Last week was indeed a period of FUD (Fear Uncertainty and Destruction) on the Crypto markets. This was mostly as a result of news out of only one country. On Monday, Chinese regulatory authorities said that they would be banning ICOs. There was the predictable crashing of the crypto markets.
The markets tended to recover over the course of the week as the FUD began to fade and bargain hunters decided to pick up assets. However, on Friday reports started to surface that the regulators were considering a ban of trading on the exchanges.
At first these were thought of as just rumours as many of the exchanges had not been told of the ban. Indeed, some are still operating at present. Yet, a number of Western outlets started to pick up the story on Monday with “reliable sources” quoting the authenticity of the reporting. Examples include a report by the Wall Street Journal.
Although there is still some degree of uncertainty in the market as to what the exact position of the regulators is, this should not be a large concern for investors and traders. Even if there is a ban on centralised exchange trading in China, there are at least three different options for Chinese investors to trade Crypto.
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Option 1: Peer to Peer (P2P) Bitcoin Exchanges
Even though the government banned centralised exchanges, this would not apply to P2P exchanges. These allow the buyers and sellers to facilitate transactions in a decentralised manner on a peer-to-peer network.
The Huobi Exchange and OKCoin, two of the biggest exchanges, said that they would fully cooperate with the regulators on the issue. If they were ordered to shut down their exchanges they would move to a peer-to-peer model. They mentioned that “Bitcoin peer-to-peer trades are not illegal” in a post on their blog.
Option 2: Moving Exchange Operations Abroad
Crypto currencies are by their very nature, global. Hence there is no reason that the exchanges should keep their operations located in China when jurisdictions such as Singapore, Hong Kong and Japan are more favourable for exchanges.
Unfortunately this could be a problem for Chinese investors who want to buy the crypto with Chinese Yuan. They would have to then only take deposits in other currencies or crypto currencies. Quartz magazine got a statement from an exchange operator who said
Chinese companies will become international in the future
Option 3: Over the Counter (OTC) Transactions
China already has quite a healthy OTC market where buyers and sellers negotiate amongst themselves a price. This is also really hard to regulate and also allows a certain degree of privacy that many people would like to keep. This is not unlike the “local bitcoins” concept that has been around for some time.
In China, these transactions are sometimes facilitated by a broker that acts as an intermediary. In China this is sometimes done through WeChat which is a Chinese version of Whatsapp. However, the regulations could mean that these OTC dealers and all of the new clients that could potentially come will move to non-Chinese chat apps.
One of the chat apps that is likely to benefit from this is Telegram which is a Russian chat app that is incredibly privacy conscious.
Long Term Impact of a Ban
While the termination of a method for Chinese investors to trade could have a short term impact on market liquidity and demand, it is unlikely to do much to the long term value of the block chain. Chinese consumers are not buying crypto currencies because of the exchanges.
Indeed, according to Eric Zhao of
CNLedger, the exchanges are not what give these assets their value but the underlying technology that underpins them. He also went on to say
From an investment aspect, while short-term speculators might find it harder to trade, long term investors are not that affected. Just inconvenience for the most part.