Cryptocurrencies: The other shoe drops
Following the ban on ICOs — initial coin offerings — announced by the People’s Bank of China last week, rumors that regulators would announce restrictions or a suspension of trade on China’s cryptocurrency exchanges soon circulated. Those rumors appear to have been confirmed as most of China’s large exchanges have either halted trade or have announced that they will, and soon.
The real question is, why? Reuters quotes a former Bank of China president, Li Lihui 李礼辉, saying, “Digital tokens like bitcoin [and] ethereum that are stateless, do not have sovereign endorsement, a qualified issuing body or a country’s trust, are not legal currencies and should not be spoken of as digital currencies. They can become a tool for illegal fund flows and investment deals.”
But money laundering, tax evasion, and unchecked capital outflows are not the only possible reasons for Beijing to worry. One theory relates the bitcoin trading clampdown to North Korea: Pyongyang, after all, is facing increasing difficulties in bringing in fiat currencies, has recently been alleged to have tried to hack South Korean bitcoin mining operations, and has been doing some of its own bitcoin mining. Some theorize that its recent test of a thermonuclear weapon, and its response to this week’s sanction vote — lobbing another missile over Japan — may well have prompted Beijing to try to constrict this loophole.
As a newish asset class, cryptocurrencies are naturally volatile. Worries about Beijing’s bitcoin ban might have spooked some speculators, but the run-up this year has been impressive. It may have ended the week slightly down, but on Friday, as the trading day ended, it had already recovered from the blow dealt by China.