How China's Stifling Bitcoin and Cryptocurrencies: QuickTake

(Bloomberg) -- China, home to the world’s biggest community of Bitcoin miners, is cracking down on cryptocurrency activity. From a halt to virtual currency trading on domestic exchanges to banning initial coin offerings, regulators have taken a proactive role in shaping the stratospheric rise of Bitcoin and its peers. The country’s moves come as President Xi Jinping targets financial risk in the economy following a decade of booms and busts in everything from stocks to real estate. The result: China’s once-dominant role in the world of cryptocurrencies is shrinking.

1. What exactly is China doing?

First it banned initial coin offerings, or ICOs -- the equivalent of initial public offerings for new virtual currencies. Then it called on local exchanges to stop trading in cryptocurrencies and outlined proposals to discourage bitcoin mining -- the energy-intensive computing process that makes transactions with the digital currency possible. It’s also moved to stop Chinese companies listed abroad skirting its domestic ban on ICOs. Officials now intend to block domestic access to online platforms and mobile apps that offer exchange-like services for cryptocurrencies. They’re also targeting platforms that allow investors to trade digital assets on overseas exchanges. Domestic stock exchanges, meanwhile, are scrutinizing companies that promote themselves as blockchain-related to boost their shares. It’s part of a concerted effort by agencies including the central bank, the cyberspace administration and China’s Ministry of Industry and Information Technology.

2. Is Bitcoin trading allowed in China?

Bitcoin and its peers can still be traded, but only in over-the-counter markets, a slower process that some analysts say increases credit risk.

3. Why is China cracking down?

There’s been no explicit explanation, but cleansing risk from financial markets has been a government mantra for more than two years. Among the main concerns is the booming shadow banking sector, a potential source of unregulated loans to speculators in whatever the latest craze happens to be. Digital currencies also provide a way to move money out of China, potentially adding to outflows that officials have aggressively set about stemming. Mark McFarland, chief economist at Union Bancaire Privee SA HK, said the clampdown moves “suggest a longer term process of tightening scrutiny of activities that aren’t in the normal sort of monetary realm.”

4. Is China anti-cryptocurrency?

Hardly. The People’s Bank of China has run trials of its own prototype cryptocurrency, taking it a step closer to being the first major central bank to issue digital money. China’s vision, however, seems to be based more on taking full control of such transactions in contrast to the libertarian aspirations of Bitcoin.

5. What’s the impact of China’s actions?

The moves are reshaping the Bitcoin mining industry and driving up costs. Miners initially flocked to China because of its inexpensive power, local chipmaking factories and cheap labor -- now they may have to look elsewhere. Bitmain, which runs China’s two largest Bitcoin-mining collectives, is setting up regional headquarters in Singapore and now has mining operations in the U.S. and Canada. BTC.Top, the No. 3 mining pool, is also opening a facility in Canada. Bitcoin exchanges and wallet services in the country are also leaving, setting up over-the-counter shops in Hong Kong or looking at operating out of Singapore or South Korea.

6. What about cryptocurrency prices?

At first prices seemed to shrug off news of increased Chinese regulation. But analysts say the rising tide of regulation has weighed on digital currencies, helping to explain heavy losses at the start of 2018.

7. Where else are regulators clamping down?

Notably South Korea, home of the most frenzied cryptocurrency trading. The country is inspecting some banks in a crackdown on related money laundering and is considering closing cryptocurrency exchanges. Officials are also reviewing a possible capital gains tax on crypto-trading in South Korea, where demand is so great that prices are often quoted significantly higher than elsewhere. The U.S. Securities and Exchange Commission late last year started clamping down on some digital token sales.

The Reference Shelf

• A QuickTake on global regulation of digital currencies.
• What central banks say about cryptocurrencies.
• The head of China’s biggest cryptocurrency isn’t concerned.
• Chinese miners will make money if Bitcoin stays above $6,925.
• Inside a Bitcoin miner -- a video.
• What’s an ICO? What are cryptocurrencies?
• The battle for the “true” Bitcoin.
• Trading Bitcoin futures.
• Criminals drop Bitcoin for another virtual currency.

To contact the reporters on this story: Grant Clark in Singapore at gclark@bloomberg.net, Lulu Yilun Chen in Hong Kong at ychen447@bloomberg.net.

To contact the editors responsible for this story: Adriana Arai at aarai1@bloomberg.net, Emma O'Brien

©2018 Bloomberg L.P.