Why doesn’t the central bank ban Bitcoin?

Chen Jianqi: Why doesn’t the central bank ban Bitcoin?

The price of Bitcoin has been rising rapidly since the beginning of this year. After exceeding the dollar price of gold per ounce in March, it has continued to soar rapidly and has now reached a high of around $3,000. The performance of Bitcoin has exceeded the expectations of many people. The surge in Bitcoin has become a hot topic in financial investment. In this context, how to view the development of Bitcoin has become an important issue in the financial field.

Some commentators believe that the central bank should ban Bitcoin to avoid impacting the financial sector. In February this year, the central bank restricted the withdrawal function of Bitcoin, but recently the central bank has relaxed the withdrawal control of Bitcoin. It can be seen that the central bank not only has no intention to ban Bitcoin, but also intends to relax the relevant regulations on Bitcoin. How the central bank should view the development of Bitcoin is not only an important content for the central bank to deal with virtual currency issues such as Bitcoin in the future, but also an important perspective for judging the development prospects of Bitcoin.

Considering the properties of Bitcoin and its current development, Bitcoin is not recognized as a currency in most countries, and China does not recognize the currency properties of Bitcoin. This determines that Bitcoin does not surpass other virtual currencies and has more legal functions, and also determines the limited impact of Bitcoin on the monetary and financial fields. Therefore, there is no need for the central bank to ban Bitcoin, and there are three internal reasons.

First, Bitcoin does not affect the exchange rate between the RMB and the world's sovereign currencies. Bitcoin has risen by about 200% since the end of 2016, and there have been relatively violent fluctuations during this period. For example, from May 26 to 27, 2017, Bitcoin once fell by $900, a drop of more than 30%. However, the RMB exchange rate against major world currencies has not fluctuated so violently this year, and has even stabilized in the near future, indicating that Bitcoin has not had an impact on the RMB exchange rate.

Theoretically, since Bitcoin is not recognized as a currency in China, the RMB price of Bitcoin only represents the RMB price of Bitcoin products, which is no different from other products priced in RMB. However, there is no trading market for RMB and Bitcoin in the foreign exchange market. Fluctuations in the RMB price of Bitcoin will also cause fluctuations in the prices of Bitcoin products priced in other currencies. This is similar to other commodities such as oil, which are priced in local currencies in various countries. Although the price change ratios of commodities priced in various currencies are not exactly the same, this basically does not affect the exchange rate between RMB and other currencies in the market.

Secondly, Bitcoin does not affect China's foreign exchange reserves. Buying Bitcoin in China is actually a structural adjustment of domestic currency ownership. Some people buy Bitcoin in China with RMB. Correspondingly, the counterparty exchanges the ownership of Bitcoin for the ownership of domestic RMB. The domestic RMB does not exchange for US dollars in the process of buying Bitcoin. The RMB obtained from selling Bitcoin still needs to comply with the current relevant regulatory provisions to exchange for US dollars and other foreign currencies. Therefore, the purchase and sale of Bitcoin will not affect foreign exchange reserves.

Although the price of Bitcoin has risen rapidly this year, China's foreign exchange reserves have not fluctuated dramatically, but have remained stable at around 3 trillion US dollars. If we look at the performance since the financial crisis, China's foreign exchange reserves have maintained rapid growth since the financial crisis and reached a high of nearly 4 trillion US dollars in the first half of 2014, but the price of Bitcoin has fluctuated violently during the same period, which shows that Bitcoin has little to do with changes in foreign exchange reserves.

Third, Bitcoin does not affect China's monetary policy. Bitcoin has been around since 2009, and Chinese buyers have been involved in the market for many years, but Bitcoin has not caused any significant changes in the efficiency of China's monetary policy. In recent years, the People's Bank of China has not significantly changed its monetary policy control methods due to the emergence of Bitcoin. Monetary policy is still adjusted through interest rates and open markets. In addition, China's macroeconomic performance has remained relatively good among major countries in the world in recent years, and price levels such as CPI have not fluctuated significantly. All of these indicate that the efficiency of monetary policy has not changed significantly.

Theoretically, buying Bitcoin in China does not directly cause money to flow out of the country, but rather a structural transformation of Bitcoin ownership and RMB ownership between counterparties, which will not affect the money supply and exchange rate level, and thus will not have a significant impact on monetary policy. In fact, if Bitcoin affects monetary policy, then the trading of other commodities will also affect monetary policy, which lacks strict logical support in both theory and reality.

The above analysis reveals from three aspects that Bitcoin does not have a big impact on the central bank, and there is no need for the central bank to ban Bitcoin. Of course, this is based on the fact that Bitcoin is not a currency but a commodity. If the central bank wants to ban Bitcoin, then it must also ban other virtual currencies similar to Bitcoin, and even other commodities such as gold, which is not feasible and unnecessary in reality. However, if Bitcoin is recognized as a currency in the future, then Bitcoin will compete with other currencies including the RMB, and it is inevitable that monetary finance will be affected by Bitcoin. How to avoid the macro fluctuations caused by Bitcoin is also worthy of attention.

(About the author: Deputy Director and Associate Professor of the World Economy Department, Institute of International Strategy, Party School of the Central Committee of the Communist Party of China.)