combating financing of illicit activities, the crackdown fits into Beijing’s wider goal of reducing structural financial market risks. Because cryptocurrencies function outside of state control, they could pose a risk to these efforts.
Chinese government explores its own alternative, Japan legalizes cryptocurrency
Nevertheless, China’s central bank is equally keen on the secure and encrypted nature of blockchain technology, which fuels cryptocurrencies.
In a strategy similar to the Bank of England, and central banks in Sweden, Canada, Singapore, and India, China, too, is exploring the possibility of creating its own digital currency. To this end, the PBOC set up a Digital Currency Research Institute in May this year, and is looking to recruit experts in encryption, blockchain technology, and big data.
Meanwhile, elsewhere in the region, Japanese regulators have recognized cryptocurrencies as legitimate forms of payments. In September, Japan officially began to license bitcoin exchanges.
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