Bitcoin price hits 3-year high, RMB continues to fall may be the main reason

Chinese investors' frenzy in buying Bitcoin over the past few months has almost coincided with the recent decline in the yuan.

Data from the China Foreign Exchange Trading Center showed that on November 16, the RMB exchange rate against the US dollar fell below the 6.85 mark, hitting the lowest level since August 19, 2008. On the same day, the US dollar index rose above 100.

According to statistics from research firm CoinDesk, the global trading volume of Bitcoin hit a record high since 2011, reaching 47 million in the week of October 24 this year. The price of Bitcoin also soared, reaching a four-month high of $742.46. As of press time, the price of Bitcoin in RMB has reached 5,340 yuan, a further increase from the short-lived sideways trend of 5,000 yuan in June this year.

People who have operated Bitcoin told China Business News that the technical process of converting RMB into USD through Bitcoin is very simple.

"It's too easy to get money abroad." Zhang Jun, a partner of angel investor Ten Dimension Capital, has bought bitcoins before. He told China Business News that on domestic trading platforms OKCoin or Huobi, you can buy bitcoins with RMB, then transfer them to foreign trading platforms and immediately convert them into US dollars. The whole process takes no more than 5 minutes.

“There will be no regulatory risk in the whole process. The only risk is that Bitcoin will plummet in these 5 minutes. Of course, it may also skyrocket.”

Recently, some media reported that the regulatory authorities have noticed the phenomenon of purchasing Bitcoin through domestic platforms and then selling it on overseas platforms to obtain foreign exchange. The measures under consideration may include restricting domestic trading platforms from transferring Bitcoin to overseas platforms, or imposing a limit on the amount of Bitcoin transferred to overseas platforms.

Our reporter sent a fax to the People's Bank of China regarding this matter, but no response was received as of press time.

Global trading volume hits new high

According to media reports, Li Qiyuan, CEO of China's Bitcoin exchange BTCC, said: "The extent of the decline in the RMB this time has caught some Chinese investors by surprise. They are seeking more stable hedging investments such as gold, including the use of Bitcoin." In fact, from the moment Bitcoin is purchased, the funds have already left the Chinese market.

From a technical perspective, this can indeed be achieved through exchanges. "At the national regulatory level, there is currently no regulation on exchanges. Individual retail investors can buy Bitcoin with RMB, then sell it on overseas exchanges, and then exchange it back to US dollars, which actually breaks through foreign exchange control. Moreover, there is no limit on the amount. As long as the two parties match the price, the transaction can be completed." A domestic digital currency researcher told our reporter.

Xu Mingxing, CEO of domestic bitcoin trading platform OKCoin, told China Business News that China's official definition of bitcoin is a virtual commodity, which actually has the function of currency exchange. It is like buying a diamond in mainland China and selling it in Hong Kong, which is essentially an act of "commodity trading."

CoinDesk's statistics also show that in the past quarter, the vast majority of Bitcoin transactions took place in China. The Bitcoin trading volume of China's three major exchanges accounted for 98% of the global total trading volume in the past three months.

Last month, China's foreign exchange reserves fell by US$45.7 billion from the previous month, the biggest drop since January this year.

Unhackable blockchain

Zhang Jun told the reporter of China Business News, "The FBI tracked a drug trafficking organization that used Bitcoin for settlement for several years. But I believe that Bitcoin itself has no loopholes. The government cannot crack anonymous wallets unless it completely bans Bitcoin transactions in the country. The circulation of Bitcoin cannot be monitored or restricted."

As a crypto currency, Bitcoin has a constant total amount, and users obtain it by using professional computers, commonly known as "mining machines", to "mine" using complex algorithms. The difficulty of "mining" will increase in stages, thereby maintaining the value stability of the entire currency system.

Bitcoin is built on the basis of the blockchain protocol, that is, if Bitcoin is regarded as currency, then the blockchain is the bank, which maintains absolute fairness. For example, A and B make a transaction, A pays with 1 Bitcoin, and after the payment, 1 Bitcoin is transferred from A's wallet to B's wallet, but the total amount of Bitcoin remains unchanged.

This feature also determines that Bitcoin transactions are synchronously backed up on millions of servers around the world and cannot be tampered with. When users use Bitcoin for online transactions, they are endorsed by the blockchain, so there is no payment fraud.

Another feature of Bitcoin is anonymity. Anyone can create a wallet, which is equivalent to a bank account, but no personal information is required. Bitcoin is the most successful application of blockchain technology to date, but it also makes it the best tool for illegal activities such as drug trafficking and money laundering.

There’s nothing the regulator can do about it?

It is precisely because of the above characteristics of Bitcoin that regulation is currently almost impossible to achieve.

"Bitcoin is a disruptive innovation," Zhang Jun told the China Business News. "The government can't do anything about it, but China has never officially recognized the legitimacy of Bitcoin."

However, some experts believe that it is not that the Chinese government cannot control the situation, but that now is not the time to put much effort into it.

Zhang Jun, dean and professor of the School of Economics at Fudan University, told the reporter of China Business News: "In the future, if there are more bitcoin transactions, the government will definitely have to regulate it."

"The overall volume of Bitcoin transactions is not large at present, so the government cannot take care of it," Zhang Jun, chief economist of Morgan Stanley Huaxin Securities, told our reporter, "but as the volume of Bitcoin transactions increases, the government will always find a way to manage it."

According to Zhang Jun's prediction, the RMB will continue to depreciate in the long run, but a partial rebound in the short term is not ruled out. In this context, investors will look for more innovative ways to transfer their wealth to overseas markets.

Wu Sijin, founder and CEO of Hangzhou Fuzhumei Technology Co., Ltd., which is engaged in blockchain technology research, told our reporter that in fact, the platform is not completely unable to monitor such transactions.

"Most speculators trade Bitcoin by buying at low prices and selling at high prices, repeatedly speculating on the market, so the net purchase volume is not too large. As for those who trade for foreign exchange, it can be seen in domestic accounts that the funds are only used for buying, but rarely for selling. It is possible that the funds were withdrawn from overseas platforms."

On December 5, 2013, the People's Bank of China and five other ministries and commissions issued the "Notice on Preventing Bitcoin Risks" (hereinafter referred to as the "Notice"), which is regarded by industry insiders as the only relevant regulatory policy given by the Chinese government on Bitcoin so far. The "Notice" clarifies the nature of Bitcoin, stating that Bitcoin is not issued by monetary authorities and does not have monetary attributes such as legal tender and compulsion, so it is not a real currency. At the same time, financial institutions are prohibited from providing Bitcoin trading services.

According to the "Notice" issued by the five ministries, Bitcoin Internet platforms need to fulfill their anti-money laundering obligations. Now different platforms have stricter requirements for real-name authentication. Small amounts require ID card authentication, while large amounts require video authentication. At the same time, they must provide proof of the legal source of funds.

The impact on the volume and price of RMB is limited

The depreciation of RMB against the US dollar has increased recently. People are worried that if they can get rid of the supervision of the central bank through the Bitcoin platform and remit RMB abroad and exchange it into US dollars, will this be a disguised form of capital flight, thus affecting the quantity and price of RMB?

Yang Tao, assistant director and researcher of the Institute of Finance of the Chinese Academy of Social Sciences, told the reporter of China Business News that it cannot affect the central bank's balance sheet at present. "If the impact is significant, all countries will be anxious, because the overall transaction scale of digital currency is still relatively limited, and its asset attributes are relatively prominent. Although there is a certain impact, it is not that big yet."

In his opinion, among the non-legal digital currencies currently on the market, Bitcoin is relatively stable. However, Bitcoin's currency attributes are very weak, and its price fluctuates greatly. Most investors now are people who specialize in speculating on Bitcoin, and most ordinary residents do not participate in it.

Moreover, most speculators currently view Bitcoin as a speculative asset for profit rather than as a currency exchange for profit, so most speculators trade domestically.

Xu Mingxing told reporters that the Bitcoin market is volatile, and Bitcoin itself cannot be used as a means of preserving value to cope with the depreciation of the RMB. Using Bitcoin to exchange currency is a hypothesis, and its operation is much more difficult than traditional means. In addition, Bitcoin trading platforms cannot provide currency exchange services, and buying a large amount of Bitcoin on domestic regular platforms will be subject to strict anti-money laundering investigations by trading platforms.

Wu Sijin pointed out that the supervision of large platforms is becoming increasingly strict, and there is also corresponding self-discipline; on the other hand, the liquidity of small platforms themselves is not that good, and overall, the impact will not be that great. "In general, (outflow through this channel) is not as easy as imagined."

Yang Tao believes that with the advancement of financial marketization and financial electronicization, there are indeed some non-legal digital currencies that are getting closer to monetary attributes, but they are not included in the statistical caliber of broad money (M2). In the future, they will inevitably have an impact on the quantity and concept of money. Therefore, due to the changes in the monetary statistical caliber brought about by digital currency, various countries are also constantly improving.

Digital currency regulation "two-pronged approach"

A person close to the central bank told our reporter that the central bank's research on digital currency mainly includes two parts: one is the development of legal digital currency led by the central bank itself, and the other is the supervision of non-legal digital currency.

Yang Tao told our reporter that these two directions are basically the research directions of digital currency in various countries around the world. "In the future, the central bank will definitely have new rules and constraints on the digital currency system. In fact, regulatory authorities in various countries are researching and intervening in digital currency," he said.

"Each country is taking a more observing attitude towards the so-called digital currency with completely decentralized credit. However, as it develops to a certain extent, its impact in various aspects becomes increasingly greater and further spreads, the regulatory authorities will have to consider the impact it will have on the entire economy and finance," Yang Tao told reporters.

Yao Qian, deputy director of the Central Bank's Technology Department and head of the preparatory group of the Digital Currency Research Institute, recently said, "The prototype plan for the central bank to issue legal digital currency has completed two rounds of revisions. In the future, it is expected to be tried out first in relatively closed application scenarios such as the bill market, but there is no clear timetable for its launch."

Among the job openings announced by the People's Bank of China last week, the People's Bank of China's Printing Science Research Institute is recruiting relevant professionals to engage in the research and development of digital currency and its platform, which means that blockchain technology is receiving increasing attention and is accelerating its "implementation."