China set to remain a major driver of cryptocurrency prices

China has been the main driver of cryptocurrency prices throughout the early history of this fledgling (but growing) market. They rose when the People’s Bank of China (PBoC) first signalled acceptance of bitcoin in 2013, and fell later the same year when the Chinese government declared that it wasn’t a currency and banned financial institutions from using it.

As a result, it’s no surprise that news of Chinese regulators cracking down on cryptocurrency exchanges has caused wild swings in the market. After breaking $5000 at the start of September, bitcoin crashed all the way down to $3000, before a 35% rally pushed it once more above $4000 in less than three weeks.

Cryptocurrencies such as bitcoin and ether have gained in popularity over the last 18 months, and have seen a significant increase in global trade volume and adoption. As a result, regulators and geopolitical multinational bodies have had to start seriously looking into the technology and use of cryptocurrencies, and how they fit in with existing legislation.

Most governments are worried about the fundamental characteristics of a decentralised currency. Money laundering, for example, and other criminal activities such as ‘darknet’ transactions made famous by the Silk Road and the WannaCry ransomware, are impossible to track for the police. Furthermore, an unregulated market where you can’t link trade execution to an individual leaves cryptocurrency price action open to market manipulation, whilst security concerns due to the underlying Blockchain technology may pose a systemic risk to hackers. As such, every major government is discussing these topics.

China has more at stake than most countries

China has far more at risk than most. The PBoC has a very protective and intrusive set of regulations to control the direction of the Chinese yuan, and it maintains very tight controls on monetary policy. There are high reserve requirements if you are looking to short the yuan, for example, and a required balance of inflow/outflow when processing cross border transactions. The ‘China exports deflation’ discussion has also been a hot topic over the last couple of years, with many thinking there should be a move to loosen capital controls.

Even without a focus on monetary policy we know the Chinese government wants to be in control as it remains hard to access free and uncensored news services, unpoliced social media, or to post political opinion online in the country.

With this in mind, it’s easy to see how a decentralised global digital currency that allows individuals to remain anonymous and which can easily be transferred anywhere in the world instantly without any governmental intermediary, would cause concerns.

News related to cryptocurrencies has been coming out of China slowly, starting with unconfirmed rumours in August and the start of September, and settling with some of the largest exchanges officially confirming they will be shutting down before the end of the month.

Now it’s official: China is cracking down on non-regulated exchanges, and crowd-sourced funding via something similar to an 'Initial Public Offering' (IPO) called an ‘Initial Coin Offering’ or ICO. The PBoC has effectively imposed regulation on the easiest area it can - the exchanges located in China that allow traditional currencies to be turned into cryptocurrencies.   

Although any price movement may already be factored in, there are some important dates you may want to note in your crypto trading diary. These events may cause volatility in the underlying market as all these exchanges are significant in regards to daily volume traded.

• September 20: Yunbi shuts down
• September 25: VIABTC stops all trading
• September 30: VICBTC website is closed, and BTCChina stops all trading

Trade switching to Japan

There are other interesting effects from the latest Chinese regulations. There has been a huge uptick in the volumes of Japanese yen to bitcoin trading. This suggests Chinese citizens have taken to the over-the-counter (OTC) market and simply migrated their business to exchanges in Hong Kong and South Korea, and dealt in yen rather than yuan.

This can’t be underestimated. According to some websites which collate global trade volumes, Japan is picking up over 47% of the global bitcoin trade, making yen/bitcoin the highest traded pair by volume followed by the US dollar (USD) and Korean Won (KRW).

It’s interesting to also look back at China’s previously published opinions on bitcoin, as well as other legal cases and major events. In December 2013 the lead cryptocurrency fell 35% in 40 minutes after PBoC issued report titled 'Guarding against the risk of bitcoin.' The year 2013 also saw the dark web’s Silk Road shut down by the FBI, whilst in 2014 the world's largest bitcoin exchange, Mt. Gox, declared bankruptcy. All these events tarnished the technology, and price action reacted accordingly. The digital currency however, picked itself up and carried on.

Expect more regulation in the future

Going forward, it’s clear that this won’t be the end of government intervention and regulations on cryptocurrencies, and that wild swings in bitcoin, ether and others are likely. If anything, we will see a significant increase in new rules and laws both on a domestic and international level.

It’s worth noting, however, that such legislation doesn’t always have to be bad for Blockchain. The European Parliament and International Monetary Fund (IMF) for example, have already had many debates and internal reports on cryptocurrencies, whilst some governments (including Singapore and Russia) are tokenising their primary currency on the blockchain. Positive or negative sentiment tends to have a significant impact on the price action, so the market will be keeping a keen eye out for anything policy makers have to say.