China's fist

During last year’s bitcoin bull market, China was the burgeoning crypto-currency’s best friend. Today, the Chinese government, rather than its people, is among the greatest threats to the success of this alternative financial economy. So says a new report, “Bitcoin’s Uncertain Future in China” issued by the US government’s United States-China Economic and Security Review Commission (USCC).

The USCC report states plainly:

If Chinese regulators successfully prevent Chinese users from accessing bitcoin, the global bitcoin market will face continued price declines, significantly decreased trading volumes and threats to its legitimacy.

At its peak in Q4, Renminbi (RMB, China’s official currency)-denominated transactions made up nearly 60 percent of global trading volume, and the global price of bitcoin climbed in lock step with the RMB volume share. Lightspeed Venture Partners-backed BTC China became the world’s largest exchange by volume, and insatiable buying demand in the communist country helped drive the price of bitcoin up threefold in a matter of weeks (and 80-fold over a year’s time) to more than $1,200, nearly reaching parity with gold.

It was always a “playing with fire”-type situation, as I argued in November of last year in an article titled “Bitcoin, you have a China problem:”

But for a currency touted for its independence from government interference, the growing concentration of Chinese influence over this crypto-currency wealth creates a single point of failure for the system. The same would be true if you replaced China with any other country (assuming it could generate similar trading volumes), but the fact that it is the notoriously unpredictable China doesn’t inspire confidence…

If the world has learned anything over the last half century, it’s that modern China can be a manic and unforgiving patriarch, making rapid and unilateral policy decisions that often fly in the face of logic or the perceived greater good. It would be foolish to assume we can predict its future actions around bitcoin….

A bet on bitcoin is increasingly a bet on the predictability of the Chinese government and its highly unstable economy. It is a bet that the Chinese economy will perform poorly, capital controls will continue, and Beijing will remain tolerant of bitcoin. In other words, it’s a sucker’s bet.

Beginning in December, the People’s Bank of China (PBoC) began taking steps to limit bitcoin adoption within the country. The primary avenue of this attack has been to choke out the operations of Chinese bitcoin exchanges by prohibiting them from obtaining bank accounts or entering into payment processor relationships. In early February, BTC China and other exchanges were forced to stop accepting RMB-denominated deposits, effectively grinding the market to a halt. A subsequent loophole to this policy was then closed in March. Several smaller exchanges in the country have since ceased operations as of the end of April.

The largely opaque campaign has been highly effective, resulting in a rapid decline in RNB volume – it currently sits at 7 percent – and enough uncertainty to yield a commensurate drop in bitcoin price – the Coindesk Bitcoin Price Index is currently $439.33.

Even before the PBoC began taking active steps against bitcoin, there were significant questions raised by Beijing’s silence on the legalities of the crypto-currency. On one hand, state-owned broadcaster CCTV2 aired a bitcoin documentary in May 2013 and a subsequent October segment on the world’s first bitcoin ATM launching in Vancouver. Around the same time, Baidu-owned firewall service Jiasule and eBay copycat Taobao began accepting bitcoins – in both cases, it turned out to be a short lived decision. Collectively, these events seemed to suggest a tacit approval by the government, and in each instance led to spikes in bitcoin wallet downloads and trading activity within China.

On the other hand, China has a habit of stomping down alternative financial instruments which challenge its own RMB currency and its stranglehold on the wealth of its citizens. The recent anti-bitcoin stance mirrors Beijing’s 2009 response when the Tencent-backed “Q-coin” in-game currency crossed over into use within physical commerce; the federal government passed new legislation outlawing the use of virtual currency in the “real” economy.

It is still legal for citizens to own and trade bitcoin as a speculative financial instrument, and therefore as a store of value, but it’s becoming far more difficult to see bitcoin taking hold as a medium of exchange in China. The country’s official policy toward bitcoin remains “characteristically ambiguous,” as the report explains, and in most cases has only been communicated verbally in closed door meetings with affected parties.

China can certainly make it difficult for bitcoin businesses to operate within its borders, but given the decentralized and pseudo-anonymous nature of the crypto-currency, it will be difficult for the country to prevent its citizens from participating in the virtual economy – ”Great Firewall” be damned. In addition to the use of VPN and Tor networks to circumvent government surveillance, another alternative appears to be shiftng bitcoin operations to Hong Kong. As the USCC report states:

Many Chinese Bitcoin entrepreneurs playing regulatory leapfrog have landed in Hong Kong, where a clearer operating environment has led to the adoption of Bitcoin vending machines and ATMs, offering growing opportunities to potential investors. Whereas PBoC acted to thwart Bitcoin use on the Mainland, Hong Kong is positioned to become a global hub for Bitcoin entrepreneurs and businesses…

Hong Kong appears to be primed for Bitcoin’s successful takeoff as a medium of exchange, but its trade volume is comparatively low. Bitcoin entrepreneurs, vendors, and payment facilitators are flocking to Hong Kong to take advantage of its wide regulatory latitude and tech-friendly atmosphere.

Stepping back, China’s anti-bitcoin stance may temporarily depress the global bitcoin market, as the price sheds some of its previously built-in China bullishness. But the insular country has little power to permanently derail the broader bitcoin economy. The same could be said about any single government, should it take an anti-bitcoin policy stance, including the US.

Rather, bitcoin’s success or failure will be decided by the collective success of its key institutions in creating trustworthy and approachable services that allow investors – both individual and institutional – to acquire, store, and transfer virtual currency easily and securely.

The USCC report is right in its assessment that China represents a large obstacle for the bitcoin ecosystem to navigate, but it’s hardly the greatest. Avoiding the next Mt. Gox and the next Silk Road, along with attracting the “grandma Bettys” of the world to adopt the currency will mean more to the long term success of bitcoin than any one government’s policy position.

[Image via Shutterstock.com]