After a bitcoin crackdown, China presently calls it an ‘investment alternative’ in a noteworthy move in tone

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After a bitcoin crackdown, China presently calls it an ‘investment alternative’ in a noteworthy move in tone

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When the government of China made a frightful flurry of regulation hoopla on February 1st, 2018 and closed down virtual currency exchanges in an effort to clean up their financial system, there was a moment of truth for this industry. The Bitcoin craze had begun to seep back into the mainstream — and not in the good way. The new rules from Beijing aimed to address the ‘greatest risks’ posed by virtual currencies — namely, their use for money laundering and terrorism funding. After a Bitcoin crackdown, China presently calls it an ‘investment alternative’ in a noteworthy move in tone. The Chinese government has recognised that cryptocurrency is here to stay: even though it has its challenges, this technology holds great promise for businesses and individuals alike.

What is a ‘digital currency’?

A digital currency is a decentralized form of money that relies on networks of computers to verify network transactions and maintain a verified history of all transactions. Unlike regular currencies that are issued and controlled by a central bank, digital currencies like the Bitcoin are peer-to-peer (p2p) — that is, they are not controlled or supervised by any entity. As such, it is not regulated by any central bank or government body.

How did Bitcoin come to be?

In his book “Bitcoin and other electronic currencies,” author Nicholas Colas explains that: Bitcoin was developed as an open-source software project in 2009 by a group of mysterious programmers operating out of the cypherpunk movement. The cypherpunk movement is often credited with inventing digital cash, which it did using cryptography. In the early 2000s, a cryptography-focused movement called “crypto-anarchism” emerged, promoting digital cash without any government control or regulation of the sector. In the 2010s, digital cash was making headlines as the “gold of the cryptocurrency world.”

The China crackdown: What next?

On February 8th, 2018, Chinese authorities shut down all cryptocurrency exchanges in the country, including those in Hong Kong and Singapore, and ordered all financial institutions to tighten up their regulations. This followed reports that a suspected bitcoin trader was detained in eastern China and that a cyberattack had caused the suspension of all banking activities in the region. Bitcoin, after all, is not recognized as a legal tender in China. The crackdown, which followed a global tightening of rules regarding virtual currencies, represented a shift in tone from the government of China, which previously viewed Bitcoin as a threat. While the government still regards virtual currencies as ‘illegal,’ it has put them in a different category from traditional money — that of ‘illegal but effective.’

Bitcoin and business in China

Although Bitcoin has not had a great track record in China, it is slowly finding a home there. Virtual currencies are banned in the country, and operating a Bitcoin exchange is a punishable offense, with some firms receiving jail time. Given this backdrop, it can be easy to forget that the cryptocurrency is more than just a tech issue: it is also a cultural issue. In an October 2016 report, the World Bank estimated the average income of a Bitcoin miner at $33,766 per year. This income, the report noted, “is equivalent to the average income of about 288,000 people in China who exercise non-formal employment.” The report further estimated that the total economic value of the cryptocurrency industry in China — which “reflects the market size and growth potential of the industry,” it said — at $1.1 billion, or “approximately the same size as the South Korean economy.”

Bitcoin and tax issues

Although the general perception is that Bitcoin is a “tax-free” investment, it is worth noting that it carries a hefty amount of government regulation. The recent crackdown on virtual currencies in China has led to renewed calls for a nuanced understanding of the tax implications of this industry. The central issue here is that of bitcoin mining. Like all centralized businesses, mining operations are required to pay taxes on the revenue they earn. Given that the vast majority of mining operations are located in China, where state-owned enterprises control the majority of mining capacity, this presents a particular challenge for the IRS.

Bottom line

Businesses that accept Bitcoin should expect a significant shift in tone from the Chinese government. This may include increased scrutiny on their tax and financial reporting, along with increased risk of being shut down for non-payment of taxes or regulatory violation. On the surface, it may seem that Bitcoin is a good thing: it facilitates a decentralized, peer-to-peer currency exchange without a central authority. But it is important to consider the full impact of this technology on the financial ecosystem. The future of virtual currencies is still very much up in the air, but it is clear that this industry faces significant challenges before it can take its place among the world’s financial systems.

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