The nature and prospects of “virtual currencies”, and bitcoin in particular, have been keenly debated. These issues again attracted attention when Chinese government authorities issued a notice on bitcoin, defining its status and barring financial and payment institutions from trading in bitcoin. This eUpdate is the third part in a series of eUpdates on bitcoin-related topics and issues. The first part of the series describes what bitcoin is. The second part of the series explains the legal status of bitcoin and how it is approached in different countries.
Rise of bitcoin in China
In November 2013, bitcoin was favourably featured in various reports on China’s state-run CCTV television network and in government-backed newspapers, including the People’s Daily. This led to a gold rush, as the Chinese tech community constructed bitcoin mining rigs on a grand scale, paying US$12,000-15,000 for hardware, and recouping their setup costs within a matter of weeks. At present, China has the world’s second largest number of bitcoin nodes (parts of bitcoin network system that verify bitcoin transactions and release new bitcoins into circulation), after the United States.1 China’s fascination with the currency upstart led to an estimated 40,000 bitcoin user software downloads per day, as well as bitcoin being accepted by some online retailers and even physical traders standing in the Tiananmen Square.2 By December 10, 2013, 26% of the global bitcoin user software downloads took place in China, thus surpassing all other countries.3
In China, in addition to being used as a means of payment for goods and services, bitcoin is also viewed as an alternative method to invest or save money, alongside stocks, gold and property. In the absence of regulation, bitcoin could be used as a means to remit money out of China or, given the strict governmental control of the renminbi (the Chinese national currency), as a way to speculate on currencies. Bitcoin could also be used to circumvent strict investment caps on the property market, making it easier to convert renminbi to invest in equities and properties overseas, as well as to evade taxes.
There are nearly 20 bitcoin trading platforms in China. Approximately one-third of the global bitcoin trading flows through a single exchange, BTC China.4 At present, BTC China is the world’s largest exchange by trading volume5, having recently unseated two other bitcoin exchanges: Mt. Gox (Japan) and Bitstamp (Slovenia). BTC China trades only renminbi for bitcoin. Even though its website has an English interface, limited access to that currency globally effectively restricts its user base to China residents. BTC China has recently secured US$5 million in funding from a venture capital firm Lightspeed China (Lightspeed Venture Partners’ local arm) to further expand its operations.6
Bitcoin prices have been volatile and have gone through a number of ups and downs in 2013. In November 2013, bitcoin prices soared after the U.S. officials’ positive statements about bitcoin during the U.S. Senate committee hearings held on November 18-19, 20137. In early December 2013, bitcoin topped US$1,000, representing a 7,173% increase since January 2013, when it traded at US$13.75. In China, bitcoin prices soared by 861% from CN¥845 (US$138) on September 3, 2013 to its peak of CN¥7,273 (US$1,186) on November 29, 2013.8 The volume charts demonstrate that Chinese demand has been the main factor behind bitcoin’s global price increase.9
Bitcoin and Chinese government authorities
Until recently, the Chinese government authorities did not take a stance on bitcoin, in contrast to the country’s stringent investment and currency regulations. However, the situation significantly changed in December 2013. On December 5, 2013, the People’s Bank of China (PBOC), together with the other government authorities10, issued a notice (PBOC’s notice) on bitcoin, barring financial and payment institutions from trading in bitcoin.11 It was the first step taken by the Chinese government authorities towards regulating bitcoin. “Bitcoin is a ‘virtual commodity’ that cannot and should not be referred to or used as a currency as it is not created by the state mint, and does not have the legal tender status,” the PBOC’s notice said, but added that “the general public may buy or sell bitcoin as an online commodity at its own risk”. The PBOC’s notice also specified that financial and payment institutions may not:
- employ bitcoin as a unit of payment for goods or services;
- accept bitcoin as a method of payment;
- purchase, sell, or deal in bitcoin;
- engage in renminbi-bitcoin exchange services;
- engage in saving, trust or mortgage services involving bitcoin;
- undertake insurance activities related to bitcoin;
- issue any financial instrument related to bitcoin; or
- directly or indirectly provide any services related to bitcoin.
The PBOC urged government agencies to educate the public on such topics as currency, investment, and financial safety and indicated that it will closely monitor bitcoin and similar virtual commodities in the light of anti-money laundering risks. In the past, in order to avoid such risks, Chinese government authorities imposed restrictions on the bitcoin’s predecessor in China called “Q coin”, which was popular in the mid-2000s, but ceased to operate in 2007.12
The press noted that bitcoin exchanges may soon be required to inform government authorities about sizeable or suspicious transactions and that internet companies serving as bitcoin trading platforms may be required to request their clients to register with certain information such as name and identity card number.13
After the PBOC’s notice was published, divisions of Baidu14 (Jiasule) and China Telecom15 (Jiangsu Telecom), two of the best known names in Chinese internet and telecommunications spheres, which previously accepted bitcoin, removed references to bitcoin payments from their services, and announced that they will no longer accept bitcoin.16
As a consequence of the PBOC’s notice, bitcoin prices slumped to below US$1,000 on major bitcoin trading platforms. On BTC China, it traded at CN¥4,785 (US$780) immediately after the publication, compared with CN¥7,050 (US$1,150) on the previous day. Bitcoin prices, however, soon bounced back and partially recovered to CN¥5,765 (US$943) as of December 10, 2013. The majority of bitcoin trading currently still occurs in renminbi.17 As of December 10, 2013, approximately 59% of bitcoin global trading occurred on exchanges which traded in renminbi. Meanwhile, bitcoin trading in U.S. dollars accounted for roughly 35% of the global trading. Bitcoin trading in euros accounted for slightly less than 2%. No other currency accounted for more than 1% of the global trading.18