China keeping eye on digital currencies in push to stabilize financial system

Photo: Reuters

China has tightened its grip on trading platforms of virtual currencies especially those based overseas, as part of its clampdown on cryptocurrencies, which are considered destructive to the country's financial stability.

The crackdown, which started in September last year when the Chinese government issued a ban on local transactions of digital currencies and initial coin offerings, has "achieved initial success by keeping the risks caused by the initial coin offerings and trading of virtual currencies at an embryonic stage", said the Shanghai branch of the People's Bank of China, the country's central bank, in a statement.

Helped by the crackdown, China's share of global transactions of virtual currencies has slumped to less than 5 percent from the previous 90 percent, enabling the country to effectively fend off the risk of virtual currency bubble caused by the globally soaring prices of virtual currencies in the second half of last year, according to the statement.

Initial coin offering is a new kind of fundraising through which companies exchange their newly developed cryptocurrencies, named tokens, for payment in an existing currency, normally an established cryptocurrency like Bitcoin. Investors make profit when their tokens gain in value at a faster rate than the currency they use to pay for them.

The central bank has labeled the initial coin offering-based fundraising as "risky" and warned the public to stay vigilant about unauthorized operators who illegally raise money from investors under the cloak of virtual currencies in what it calls "Ponzi schemes".

The central bank has also taken aim at 124 offshore trading platforms of digital currencies, which primarily serve Chinese investors, blocking some 3,000 accounts used for virtual currency transactions. It has also ordered third-party payment service providers not to handle cross-border payments for cryptocurrency transactions and initial coin offerings.

In January, the National Internet Finance Association of China asked investors to be aware of the risks of overseas trading platforms of digital currencies, saying that they may well take part in money laundering and marketing manipulation.

Earlier this month, Xu Mingxing, founder and chief executive officer of OKCoin, one of China's biggest cryptocurrency exchange platforms, was reportedly besieged by investors in Shanghai and was later put into police custody on suspicion of fraud. Reports said that the Shanghai government had received complaints from many investors, who thought Xu was running "fraudulent schemes".

Besides, the Chinese government has also extended its crackdown to the social media platforms, where many trading platforms of digital currencies advertise their business.

Last month, Tencent permanently closed numerous WeChat public accounts devoted to spreading knowledge and information about cryptocurrency and blockchain, saying that they were suspected of violating a provisional regulation, which bans public accounts from hyping information about initial coin offerings and virtual currencies on the WeChat platform.

Tencent's move was highly considered as the result of a government decree focusing on protecting the legal tender status of the yuan.

The central bank is developing a state-backed digital currency featuring higher security levels than private virtual currencies, whose issuance, management and exchange are decentralized, with the rising demand for non-cash payment.

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