Nov 08, 2018 07:40 AM

Cryptocurrency ‘Bubble’ Risk Cited by Central Bank

The People's Bank of China. Photo:VCG
The People's Bank of China. Photo:VCG

China’s central bank warned of “obvious bubbles” in blockchain-related financing and investments involving cryptocurrencies, especially in Initial Coin Offering (ICO) activities.

The government should strengthen supervision of the sector and prevent financial risks, argues a working paper published Tuesday. The paper, titled “What can a blockchain do and not do?” was written by Xu Zhong, director of the Research Bureau of the People’s Bank of China, and central bank analyst Zou Chuanwei.

“Speculation, market manipulation, and even violations of laws and regulations are common, especially for token projects involving public offering transactions,” the paper says.

Even though the 20,000-word paper purports to represent only the researchers’ “academic opinions,” it’s widely seen as an important signal of the central bank’s policy attitude toward blockchain-related currencies such as bitcoin. Blockchain refers to an advanced encryption technology that can be used not only as the basis for cryptocurrencies but also in business applications involving ledger entries and transaction tracking.

China, known for its stance against cryptocurrencies, banned all ICOs outright in September 2017, declaring them a form of illegal fundraising and shutting down local crypto platforms that facilitated such offerings.

Following the ICO ban, major cryptocurrency exchanges based in China moved overseas, mostly to Singapore, Japan and Hong Kong, but continued to serve domestic investors, according to the central bank. Some companies also continued operating on the mainland by acting as market-makers and guarantors in over-the-counter trading, which was not explicitly banned.

China’s regulators have since warned against and cracked down on variations of ICOs disguised under various alternative names.

Despite the strict regulation of cryptocurrencies and ICOs, China has taken a more positive stance on blockchain technology. In 2016, blockchain was added into the government’s 13th Five-Year Plan, a road map for national development from 2016 to 2020. In May, President Xi Jinping called blockchain technology “a part of technological revolution”

The PBOC paper discusses various applications of blockchain technology and provides an economic analysis of blockchain projects. The paper calls for a practical view on the application of the technology.

“Firstly, don’t exaggerate the function of the blockchain,” the paper says. “Some industry practices in recent years have proven that some blockchain applications are not feasible,” particularly in the financial sector.

“So far, no technological innovation has had a disruptive impact on the financial system, and blockchain is no exception,” the authors write.

The paper emphasizes that cryptocurrencies lack intrinsic value or credible sovereign backing and therefore cannot replace legal currencies.

The anonymous nature of cryptocurrencies will also increase the difficulty of implementing anti-money laundering and “know your customer” practices in financial transactions, the paper says.

The paper does not provide details of what would constitute acceptable use of blockchain technology in China but mentions that the decentralization of China’s commercial bill market provides opportunities for blockchain applications.

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