The Chinese Connection

The price is up. The price is down. The price is back up! The bitcoin rollercoaster rolls onward, attracting renewed mainstream interest as the digital asset outperforms other investment instruments. In China, where bitcoin trading volume far surpasses that of other nations, bitcoin has been under the microscope of Chinese regulators and government officials. Among the greatest fears for bitcoin believers is a government ban in what has become a massive market for bitcoin. The Chinese have signaled there will be no ban, but many details are still up in the air.

Bitcoin regulation is an unpredictable variable in an industry riddled with unpredictable events. The uncertainty around bitcoin has created the Wild West atmosphere that many bitcoin believers find desirable. Volatility is opportunity for many investors and developers, exploring the fringe of finance to escape regulation is exactly what they are after, and the risk is simply part of doing business. But concern over regulation in places like China extends beyond business opportunity and may create existential risk to the still developing digital currency. While no single entity, China included, has the ability to shut down bitcoin, the volume of trades in China would surely cripple the bitcoin ecosystem if it were suddenly stopped. Though other trading facilitators may pour into the gap left by China, the delay and negative press would leave bitcoin worse off.

On the other hand, regulation isn’t necessarily a bad thing for an industry plagued by scams and hacks. Though bitcoin believers malign traditional banks and financial institutions, the adoption of standards like PCI, KYC, and AML have assisted in establishing a secure framework throughout the financial sector. It still makes news when a bank suffers an attack, but this may be due to the uniqueness of the attack rather than the regularity. In the bitcoin space, the opposite tends to be true. The running joke “Sorry For Your Loss” or SFYL hones in on the fact that bitcoin users regularly experience some form of scam or hack, prompting the stock SFYL response. Similarly, governments have played both sides in dealing with bitcoin. Some, especially smaller nations with less regulated financial sectors, have embraced bitcoin as another means of discreetly moving money. Others, like China and Russia, have wavered between support, apathy, and dislike. Clarity in how nations will regulate bitcoin will be a good thing for users, even if the short term news is poor.

The type of regulation is equally important. The news from China is that regulators were looking for exchanges to moderate risk, a reasonable attitude toward commodity trading. This seemingly even-handed approach could provide other nations with a framework on how to deal with bitcoin in a way that benefits bitcoin users and investors. It also signals an attitude shift, from nations leaning toward bans or heavy regulation as though bitcoin were a currency, to instead treating it like most other commodities. While not what bitcoin idealists may prefer, treatment of bitcoin like a commodity could help the technology across important regulatory hurdles.

The future of bitcoin is still dependent on Chinese exchanges. The liquidity of bitcoin is heavily reliant on a small number of Chinese bitcoin exchanges, meaning mainstream adoption in any location will be directly or indirectly coupled to the availability of bitcoin on these exchanges. Price swings and unaudited trade books mean bitcoin will remain an unpredictable digital asset, one scam away from the next price crash. Increased regulation may be the counter intuitive answer for users who want to be free from the government, but also want the protections commonly found in developed nations.

Image credits:

Featured (homepage) image of Chinese flag – Public domain image

Dollar/bitcoin image – Public domain image by Web-dev-chris