After several weeks of speculation on the Chinese government’s next move on Bitcoin and cryptocurrencies exchanges, the Chinese authorities have now ordered the closure of all the exchanges operating in the country. Previously, it had been reported that according to China’s National Internet Finance Association (NIFA), the exchanges operating in China have no legal authority to operate cryptocurrencies in the country. None of the cryptocurrency exchanges operating in China have the requisite licenses required for order book exchange.
The exchanges have been ordered to voluntarily wind down their operations and were supposed to stop any new user registrations by September 15th 2017. They were to publish the closing notices outlining the schedule of when they will stop trading of all virtual currencies. Additionally, the regulators have instructed the exchanges to develop and publicize plans on how they intend to allow customer withdrawals in a risk-free manner and how they will ensure that the funds are handled in a manner that protects the interest of investors.
All the major exchanges including BTCC, ViaTBC, Huobi, OkCoin, and Yotbc have already complied with the notice and announced their closure plans. BTCC and ViaTBC will be closing operations on September 30th while Yotbc shall close on September 18th . OkCoin and Huobi will be closing at the end of October.
And the reaction to the news of the closure of the cryptocurrency exchanges was instant and sent shockwaves globally. It saw the Bitcoin struggle around the $3000 region from a high of over $5000 earlier in the month but has since recovered to trade at around $3600 by the time of writing. The Yuan-dominated Bitcoin crashed as much as 35% plummeting from 25,000 Yuan to a low of 16,000 Yuan on September 14th upon confirmation that BTCC was shutting down operations.
The authorities’ latest decision to close down the cryptocurrency exchanges began earlier in the month. They ultimately want to stop all initial coin offerings (ICOs) in a bid to stem fraudulent fundraising, pyramid schemes and speculative investment. Additionally, this closure follows the authorities’ earlier crackdown on the exchanges in February this year which saw them temporarily stop operations as they sought to upgrade their customers’ verification systems to comply with the Anti-money laundering policies of the People’s Bank of China.
But will the latest closure of the cryptocurrency exchanges in China have any long-term implications on the growth and development of this nascent technology? Most analysts believe not. First and foremost, the analysts have observed that the closure is likely to be temporary and all that is needed for exchanges to resume operations is a license. Although no authorities have confirmed or denied this, it is believed that the Chinese regulators are working on a stricter regulatory and licensing regime meant to strengthen the cryptocurrency exchange supervision. These new regulations and licensure requirements are expected to be enforced after the National People’s Congress slated for mid-October. It is during this Congress that the ruling party elects its leaders and, historically, the period leading to the Congress witnesses increased power tripping by the Chinese government.
It is believed that the real reason for the crackdown on the cryptocurrency exchanges is an attempt to put a stop on capitalism. But will these endeavors succeed? With the tightening of regulation in the mainland China, there is a high possibility that the exchange business will shift to Hong Kong. Already, the cryptocurrency and blockchain token exchanges in Hong Kong have reported an increased number of inquiries from the mainland by people who would like to list their tokens in the City’s exchanges. Japan and South Korea are the two neighbors who have the potential to hugely benefit from the crackdown in China since they have more efficient regulations, industry standards and policies.
The increased surge in the number of Chinese clients registering in Hong Kong’s exchanges and the increase in trading volumes in Japanese exchanges is a clear evidence of the historical fact in economics which teaches that capitalists always finds a way. Financial markets exist to channel capital to where it is needed and any regulations which restrict the free flow of capital will eventually die. Additionally, any Chinese citizen traveling outside the country can easily purchase Bitcoin from the thousands of public exchanges operating elsewhere in the globe. No single country can halt the development of the cryptocurrency movement.
Moreover, the closure of the exchanges does not reflect a change in fundamentals of the cryptocurrency technology and applications but rather it is just a market structure drop. The foundation upon which blockchain technology and the cryptocurrencies are built is as solid as it has always been and therefore there is no tangible proof that the closure of such exchanges will impact on the growth of the industry. The value of the blockchain assets such as Bitcoin is not derived from the exchanges but rather it is intrinsic in the technology and the numerous applications to which it is put into use.
In any case, the closure of the exchanges has not classified Bitcoin and other cryptocurrencies as illegal and so their usage in the purchase of goods and services shall continue. According to Bloomberg, the ban on exchange-based cryptocurrency trades will not apply to over-the-counter (OTC) trades. Consequently, it is expected that we are going to witness a surge in broker-based OTC and peer-to-peer trading. This means that although the aggregate cryptocurrency business in the country may be curtailed, it is may not be eliminated completely. Moreover, there will be increased trading conducted solely between cryptocurrencies.
Finally, does the closure of the cryptocurrency affect the Bitcoin and other cryptocurrencies mining business? China is famed for the heavy investments in cryptocurrency mining and some reports estimate that the country’s share of total worldwide hashrate is in the range of 70-72%. According to the announcements put out by BTCC and ViaBTC when announcing the impending closure of their exchange operations, both companies have indicated that their mining pools and cloud mining services remain unaffected by the ban. However, without access to domestic cryptocurrency exchanges, if the ban is extended for prolonged periods or becomes permanent, many of the mining operations may close down and relocated to other countries. In the long-term, such a move would erode China’s leadership in the mining industry but would not affect the business of mining globally.
As seen above, the actions by the Chinese regulatory authorities may not have long-term implications in the blockchain technology and cryptocurrencies. There will be short-term price movements but the fundamentals are still strong and the currencies will rebound.