North Carolina Journal of International Law

"Connecting North Carolina to the World of International Law"

What is Next for Bitcoin and Cryptocurrencies after China’s Ban?

By: Ryan Nichols

 

 

 

 

 

 

 

Earlier this September, China decided to place a “comprehensive ban” on the buying and selling of bitcoin exchanges;[1]  the plan is to close the exchanges by the end of September.[2]  Bitcoin is digital currency, which causes problems for regulators because it prevents them from doing their jobs by erasing the need for banks to move and transfer money.[3]  This essentially prohibits regulators from implementing safeguards on these exchanges.  Currently, “[b]itcoin currency is completely unregulated and completely decentralized.”[4]  Bitcoin, and other cryptocurrencies, “take the power of making money away from central federal banks, and give it to the general public.”[5]  The result of the promulgation of cryptocurrency for China has been that the value of its national currency has plummeted.  This is due to international investors’ preference for the higher yields and lesser regulation that bitcoin and other cryptocurrencies offer[6]  instead of traditional investments that have a positive effect on China’s money supply.[7]  This report will proceed in three parts.  Part I will analyze why the ban makes sense for China.  Part II will discuss the possible effects of the ban.  Finally, Part III will discuss reasons for countries to have a regulatory framework concerning cryptocurrencies in order to provide a more stable market.

Why is the Ban Good for China?

A bitcoin ban makes sense for China because it strengthens the country’s conventional currency by limiting the volatile effects of cryptocurrencies on its markets.[8]  Cryptocurrencies, as with conventional currencies, present governments with the tough tasks of “protect[ing] the public from market manipulation [] and [] ensur[ing] financial stability.”[9]  This ban enables China to do both by focusing on its conventional currency by controlling its banking system, thus limiting volatile effects on its markets by cryptocurrencies.[10]  Cryptocurrencies differ significantly from conventional currencies because they lack regulation from a centralized banking system.[11]  Yet, they still provide viable threats to the financial system, like threatening a bank’s ability “to create money and control the financial system and the economy.”[12]  By banning the use of bitcoin and other cryptocurrency exchanges, China is clamping down on market manipulation by stifling the threat cryptocurrencies present to the stability of their economy.[13]

China’s ban “shows how much of a threat [cryptocurrencies] are perceived to be to financial stability and social order in China.”[14]  Moreover, because China’s currency has plummeted in value, in part because of bitcoin and other cryptocurrencies,[15]  this ban allows China to indicate to the rest of the world that it plans to be a “leading rule maker in [cryptocurrencies, and the ban] will also enhance the importance of [China’s currency] as a global reserve currency.”[16]

What are the International Effects from the Ban?

Besides benefitting China, this ban could provide two positive effects on the overall bitcoin market: (1) more investors and (2) regulation.[17]  Notably, since China is the world’s largest cryptocurrency market, making up around “80 percent of Bitcoin transactions taking place in yuan”,[18]  the implemented ban dropped bitcoin’s price by twenty percent.[19]  China’s decisions going forward will indubitably continue to have profound effects on the overall market.

First, lower prices mean more people can enter the bitcoin market.[20]  This can in turn lead to innovation, competition, and overall security and confidence for the market.  Moreover, as bitcoin is already the world’s most popular cryptocurrency,[21]  it is unlikely that the bitcoin market will collapse completely due to China’s ban.  Quite the opposite, the market has already begun to rebound from the $5,000 to $3,400 drop in price by rising back up to $3,500.[22]  The increase in price in the markets of bitcoin and other cryptocurrencies is determined through means of supply and demand,[23]  in which the price is set, compiled of the value of bitcoin,[24] between buyers and sellers.[25]  Economically, bitcoin has skyrocketed in value because it is scarce, with a cap of bitcoins set at 21 million with around 16.2 million currently in circulation.[26]  Further adding to its value is its utility, because “[t]here is simply no other digital currency that is as widely used and integrated at this point in time.”[27]  Therefore, it is unlikely that China “intend[s] to exit a market with so much potential upside”,[28]  especially because of China’s strong presence in the market.[29]   Given bitcoin’s strong year overall by reaching a record high of $5,000 per bitcoin,[30]  bullish investors could seize the opportunity at the lower price and buy bitcoin with hopes of a strong rebound[31]  because of bitcoin’s strong global presence in top countries such as the United States, Canada, Australia, Belgium, Cyprus, the UK, Switzerland, Italy, the Netherlands, France, Singapore, Japan, and Israel.[32]

Further, China’s ban could benefit bitcoin and other cryptocurrency markets because “[s]trict regulations and impractical policies on bitcoin and cryptocurrency trading will lead to traders in China moving to nearby markets such as Hong Kong, Japan, and South Korea.”[33]  These countries’ cryptocurrency markets are already regulated, and “the shift in trading volumes into Japan, South Korea, and Hong Kong will create a more efficient, organized and stable global bitcoin exchange market.”[34]

In addition to benefitting investors, China’s ban on bitcoin shows some at-home regulations could be forthcoming, which not only could provide a more efficient bitcoin exchange market for the reasons mentioned above, but could also provide clarity for businesses by giving a standard set of rules to follow.  “[R]egulators are starting to provide some clarity, and even if new rules aren’t ideal, they’re better than the uncertainty of potentially inferior regulation.”[35]  This regulatory framework will be able “to ensure [the regulators] have full transparency and oversight of which individuals are trading, how much they can trade, and which cryptocurrencies they are allowed to trade.”[36]

Reasons Needed for Regulatory Framework

The global threat cryptocurrencies are perceived to have to international financial stability is one of the main concerns that led to China’s ban.  Specifically, “the use of cryptocurrencies . . . to perpetrate and disguise fraudulent activity, including money laundering and ponzi type investment schemes[,]”[37]  presents a systemic risk of financial collapse to markets, as well as creating social unrest from fears of potential bubbles and uncertainty in engaging in investments.[38]  Notably, regulation in other countries has already been implemented, or is in the process of being implemented, in order to mitigate and prevent these illegal activities.[39]  For example, the United States Securities and Exchange Commission has decided to treat cryptocurrencies as a security, and as such, cryptocurrencies are now regulated under the nation’s securities laws.[40]  Australia has discussed implementing bills to ramp up their anti-money laundering efforts to provide added security and confidence in cryptocurrencies.[41]  Likewise, India is pursuing a response to multiple cyber-attacks by possibly “banning trade in cryptocurrencies, regulating and taxing it or treating it as a digital asset similar to gold.”[42]  Thus, China, in searching for a regulatory framework to best fit their needs that promotes economic stability and security, can use these countries as examples of how to tackle the regulatory and financial issues presented by bitcoin and other cryptocurrencies.

Conclusion

Despite previous skepticism that regulation on bitcoin and other cryptocurrencies is not possible due to their digital nature that resembles the “Wild West”,[43]  advocates for regulation argue in favor of methods to control cryptocurrencies’ volatility by “smoothing out the crazy turbulence of crypto markets and to bring order . . . sense . . . and governance to the cryptocurrency space.”[44]  Notably, since bitcoin is “entirely based on speculation [because of its digital nature,]”[45]  regulation could help stabilize and provide “order to the crazy turbulence of crypto markets” because a standard set of rules that all companies follow will provide easier guidelines for compliance, innovation, and growth for companies, as well as confidence in investments for consumers.[46]  Whatever path China chooses to follow, regulation seems to be in the near future for bitcoin and other cryptocurrencies in order to establish a more stable, profitable, and secure global market.

 

[1] Thuy Ong, China Tightens Cryptocurrency Ban with New Directive, The Verge (Sept. 18, 2017) [hereinafter Ong], https://www.theverge.com/2017/9/18/16326078/chinese-regulators-ban-cryptocurrency-platforms-bitcoin [https://perma.cc/2BT6-HXGX].

[2] Evelyn Cheng, China’s Bitcoin Clampdown is Likely here to Stay, Analysts Say, cnbc (Sept. 19, 2017) [hereinafter Cheng], https://www.cnbc.com/2017/09/19/chinas-bitcoin-clampdown-is-likely-here-to-stay-analysts-say.html [https://perma.cc/SYB8-PBPQ].

[3] See Paul Gil, What are Bitcoins? How Do Bitcoins Work? Lifewire (Sept. 5, 2017) [hereinafter Gil], https://www.lifewire.com/what-are-bitcoins-2483146 [https://perma.cc/67GG-KZ29].

[4] Id.

[5] Id.

[6] Andrew Godwin, China’s Crackdown on Cryptocurrency Trading- A Sign of Things to Come, The Diplomat (Sept. 21, 2017) [hereinafter Godwin], http://thediplomat.com/2017/09/chinas-crackdown-on-cryptocurrency-trading-a-sign-of-things-to-come/ [https://perma.cc/KU58-X5E8].

[7] Ong, supra note 1.

[8] Godwin, supra note 5.

[9] Panos Mourdoukoutas, Why China Crushed Bitcoin, Forbes (Sept. 9, 2017) https://www.forbes.com/sites/panosmourdoukoutas/2017/09/09/why-china-crushed-bitcoin/#7a07f05e29ef [http://perma.cc/M4JX-ALPW].

[10] Id.

[11] Cheng, supra note 2.

[12] Panos, supra note 8.

[13] Tama Churchouse, China’s Crackdown Won’t Kill Cryptocurrencies- but it Will Have an Impact, Business Insider (Sept. 16, 2017) [hereinafter Churchouse], http://www.businessinsider.com/bitcoin-price-chinas-crackdown-wont-kill-cryptocurrencies-2017-9 [https://perma.cc/HD5A-9G24].

[14] Godwin, supra note 5.

[15] Godwin, supra note 5.

[16] Id.

[17] Lester Coleman, Crypto Executives See Silver Lining in China’s Ban of Bitcoin Exchanges, Cryptocoins News (Sept. 18, 2017) [hereinafter Coleman], https://www.cryptocoinsnews.com/crypto-executives-see-silver-lining-in-chinas-plan-to-ban-exchanges/ [https://perma.cc/GXP3-9NUU].

[18] Godwin, supra note 5.

[19] Joon Ian Wong & Zheping Huan, China’s Three Biggest Bitcoin Exchanges Will Soon Halt Local Trading, Quartz (Sept. 15, 2017), https://qz.com/1078652/bitcoins-btc-price-is-under-pressure-as-chinas-three-biggest-exchanges-btcc-okcoin-and-huobi-will-soon-halt-local-trading/ [https://perma.cc/9H7Q-NCFJ].

[20] Godwin, supra note 5.

[21] Tristan Greene, China’s Bitcoin Bans are Speed Bumps on the Journey, but Don’t Stop Believing, The Next Web (Sept. 14, 2017) [hereinafter Greene], https://thenextweb.com/finance/2017/09/14/chinas-bitcoin-bans-speed-bumps-journey-dont-stop-believing/#.tnw_UJwmQ3y3 [https://perma.cc/Q9KU-4QE4].

[22] Id.

[23] Lisa Visser, Why Does Bitcoin Have Value and How is the Price Determined? Luno (Mar. 15, 2017), https://www.luno.com/blog/en/post/how-bitcoin-price-determined [https://perma.cc/P9BY-BNA4].

[24] Id.

[25] Id.

[26] Id.

[27] Id.

[28] Coleman, supra note 14.

[29] Godwin, supra note 5.

[30] See Greene, supra note 18.

[31] Id.

[32] Kristina Frunze, Top Countries Where Bitcoin is Legal, A to z forex (May 24, 2017), https://atozforex.com/news/top-countries-where-bitcoin-is-legal/ [https://perma.cc/G9SA-JDAU].

[33] Joseph Young, Why China’s Crackdown on Bitcoin is Good for the Industry, Cryptocoins news (Sept. 20, 2017), https://www.cryptocoinsnews.com/why-experts-perceive-chinas-crackdown-on-bitcoin-as-positive-development-for-the-industry/ [http://perma.cc/RSP3-VL7T].

[34] Id.

[35] Coleman, supra note 14.

[36] Churchouse, supra note 11.

[37] Id.

[38] See id.

[39] See Tama Churchouse, The SEC is Finally Starting to Regulate Bitcoin and Other Cryptocurrencies, business Insider (Jul. 29, 2017) [hereinafter SEC],  http://www.businessinsider.com/bitcoin-price-security-equity-sec-2017-7 [https://perma.cc/PP3N-8LKW]; Joshua Althauser, Australian Government Moves to Regulate Cryptocurrency Exchanges, Cointelegraph (Aug. 19, 2017) [hereinafter Althauser], https://cointelegraph.com/news/australian-government-moves-to-regulate-cryptocurrency-exchanges [https://perma.cc/W7AB-GJVY]; Archana Chaudhary and Santosh Kumar, With Attacks Soaring, India Races to Regulate Cryptocurrencies, bloomberg (Aug. 21, 2017) [hereinafter Kumar], https://www.bloomberg.com/news/articles/2017-08-21/with-attacks-soaring-india-races-to-regulate-cryptocurrencies [https://perma.cc/94DF-GUGV].

[40] See SEC, supra note 30.

[41] See Althauser, supra note 30.

[42] See Kumar, supra note 30.

[43] See Gil, supra note 3; see also DPM, Cryptocurrency Regulations and the Changing Landscape, cryptolab (Sept. 19, 2017) [hereinafter DPM], http://www.cryptolab.io/cryptocurrency-regulations-and-the-changing-landscape/ [https://perma.cc/MA3Q-GKNU].

[44] DPM, supra note 35.

[45] Greene, supra note 18.

[46] DPM, Book Review: Bitcoin, A Primer for Policymakers, cryptolab (July 25, 2017), http://www.cryptolab.io/book-review-bitcoin-primer-policymakers/ [https://perma.cc/GNM4-3J27].

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