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China Bitcoin Ban – All You Need to Know

China Bitcoin Ban – All You Need to Know

The China bitcoin ban is on everyone’s mind after it was announced a few days ago, and one expert in Chinese finance has offered an explanation about the reasons behind the Government’s decision.

Both Initial Coin Offering (ICOs) and Chinese operated bitcoin exchanges were included in the China bitcoin ban by Chinese Regulatory agencies. In an interview on China Central Television (CCTV), Professor Yang Dong, Deputy Dean at China’s Renmin University Law School, offered his interpretation of why Chinese regulators have chosen to take definitive action. He said:

“At present, China’s domestic virtual currency trading platforms lack the relevant legal license, which leads to the virtual currency trading platforms free from the existing regulatory system. In fact, there is a huge business risk.”

As reported by China Finance online, Professor Dong argued that the China Banking Regulatory Commission and the China Insurance Regulatory Commissions require all financial institutions to obtain licenses – which cryptocurrencies operating in China currently do not.

Professor Dong, who is also the Director of Renmin’s Center for Fintech and Internet Security, pointed out the major security risks that online transactions involve. “Data risk and information security risks are intertwined,” he elaborated. If the security system is not strong enough, hackers can access bitcoins which will lead to a large amount of data loss at the bitcoin exchange and irreparable damage, he added.

Beyond a simple data risk, Professor Dong noted the risks associated with bitcoins high price volatility.

“Because there are no economic fundamentals to assess the supply and demand of bitcoins and intrinsic value,” he explained, “the market speculative atmosphere results in sharp fluctuations in prices.”

Moreover, he said cryptocurrencies are “not affected by the driving force of inflation and the exchange rate difference as well as other issues.” This leads to the risk of easy market manipulation by outside forces.

“Because virtual currency has no borders, cross-border payments through virtual currency can avoid foreign exchange controls, and there is a greater need to guard against such anonymous transactions for countries and economies where capital projects are not fully open.”

Significant investors, those with millions rather than thousands to invest, will be able to manipulate the price to inflate it, Professor Dong explained. Any losses are passed onto ordinary investors with less information and a disadvantaged position, he detailed. Investors following the trend blindly could suffer significant losses.

Dong, who has spoken at many workshops, well attended by regulators, academic researchers, think-tanks and lawyers, noted that digital currency transactions can be used for money laundering and financial fraud. First off, there is the obvious factor of cryptocurrencies being used in Darnet market transactions, which are not regulated.

“The darknet transactions are without strict protective measures, and will not strictly enforce anti-money laundering, KYC and other effective measures, and are even intended to allow anonymous transactions. The government can not effectively monitor the shortcomings of the darknet.”

He followed up stating that pyramid schemes and fraudulent activities can use digital currencies to fund their actions.

Professor Dong’s most poignant point however, regarding the China bitcoin ban, was about the nature of bitcoin itself. “The mechanism of limiting the amount of encrypted money by specific code is controversial,” Professor Yang claimed, citing how a “new encryption system may be invented, the existing algorithm can also be tampered with, the issuance of encrypted money may also increase.”