China’s Influence on Cryptocurrencies and their Recent Regulations

Term Paper (Advanced seminar) , 2017 , 18 Pages , Grade: 82

Computer Sciences - Cryptocurrency

China is known as one of the biggest participators in the market of digital currencies but also as one of the most regulating countries in the world. This research paper analyses the influence of China on digital currencies and deals with the question whether the recent regulation enforced by the Chinese government had any impact on the global market. For this purpose, I evaluated if any regulation imposed is related to a change of the market value or trading volume of cryptocurrencies.

Cryptocurrencies and the technology evolving around it are receiving a lot of attention in the recent years. Since the release of the first Blockchain based cryptocurrency - Bitcoin - in the year of 2009, more than 1285 cryptocurrencies have been created. The vast majority of those with moderate success. With a market capitalization of over $163.5 Billion as of today, cryptocurrencies have an immense impact on today’s financial markets. That led the financial institutions and governments pushing in the direction of more regulation and better control of this decentralized market.

Table of Contents

1. Introduction

2. Literature Review
2.1. Introduction to Cryptocurrencies
2.2. China’s position in the Cryptocurrency market
2.3. Regulations and the influence on cryptocurrencies
2.4. Background of the regulation and popularity of cryptocurrencies in China
2.5. Current and future situation in the cryptocurrency market

3. Methods

4. Discussion

5. References

6. Appendix

Abstract

China in known as one of the biggest participators in the market of digital currencies but also as one of the most regulating countries in the world. This research paper analyzes the influence of China on digital currencies and deals with the question whether the recent regulation enforced by the Chinese government had any impact on the global market. For this purpose, I evaluated if any regulation imposed is related to a change of the market value or trading volume of cryptocurrencies.

1. Introduction

Cryptocurrencies and the technology evolving around it are receiving a lot of attention in the recent years. Since the release of the first Blockchain based cryptocurrency - Bitcoin in the year of 2009, more than 1285 cryptocurrencies have been created. The vast majority of those with moderate success. With a market capitalization of over $163.5 Billion as of today, cryptocurrencies have an immense impact on today’s financial markets. That led the financial institutions and governments pushing in the direction of more regulation and better control of this decentralized market.

At night of September 4, 2017, the People’s Bank of China (PBOC) published a statement and declared Initial Coin Offerings (ICO’s) an illegal form of fundraising in China. (Higgins, 2017) Followed by the ban, Chinese authorities have ordered organizations and fundraisers to refund investors. That led to a drop of the Bitcoin price of nearly 14%. Due to the great impact of this announcement this research paper discusses how strong the influence of China on cryptocurrencies is, and whether China can keep that influence. Furthermore, it discusses the recent regulations by the Chinese government and analyzes whether there is a difference in the level of influence on different cryptocurrencies. The main focus will be on Bitcoin, due to its representative role in the cryptocurrency market and highest market capitalization.

Over the past years, the popularity of Bitcoin increased significantly with Chinese investors, which led to the founding of multiple China-based exchanges. Until recently, the importance of the Chinese market was shown by greatest trading volume in the year 2016 (Lu, 2017) and the high investments in ICO’s by Chinese investors. I am going to discuss why China plays an important role in the early development and market influence of cryptocurrencies.

The paper is organized as follows. Section 2.1 provides an overview about cryptocurrencies, discussing the important details. Section 2.2 deals with Chinas position in the cryptocurrency market by presenting facts and figures about Chinese exchanges and cryptocurrencies. Section 2.3 deals with the influence China has caused to the cryptocurrency and digital token market in a historical order. It describes the most important events and their effect on the market value and trading volume of cryptocurrencies. Section 2.4 gives an overview of why China imposed regulations and describes the still growing popularity of digital currencies. In Section 2.5 of this paper, the current situation of the cryptocurrency market will be discussed and a future prospect will be given. Section 3. shows how the information which is the basis of this paper was conducted and which difficulties occurred. In Section 4. the paper gives an outlook of what to come and discusses current and future implication Chinas role in the cryptocurrency market.

2. Literature Review

2.1. Introduction to Cryptocurrencies

Already in the late 1980s, there have been attempts to establish digital money, but they all failed. Until a paper by an unknown developer Satoshi Nakamoto was published in the year of 2009. It was named “Bitcoin: A Peer-to-Peer Electronic Cash System” and led to the first successful decentralized cryptocurrency. A cryptocurrency functions similar to a standard currency with the purpose that its users can use it as a replacement of fiat money to pay for goods and services. It does that by using various cryptographic methods to prove that the transaction which transmitted by the user is legitimate. What is special about it is that the whole system is decentralized. (Farell, 2015) That means that the Blockchain where all transaction data is stored is distributed on multiple servers around the world without anyone able to manipulate it. It gives individuals and businesses the opportunity to send transactions in a peer-to-peer network without the control of a governmental institution. (Farell, 2015)

At the time of writing the cryptocurrency market consists of 1285 cryptocoins. The majority of these cryptocoins don’t have any use because they don’t add any additional value or features to the market. They are copies, so-called “coin forks”, which duplicate the Blockchain and use the core features of a coin. According to Coinmarketcap the total market capitalization of cryptocurrencies amount to $163.5 Billion with Bitcoin having 46.29% the biggest market share.

2.2. China’s position in the Cryptocurrency market

Since the closure of many Chinese exchanges and the recent regulations, this section deals with China’s position in the cryptocurrency market until the beginning of the year 2017. China is considered the biggest participant regarding trading volume and mining power.

After a big cyberattack on the Japanese Crypto Exchange Mt.Gox and the resulting $473 Million loss of cryptocurrencies at the end of 2013 Chinese trading platforms started to thrive. With more than 20 Chinese exchanges they are accounted for 80% of the global trade volume at the end of 2014. (Lu, 2017) According to a Goldman Sachs research report on payments, 80% of Bitcoin volume is exchanged in and out of Chinese Yuan. (Greenemeier, 2015)

The most popular names on the market are OkCoin, BTCChina, Huobi, and Lakebtc. They were able to bundle the majority of trade volume by charging no trading and transaction fee which led the Chinese Yuan (CNY) to be the number one traded currency against Bitcoin (CNY/BTC).

From the technical perspective, China is the leader in providing mining power for cryptocurrencies. Around 80% of the global Bitcoin mining is carried out by China. (Eha, 2017)

The biggest Bitcoin mining pools are ViaBTC, Antpool, F2pool and BTCC Pool. (Figure 1) The reason why mining of cryptocurrencies in China is so popular and profitable is because of cheap electricity which is the main resource for mining. Furthermore, skilled Chinese developer teams have created multiple China-based cryptocurrencies. The most famous one is NEO formerly known as Antshares. With a market capitalization of $2.5 Billion, it ranks as the 7th most valuable cryptocurrency. Noteworthy Chinese cryptocurrencies are also Bytom (BTM), Qtum (Qtum), and OKcash (OK).

2.3. Regulations and the influence on cryptocurrencies

With increasing influence and popularity of cryptocurrencies, governmental institutions started to pay close attention to the matter. Due to its possibility to revolutionize the way how our financial system is structured certain rules and regulations must be implemented to prepare an integration into it.

This section focuses on Chinas enforced regulations from the years 2013 until 2017 and analyzes the influence it had on the trade volume and price stabilization of cryptocurrencies.

Even before China imposed regulations on Bitcoin it tried to regulate digital currencies, including Q-coin, a video game currency, which was used for the real-world exchange of goods and services. (Ponsford, 2015)

One of the earliest events which shows the impact China has on the USD and CNY cryptocurrency market was the development around the search-engine Baidu. In October 2013, an announcement that Baidu is accepting Bitcoin payments led to a large surge in Bitcoin value. (Kristoufek, 2014)

Only two months after this event a statement by the People’s Bank of China was issued which warned citizen and businesses that Bitcoin is not a real currency and is not legally protected.

Furthermore, it stated that no financial institution is allowed to participate in Bitcoin trading. (Hern, 2013) It was reasoned by raising concerns about money laundering and threating financial stability. Directives said that “ [ … ] it protects the status of the renminbi as the statutory currency, prevent risks of money laundering and protect financial stability.” (Mullany, 2013)

According to Hern (2013), the result of this announcement was that Bitcoin price fell by 28% over two hours before stabilizing again.

Probably the most interesting incident was a false report published on a financial news feed by the microblogging site Sina Weibo. It claimed that "on March 18th the PBOC had issued a notice calling for all bitcoin transactions to be halted by April 15th." (Sina Weibo as cited in Rizzio, 2014) A global price decline of 2% was the result. The impact on Bitcoin prices on Chinese exchanges was more severe. Dropping from 3,568 Yuan to a low of 3,301 Yuan on the Chinese exchange BTCChina in only 30 minutes. (Rizzio, 2014)

Bitcoin price on BTCChina in CNY

Abbildung in dieser Leseprobe nicht enthalten

Figure 2 – Reprinted from “BTC Price Declines Following False Report of Bitcoin Ban in China.” by Rizzio, P. 2014, March 21 – Retrieved from: https://www.coindesk.com/bitcoin-price-declines-following-false-report-chinas-bitcoin-ban/ – Data provided by Bitcoincharts.com

Even though the market price quickly recovered after clarification from Chinese regulators it shows how volatile and open to influence the Bitcoin price is.

The year 2017 marks the most significant chapter of regulations in the cryptocurrency world. In early 2017, it seemed that Chinese regulators went from banning to imposing regulations on cryptocurrency exchanges. (Nica, Piotrowska, & Schenk-Hoppé, 2017) So did officials from the PBoC meet with representatives from the three biggest exchanges OkCoin, Huobi and BTCChina to ensure the compliance with the law and the conduction of self-checks in the beginning of 2017. (PBoC, 2017) Statements of all 3 exchanges were published shortly after the meeting stating their absolute compliance operating in accordance with Chinese laws. The market reacts with a month low of 6,188 yuan ($892). (Figure 3)

Soon after the new regulations were announced government officials made sure that the instructions were strictly adhered to. In the following week, the bitcoin exchange BTCChina was a target to an on-site inspection conducted by officials from the city’s finance office and People’s Bank of China branch in Shanghai, looking for evidence of violations, such as market manipulation or money laundering, and assessing the safety of customer funds. (Kharif, 2017)

With BTCChina being the world’s biggest cryptocurrency exchange it a had a massive impact on the Bitcoin price in the following month. It fell almost 16% to a low of $762.5, considering it hit its all-time high of $1,190.78 on January 5., (Figure 4) it clearly shows that there is no price stability in the Bitcoin market and measures need to be taken soon to strengthen its independency from external factors.

“The State Administration of Foreign Exchange has scrutinized some major bitcoin exchanges, possibly to investigate the use of the digital asset to evade capital controls.” Lee and Dai (2017) said. These ongoing repressive measures raise concerns among investors and the community that China tightens its oversight and scrutiny of alternative currencies.

The intensity China is pressing regulations highly intensified since the beginning of 2017. Meetings between the exchanges and the PoBC are happening on a regular basis. In the beginning of February, all major exchanges were forced to stop withdrawals of cryptocurrencies into foreign currencies, due to a recent meeting initiated by the PoBC. As expected the Bitcoin price dropped almost 8% to $977.39 after announcements of the exchanges.

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• College: Cologne Business School Köln
• Grade: 82
• Publication Year: 2017
• Pages: 18
• Catalog Number: V512648
• ISBN (eBook): 9783346099785
• ISBN (Book): 9783346099792
• Language: English
• Tags: Cryptocurrency, China, Laws, finance