China should ban Bitcoin trading to avoid risks

Source:Global Times Published: 2017/5/18 20:38:39

Illustration: Peter C. Espina/GT

The rapid rise of Bitcoin in domestic and foreign markets is creating an unregulated, uncontrolled virtual currency instrument that is increasingly being used for money laundering and capital flight. The existing credit situation and the central bank's ability to control financial risks are greatly affected by Bitcoin. Given this uncertainty, we suggest that China's central bank should completely block Bitcoin transactions in the Chinese market temporarily. The ban could be lifted after problems with the virtual currency have been thoroughly analyzed.

In the global financial market, Bitcoin has started a unique trend. By May 9, China's Bitcoin rate exceeded 9,740 yuan ($1,415), a domestic record. On May 10, the price of Bitcoin on its trading platform Bitfinex rose by 5.4 percent to $1,779.

In 2009, Bitcoin was invented by a Japanese American called Satoshi Nakamoto. The crypto currency earned global attention after its first transaction, in which Satoshi Nakamoto successfully bought a $20 pizza with 10,000 Bitcoins. However, the point where trading of it involved hundreds of millions of dollars per day only came in recent years. Unlike traditional visible currencies, Bitcoin has neither trading nor governing entities. As a virtual currency without legal guarantees, Bitcoin transactions allow anonymity, making it popular with people conducting concealed international financial activities and money laundering.

After the financial crisis, global central banks took unprecedented quantitative easing monetary measures. After this, the distorted financial market caused a drastic increase of global assets and stock value. The price per Bitcoin started to increase, from more than $400 last year to several times higher within one year.

It is worthy of attention that during this period, a large-scale "capital flight" trend appeared in China, and Bitcoin has become an important tool for capital outflows. After 2014, China's Bitcoin market became dominant. The trading volume in the Chinese mainland once accounted for 90 percent of the global Bitcoin trading volume.

This points to two problems. It reflects the essence of market speculation, and it also shows the distrust for the current monetary systems. However, it should be clear that there's no reaping without sowing. The price of Bitcoin depends on supply, demand and the confidence of the speculators, so its foundations are very fragile. A sudden ban on trading of it by the government and the ensuing uncertainty will be powerful enough to instantly overthrow this speculation. What's more, Bitcoin is experiencing considerable price fluctuations. Investors who lack awareness of this are facing huge risks.

China's central bank is trying to strengthen regulations for this influential but unpredictable currency. According to some regulators, China's central bank plans to issue an administrative notice to three special currency trading platforms - OKCoin, and BTCChina - with regard to administrative penalties. What's more, two documents relating to strengthening regulations and curbing money laundering will soon be released. Since the central bank started this increased supervision, public data shows Bitcoin transaction volumes in China have been declining.

The current Bitcoin transactions are a form of underground financial activity that cannot be effectively controlled by the central bank. Therefore, it must be blocked in order to control financial risks.

It would be easier to supervise Bitcoin transactions now than in the future, as the market size is still controllable. If it is simply allowed to continue growing, the potential risks would be unimaginable.

So the central bank should completely block the transactions. However, after comprehensive research has been done, Bitcoin trading could be reopened to the public with a proper supervisory system.

The central bank can warn participants to stop trading and gradually promote the process of blocking the transactions, which may minimize the negative impact.

The article was compiled based on a report by Beijing-based private strategic think tank Anbound.


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