The People’s Bank of China recently released a notice on virtual currencies (like cryptocurrencies) which shook the global financial markets. This primer explains the notice and what it means for the future of virtual currencies.
What led to this notice?
PBOC says that in recent years, transactions in virtual currencies such as Bitcoin have risen significantly. Most of these transactions are being used for illegal activities such as “money laundering, illegal fund-raising, fraud, pyramid schemes and other illegal and criminal activities”. China has deemed these transactions as not just a risk to private property but also national security and social stability. This has led PBOC along with many Chinese regulatory bodies to pass a notice for cleanup and rectification in this space.
What does the notice say?
The notice said that all privately issued virtual currencies are not legal tender and cannot be used as a currency in China. PBOC has also banned businesses related to virtual currencies such as buying/selling virtual currencies, exchanging virtual currencies, providing information, financing tokens and derivatives linked to virtual currencies, raising funds and so on. All the banks, financial institutions, non-banks etc cannot open bank accounts, transfer funds for virtual currency-related activities. No business should not contain words “virtual currency", "virtual assets", "encrypted currencies" and "encrypted assets” for attracting customers.
The notice has also barred overseas exchanges to provide virtual currency-related information to Chinese residents. Even Chinese residents who work for such overseas exchanges via the internet have to stop working for such organisations. Internet companies cannot promote or advertise virtual currency-related business.
Is that all?
Given the wide usage of virtual currencies across financial instruments, this is not about PBOC alone. PBOC, like most other central banks across the world, has been cautioning banks against virtual currencies earlier as well. This time Beijing has formed a team of nine institutions including PBOC, the cyberspace administration, the ministry of industry and information technology and so on for coordination and linking information.
On top of this, it has also reached out to provincial governments who have been asked to clean up the system with help of local financial regulatory authorities. The local authorities should do comprehensive monitoring and build early warning systems.The PBOC has also reached to Chinese associations and forums (such as China Internet Finance Association, China Payment and Clearing Association, and China Banking Association) to self-discipline and ask member firms to stop doing virtual currency-related business.
Hence, this is much more than a mere ban on virtual currencies.
Is this to deflect attention from China’s growing financial sector problem?
Governments are famous for using tactics to deflect attention from a core issue. China has been facing the problem of its largest real estate firm Evergrande possibly defaulting on debt payments. Economists for long have been concerned with the state of economic affairs in China. Some are comparing the Evergrande fallout with the 2008 US crisis which also spilt from housing to financial markets. There are others such as economics Nobel Laureate Paul Krugman who has compared it to Japan’s financial crisis in 1989.
Given the scale of the crisis in China, is this a tactic by the Chinese government to deflect attention from the ongoing crisis? We will only know in future or perhaps never given the secretive functioning of the Chinese government.
What does this notice mean for the future of virtual currencies?
Virtual currencies are currently in an interesting spot with countries opting for multiple policies. Countries such as El Salvador have permitted bitcoin as legal tender. In some countries which are suffering from authoritarian governments and hyperinflation, people have adopted virtual currencies on their own. There is a growing list of countries which are working on issuing central bank digital currencies ironically using technologies pioneered by private virtual currencies. China itself is in an advanced stage of issuing a central bank digital currency for public usage. Within all these choices, there are countries that have banned virtual currencies and China has also joined this list.While it is true that virtual currencies have made inroads in some economies, most of these economies are either small or troubled. No major economy has allowed virtual currencies so far and until this happens, they will remain on the sidelines of the monetary world.