Bitcoin – the world’s largest cryptocurrency- has become embroiled in a burgeoning currency war. Chinese traders have reportedly been discovered utilizing the blockchain money in order to bypass the remnants of the once-stringent capital controls designed to prevent capital-flight from the chaotic Far-Eastern economy.
Chinese authorities have began to investigate the largest three Bitcoin exchanges in China, supposedly in reaction to tip-offs regarding money laundering offences. The value of Bitcoin, designed by an anonymous programmer under the pseudonym Satoshi Nakamoto, immediately fell by 16% after the news broke to the Chinese press.
The assault on bitcoin is the final step of the CPC’s sequence of drastic measures to ensure that the price of Yuan doesn’t fall drastically. Research analysts were first instructed to refrain from publishing negative stories about the currency, and limits on banks’ currency volumes were placed in the wealthiest Chinese provinces.
Xi Jinping announced at the World Economic Forum in Davos today that any depreciation of the Yuan is out of the question. Although no longer rigidly pegged to the dollar, trading the Chinese currency is regulated to very tight bands (a daily limit of 1% on the dollar). Bitcoin is traded as a commodity rather than a currency in China and as a result manages to bypass the archaic regulations.
Bitcoin enables anonymous and decentralized transactions between two parties; it’s popularity in a country with draconian economic controls is easy to comprehend. Crucially, it rose by a whopping 125% in 2016, and with Yuan comparatively falling by 7% in that same year, Chinese capital either flooded out of the country via the cryptocurrency, or changed hands in untaxed untrackable proceedings – often over the Dark Net.
The virtual currency is entirely administered outside of any central authority – transactions are ‘mined’ on to a public ledger that records the value of the contents of an account (or ‘wallet’). This presents a stark contrast to the fiat currency that Chinese financiers are used to, of which is ruled-over by the People’s Bank of China with an iron fist. The PBOC created the ‘Macro Prudential Assessment system’ in 2016 which allows the central bank to oversee bonds, equities and off-balance sheet assets held by commercial banks.
Soon after the assessment against the exchanges was announced, margin trading immediately ceased from OKCoin, Huobi and BTCC, the three largest brokers in China. Margin (or leveraged) trading of Bitcoin was very common among individual low-capital investors as it enables a greater exposure (and also risk) to the currency for those with lower investments. Although the exchanges have since reopened a severely limited form of margin trading, many have suggested that this move by the PBOC reveals its true intentions to stifle small-scale cross-border capital movements rather than regulate fraudulent aspects of the industry.
After taking an initial beating, Bitcoin has shown resilience to the Chinese crackdown, finally rising by 6%. Despite this optimism, the payment system that commits itself to representing the ‘democratization of money’ has met a powerful enemy in the Chinese financial administration.
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