How China will weather the Bitcoin Storm

It is no secret that the central authorities in China want to clamp down on the trading of Bitcoin, Litecoin and Ethereum but the fact remains that China is the biggest player in the Bitcoin mining world

Bear in mind that the mining of BTC isn't illegal in China. Places like Ordos in Inner Mongolia rely on such activities to generate revenue for a ghost city. Not many people are familiar about Ordos outside of China. It has lavish infrastructure and even a international racing circuit that hosted the FIA GT1 World Championship. But for some reason, it became a failed city project due mainly to the harsh terrain and living conditions and lack of supporting industries.

With cheap electricity rates, a new industry was born. Bitcoin mining.

As a mature crypto currency, Bitcoin mining has become a relatively expensive affair as the computational requirements to win the right to process a transaction depends on having cheaper electricity. And let's not underestimate BTC miners in China as they have had so much clout over the rest of the world to the point that they manage to fork Bitcoin to Bitcoin Cash.

ETH mining on the other hand is less energy intensive as transactions are processed using 'gas' prices. This means mining isn't dependent on cheap electricity.

So if the Chinese authorities wanted to stop virtual currencies in China, it only has to kill off Ordos as the mining capital for Bitcoin. It is easier said than done since virtual currency mining hasn't been made illegal. They risk killing off the very last industry that would bring hope to the people living in Inner Mongolia. But there are other reasons why this won't be happening.

Link to the outside World

China is dependent on world trade. They need a connection to the outside world. To cut off all access would be relatively easy but would they?

This is the same people people have asked about China banning the use of VPNs in the country. Ever since their Golden Shield (read Great Fire Wall) project was initiated, it became a cause of concern for Chinese exporters since they can't reach out to customers outside of China. The only way out would be to turn to a VPN. Shutting down access to VPNs in China would be like banning world trade. Would China do such a thing just to spite its own face?

China is an export driven country. It exports products and services so as to keep their own citizens preoccupied with making money instead of fighting the government. What they have done with the virtual currencies is to look the other way but the crackdown has to happen because of the shadow banking system.

Whack a Mole Approach

China has a currency control system in place and there are no signs this would loosen. Citizens and residents of China are only allowed to remit abroad US$50,000 a year before they have to seek special permission to send any more cash out of the country. So Chinese citizens have thought of rather brilliant ideas to send cash outside of China while the government plays 'whack a mole' each time a brand new way to launder money crops up.

Simply put, Bitcoin exchanges were involved in laundering money and it has to be stopped as ICOs were using that approach to get BTCs transferred out of the country. There are two kinds of ICOs, one that gets you to invest with a RMB$ deposit in return for a token and the other is to get you to invest through a token exchange.

Virtual currencies were being used as real world currency in this case and all you have to do is exchange your RMB$ for BTC or ETH and send it abroad as an investment without having to exceed the US$50K annual limit. After all, BTCs are being mined in China so getting them would not pose a big problem.

The sudden clampdown was expected. ICOs were not regulated so why not just ban their operations in China.

Except that it didn't stop Chinese people who were crafty enough to see that they just can't invest in them locally but nothing would stop them from investing in foreign ICOs if they could access these sites directly.

One Country Two Systems

Creatively, the Chinese have developed many crafty ways to send money outside the border. I have seen this with my own eyes when I was living in Macau.

In Macau SAR, the gambling haven of the world, junket operators would take possession of prime real estate in China from gamblers in return for millions to gamble in one of the many casinos found in the former Portuguese enclave.

Those who do not have prime properties to pledge as collateral used their Union Pay debit cards to buy luxury items from 24 hour Pawn Shops found in Macau and once the transaction is processed, they resell these same luxury items to the shop at a small loss and get HKD cash in return. This was happening so often that the Chinese government started to impose limits on the maximum amount that can be purchased with each transaction but that didn't stop them. They only had to resort to breaking down the purchase into multiple transaction and thereby escaping the limits of the law.

In another case, property developers in China were busy selling their own foreign developed real estates at inflated prices in China for the same reason. Chinese would pay for these properties in RMB$ back home in China and they will get the title deeds to the property in foreign lands. These foreign real estate properties can be sold in cash by these same Chinese owners without having to remit back the proceeds to China.

In some third world countries in South East Asia, where buying of agriculture or commercial land by a foreign entity is permitted, Chinese companies will buy large tracts of land at an inflated price and send the paperwork back to the Chinese government for approval to pay for these purchases. As long as they spin a yarn to the central authorities, they never get into trouble that is until recently when the Chinese government started a crackdown on foreign developed real estates by Chinese companies who were using these methods to launder money.

Which brings us to the ICO ban recently announced by China. ICOs are just another means for Chinese citizens to ship their money aboard and this has to be stopped.

The ban on ICOs and closing down of virtual currency exchanges is nothing more than a dent in the underground financial system. Sure there will be those who will start to fret and dump all their holdings of virtual currencies causing the BTC and ETH market to crash but others will seize the opportunity to buy low now to sell high. But China's underground financial system's tentacles is far greater than Bitcoin and Ethereum put together. In the last two years, over US$1.8 trillion has left China through the underground financial system. And this figure was reported by Bloomberg.

China will weather the Storm in a Tea cup

BTC and ETH virtually currencies will not be going away by a long shot. The underground financial system in China will make sure it stays relevant by finding more creative ways to circumvent currency control measures implemented by the Chinese government. There are still virtual currency exchanges being operated in Hong Kong that are legal. The only caveat is that you need to be white listed to trade there. But if you run a business that accepts BTC and ETH as payment in Hong Kong, there is no reason not to exchange your virtual currency holdings for cash as a legitimate business.

It is very easy for Beijing to exert monetary control over Hong Kong and Macau. But they also know they need these regions to operate independently.

China needs places like Macau and Hong Kong to weather threats from the US financial system. Steven Mnuchin, US treasury secretary had threatened to cut China from the global financial system but as long as both Macau and Hong Kong stay outside of Beijing's reach, the two will be immune from any possible sanctions. China sees much benefit from not having to rule these two former colonies with an iron hand. China has global ambitions when it comes to trade and this isn't going to change overnight.

ICOs seeking to fund their activities could still set up in Hong Kong, provided the HKMA doesn't come out with a final rulling to ban ICOs from Hong Kong, which as a financial capital would gravely hurt their image. Some sort of middle ground would be taken to ensure that those who do offer ICOs in HK will not sell them as a form of security.

It just take a little creative thought into restructuring an ICO listing to appear not to have the securities option and by doing so, get away with it.

What happens next will be textbook Chinese. If you can take the trouble to get a HK or Macau based entity to change your BTC or ETH to cash, then it won't fall into the tenterhooks of the law. The Chinese shadow banking system will gladly take your ETH and BTCs in return for HKD.

The storm in a tea cup will eventually blow over and a new way to do launder money will be invented.