Last week, an article was published in the Global Times titled “Improved regulation makes more sense than just saying no to Bitcoin in China.” It called for a resumption of Bitcoin trading in a way that would not compromise the security of the financial system. But the reality is that the time has not yet come to resume Bitcoin trading in the country.
The cryptocurrency trading market in China has become associated with chaos since funds were raised illegally under the guise of cryptocurrency transactions in 2016. This led to stringent controls on the activity. On September 4, 2017, the People’s Bank of China (PBC), the country’s central bank, banned fundraising for cryptocurrency ventures via initial coin offerings (ICOs). By April this year, Bitcoin trading platforms had virtually disappeared from the Chinese mainland.
It is still too early for Bitcoin trading to be allowed back, despite the loosening of regulations for cryptocurrencies and ICOs in some countries such as South Korea last month. There are several reasons for this.
First, it can be difficult to track or conduct effective supervision of ICOs. Although there are some similarities between ICOs and IPOs, an ICO is a form of fundraising that bypasses normal regulations. It is based on cryptocurrencies and the transactions can be anonymous and untraceable. Also, most ICO projects are at their initial stages, which means they are not mature enough for normal commercial operations. Information about their legal status, capital and risk control is generally inadequate. Also, since the technology behind it is so innovative and subversive, it is challenging for regulators to make a professional and reasonable assessment about the value and prospects of ICO projects.
Second, levying a tax on cryptocurrencies and ICOs would not be effective. The transactions and trade verifications are conducted on the internet, so the regulatory watchdogs would have trouble tracking the flow of cryptocurrencies, let alone collecting tax on them. So far, there are no regulations for the Bitcoin transfer process in China and digital assets such as cryptocurrencies do not require any registration. Furthermore, cryptocurrencies and ICOs are often used for tax evasion and illegal purposes.
Third, cryptocurrency transactions do not play a positive role in the real economy. For instance, Bitcoin trading exists in a network that is completely independent from the real economy. Unlike stocks, or derivatives that are pegged to certain tangible goods, the value of cryptocurrencies is not related to any tangible assets. Also, they are susceptible to speculation and criminal activities, and pose a threat to economic stability.
There is currently no practical solution for taming and harnessing cryptocurrencies. Getting them onto a rational track and curbing speculation will require more regulations, information disclosure and a law for transfer of digital property. All of this should be done before cryptocurrency trading can be allowed to return.
Even though it is too early for Bitcoin trading to make a comeback, the blockchain technology that supports it can be a helping hand for creating new operating formats, as well as reducing costs and improving payment and settlement efficiency in the financial sector.
Instead of focusing on the reopening of cryptocurrency trading platforms, the main current issue is to pursue a better understanding of the underlying blockchain technology, and to explore its potential applications.
Cryptocurrency trading will be resumed eventually. With the perfection of a regulatory and legal system, along with acceleration of the global economic integration process and a more mature market and investors, cryptocurrencies still have a future in China.