Why China Fears Bitcoin

China Has A Good Reason To Crack Down On Bitcoin


The price of Bitcoin has been getting clobbered over the last day as China continues to crack down on its use.

The latest huge blow is that Bitcoin exchange BTC China announced that due to regulatory issues it could no longer accept deposits in Renminbi (the Chinese currency) which is a huge problem to say the least. Interestingly, BTC China had just raised $5 million in venture money back in November, so that is very bad timing.

But this isn't the first time China has cracked down on bitcoins either. Earlier this month, the People's Bank of China told financial institutions not to accept bitcoins as legal tender.

At the time it said, "the warning is aimed at protecting the property rights of the public, safeguarding the Renminbi status as a fiat currency, preventing money laundering, and maintaining financial stability in China," according to Xinhua.

So why would China want to crack down on Bitcoin? Simple: capital controls.

China tightly regulates all the money flowing in and out of the country. You can't just bring a bunch of cash into the country, in part to prevent people from buying up the local currency (which is generally believed to be deliberately suppressed). And China makes it hard to get money out of the country as well.

There are various ways currently that rich people do get their money out of Chinese banks and out of the borders. One popular way is through Macau. Rich people buy a bunch of gaming chips through seedy "junket operators." Then they go to Macau and gamble a bunch. Then they take what they have left, and exchange their chips into the local Macau currency, at which point they can deposit that money in a Macau bank, and voilà the money is outside of the country.

Bitcoin offered/offers an even quicker way to get your money out of the border. Buy 10,000 yuan work of bitcoins on a site like BTC China, transfer those bitcoins to a wallet outside of the country, and then sell those bitcoins in some new currency in a different country. Voilà, your money is liberated!

Of course there's also the arbitrage play which China isn't too happy about. For a while, Bitcoin was more expensive in dollar terms on BTC China than it was when traded abroad. This made it easy for traders to buy bitcoins using the greenback elsewhere and then selling them on BTC China for a profit.

And remember when China reported a surge in exports in November there was some speculation that fake invoicing was back.

So as long as China is going to restrict the way money flows across the border, there's no way they're going to tolerate bitcoin use in a large scale, since it enables transactions that can't easily be tracked and stopped.

The more interesting question is whether Chinese regulations can actually stop bitcoin usage. Obviously restrictions will make it more difficult to use, but there are going to be all kinds of workarounds, even if financial institutions are prevented from dealing with bitcoin exchanges. The extent to which an even grayer bitcoin market emerges in China will be a big story to watch.