Can China Control Bitcoin?

Can China Control Bitcoin?

Despite a cyber attack on one exchange platform last month that robbed investors of millions in bitcoins, The New York Times reports that the virtual currency is booming in China:

Bitcoin’s appeal to Chinese investors is manifold. The currency experienced a major spike in value in July shortly after being the subject of overwhelmingly favorable reports on CCTV, China’s state-run television station, and People’s Daily, the main Communist Party newspaper. The currency received a further boost in October when the Chinese search engine Baidu, which commands more than 80 percent of the Chinese search market, announced a plan to accept bitcoins as payment for its online security and firewall services.

Last week, a real estate developer in Shanghai declared that it would accept bitcoins as payment for housing units in the city’s Pudong district. The company, Shanda Tiandi, posts bitcoin exchange values daily outside its office. This raises the possibility that China’s high-net-worth investors could try to use bitcoins to circumvent strict investment caps on the property market.

Analysts say that there is a deeper and more contentious reason for China’s bitcoin boom. The popularity of the digital currency has been linked to the fact that China’s citizens are unable to trade the renminbi as freely as people in other countries trade their own currencies. Beijing keeps a close grip on the renminbi, concerned about potential disruptions to the economy that could result from sudden outflows or inflows of funds. [Source]

This isn’t China’s first exposure to the virtual currency world, as CNN Money recalls how the government moved to marginalize Tencent’s QQ currency in 2009 and explores why Bitcoin may be different:

Because Tencent controlled QQ through central online reserves, the Communist Party’s response was swift, hobbling QQ at its knees and bringing it well back into line overnight. How did they do it? Since QQ was centrally managed, all the Chinese government had to do was tell Tencent to limit QQ’s use or face a total shutdown of their business. So Tencent reeled it in.

Such a move is not so easy with the decentralized cryptography of Bitcoin, and Chinese officials know that.

Within months of the chop on QQ, the Bitcoin algorithm was released anonymously online. Bitcoin is difficult to trace. And as the open source aspects of Bitcoin grew and strong demand began to push up prices, China took notice, perhaps having been more aware than others of how quickly and completely these things can take off. [Source]

While Bitcoin may pose challenges to the Chinese government as it considers potential changes to its currency policy, Adam Pasick at Quartz reports that the issue is not so black and white:

The Chinese government is in the progress of rolling out financial reforms that could eventually allow Chinese investors to freely trade renminbi and make offshore investments. Bitcoin, however, threatens to short-circuit these gradual changes. Chinese bitcoin holders could conceivably use bitcoin to speculate on foreign currency and put their investments offshore.

But some argue that the Chinese government has more to gain from bitcoin’s rise than it has to lose. Jonathan Stacke, a writer for the digital currency research site The Genesis Block, wrote in May that bitcoin could conceivably chip away at the US dollar’s status as a reserve currency. That’s a long-held goal of the Chinese government, which gave bitcoin its de facto blessing with glowing reports on the state-run broadcaster CCTV and the Communist Party-controlled People’s Daily newspaper. [Source]

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