Cryptocurrencies

China Is Tightening Its Grip On Cryptocurrency To Promote Rather Than Purge It

China’s financial technology entrepreneurs keep trying new things with cryptocurrency, meaning border-less digital assets not backed by any country’s monetary authority. For instance, one businessman in Shanghai created an open software system to build an exchange for cryptocurrency trades. But the Chinese government keeps taking action against crypto operations, too. The latest: In mid-April police in Shanghai stopped an event for blockchain entrepreneurs, people who are trying to do more with cryptocurrency’s digital transaction ledger.

Expect these ups and downs to go on for awhile. The country with a managed $12 trillion-plus economy throttled potentially destabilizing capital outflows just over a year ago. It’s keen to keep the control it has today. But China also sees advantages in allowing crypto to develop in a manageable way,  analysts who follow China say.

“Without government’s control, cryptocurrency could become instruments for drug dealing, capital outflow, terrorists and other illegal activities,” says Felix Yang, an analyst with the financial advisory firm Kapronasia in Shanghai. But, he says, “the Chinese government is not reluctant about the development of blockchain or cryptocurrency under one condition — if it is manageable.”

Signs of tougher crypto rules

Chinese authorities last year banned Initial Coin Offerings (ICOs) as fundraising tools as well as some types of cryptocurrency exchange, according to this industry media report. In January they took an axe to peer-to-peer and over-the-counter trading networks. A month later it banned offshore exchanges of cryptocurrency.

These moves and maybe more to come would let Beijing’s monetary authority the People’s Bank of China give investors more security and add safeguards against “speculative investment products,” says Lance Morginn, CEO of the cryptocurrency tracking firm Blockchain Intelligence Group.

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China also wants to stop any renewal of the mass capital outflows. Moving assets offshore shelters them from legal detection or any volatility in China’s capital markets. Policymakers in Beijing worry that capital flight would devalue the yuan currency and undermine economic stability that depends on a strong foreign exchange reserve.

Widespread investment in cryptocurrency could pose risks to the yuan, a finance institute under the People’s Bank of China says, as cited in this Bitcoin.com industry news report.

Hints of an eventual welcome for cryptocurrency

But the monetary authority intends ultimately to expand research and development of cryptocurrency in China, the Bitcoin.com report says. The authority’s finance institute calls cryptocurrency a top priority for 2018. When China announces priorities, it almost always acts on them.

The government wants to improve blockchain technology behind cryptocurrency and may be keen to use digital currency in its monetary policy, Yang says.

An ATM machine for digital currency Bitcoin is seen in Hong Kong on December 18, 2017. (ANTHONY WALLACE/AFP/Getty Images)

While reports of shutdowns have flowed from China since late 2017, a lot more crypto-linked businesses are probably carrying on. Earlier this month the local government-backed Xiong’An Global Blockchain Innovation Fund, for example, began offering $1.6 billion to Chinese blockchain startups.

“China’s central bank has acknowledged the inevitability of digital currency and the likelihood that it will eventually replace coins and paper money,” Morginn says.

Another possibility: China wants its own stake in cryptocurrency.

China will get “tougher in that they want it to be in their own hands, they want to control it,” says Jason Hsu, a Taiwanese legislator who follows crypto policies around Asia and wants to liberalize it in Taiwan. “They’re likely to have some sort of chain built by the country and run by the government.”

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