We all know that China plays a big role in the world of Bitcoin and cryptocurrency. Recently China told all its Chinese cryptocurrency exchanges to stop. We do not yet know when or if these exchanges will be allowed to open up again. But what has led to this and why exactly did China order these exchanges to stop?
Closing of Cryptocurrency Exchanges
The world of cryptocurrency was in shock when China announced to shut down all Bitcoin and cryptocurrency related exchanges. China is not only home the biggest mining facilities of Bitcoin, it is also home to the largest trade volume of Bitcoin over its exchanges. The price of Bitcoin went from a staggering amount of somewhere around $5.000 per coin, down to $3000 in just a matter of days, it is clear that this was due to the news out of China. But why is it that China is closing Chinese cryptocurrency exchanges?
Cryptocurrency exchanges have been able to operate in China but under the constant pressure of potential regulation, with the news earlier in 2017 that China was looking to put a hold on Bitcoin it was already clear that China was keeping a close eye on cryptocurrency.
It is clear that regulation is the reason that China has temporarily ordered the Chinese exchanges to shut down, but what is the reason behind this? Well, the Chinese economy is in a fragile state and the Chinese government is doing everything possible to keep it strong while maintaining growth. So what does this have to do with Bitcoin and cryptocurrency you might ask yourself, well this has everything to do with capital outflow.
China has an economy that is still relying on its exports and foreign demand, if the Chinese currency is getting more expensive than foreign demand will decline and hurt Chinese exports. This is why China has put a lot of efforts in keeping its currency ‘export friendly’. However, China is also trying to move towards a consumer based economy. In order to balance this, China has limited the amount of capital outflow to $50.000 per person. This means that is has become increasingly more difficult for Chinese businesses as well as rich individuals to move money abroad as part of for example an investment.
In other words, China is still dependent on its exports but is trying to reform. China is trying to change this by keeping money in China and turn it into a more consumer based economy. This can not happen when capital is leaving the country. But on the other side the Chinese currency has been starting to appreciate against the dollar as a result of China trying to reform their economy. In efforts to de-appreciate its currency it has seen increased exports but on the other hand also more outflow of capital as companies and rich individuals see these policies and these quick reforms an unstable situation, which it is.
Bitcoin offered a solution, one could buy Bitcoin in China with the local currency and sell their Bitcoin abroad for example Euro’s and Dollars. China saw even more money leave its country, even though it has continuously been trying to keep money inside of China. Closing the cryptocurrency exchanges was the only possible, short-term, solution to stop people from moving capital abroad.
So what will happen next? What we will most likely see before anything else, are regulations that can be enforced upon these exchanges before they are allowed open up again. China is definitely not against cryptocurrency or block-chain technology, but they are looking out to protect their economy as it has shown to be quite fragile. When can we expect such regulations you might wonder, well on the 18th of October the 19th National Congress of the Communist Party of China will take place. After this congress we will most likely know more about the future of cryptocurrency in China, what we know for sure is that China will definitely not want it to go away forever.
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