BOFIT Viikkokatsaus / BOFIT Weekly 2017/38

Chinese officials announced at the start of the month the banning of all fund-raising schemes offering tokens in exchange for investments in virtual coins (a practice known as Initial Coin Offerings or ICOs). ICO campaigns seek to raise capital from the public in exchange for virtual coinage such as Bitcoin or Ethereum coins in order to launch a business or project. In exchange, investors receive tokens that entitle them to an ownership stake in the firm or to a certain amount of the firm's future products and services.

Last week the central bank declared a complete end to trading on virtual currency markets in China. China's three largest bitcoin exchanges announced the suspension of trading in yuan would occur at latest in October. After the announcement Bitcoin, by far the most popular virtual currency, plunged from about 4,000 dollars to around 3,000 dollars before rebounding close to the earlier level.

ICO campaigns in China have intensified this year and the amount of money raised from such campaigns has exploded. In the first half of 2017, ICO campaigns raised an amount equivalent to 400 million dollars in cryptocurrencies from roughly 100,000 investors. ICO campaigns are beyond the scope of official regulation, which has created additional risks for Chinese financial markets. Due to the anonymous nature of virtual coins, ICO campaigns are ideal vehicles for financial scams and money laundering.

Trading in digital currencies had been quite lively up until February 2017, when officials announced that bitcoin exchanges had to monitor transactions. Moreover, the loading of cryptocurrency into the digital wallets of customers, i.e. the final step needed to allow them to use digital currency in normal payments, was frozen for four months. At the end of 2016, when transaction volumes had reached their peak, over 90 % of global trade in virtual currencies was conducted in yuan. Since the freeze, the amount of global transactions, all currencies combined, has plummeted to about 3 % of the December 2016 level. The Chinese have been quite astute at using cryptocurrencies to e.g. ferry capital out of the country.

Even with the recent crackdown on the use of digital money, the PBoC is apparently contemplating its own virtual currency. Besides the cost savings in payment handling, an official cryptocurrency would provide better tracing of financial transactions.