During the first week of September, China issued its ban on new “Initial Coin Offerings” which raise funds for start-ups by receiving either bitcoin or the ether coin in exchange for a new currency with the idea that the value of the new coins will increase as the project grows and is implemented by a greater number of users. We can only surmise on the reasoning behind the ban, as the government is being notoriously quiet regarding this drastic action.We might guess that it was China’s concern for financial fraud that prompted this action, although the incidence of fraud in the ICO arena is unknown, it can be certainly to be stated as relatively minor as the investors are generally sophisticated enough to be able to understand the project in which they invest or be able to retain someone who does. While ICO fraud remains a (minor) concern, it is unlikely the primary motivation behind the ICO ban.

In further news, China has also apparently closed down 3 of its largest cryptocurrency exchanges, although this has not been confirmed by the exchanges themselves. A drastic move to say the least, since we can be certain that China’s government regulators have full documentation from each exchange on their entire operations, revenues, and traders/investors who are members of the exchanges. Probably they track every transaction that is made through each exchange including who it was made by, and have been doing so since inception, so why the shut down now?

It’s not a secret that China is extremely paranoid regarding its currency and where it is moved, with strict regulations regarding the withdrawal of cash outside of the country. China’s economy is in shambles and has been slowing substantially for a number of years due to its extreme overbuilding of the ‘ghost cities’ where no one lives and a decreased global demand for its products (which is further demonstrated by the collapse in oil prices).

Basically, a country that attempts to restrict capital outflow, becomes extremely ripe for the use of cryptocurrency. Wealthy Chinese who’ve made their money during the boom can see smoke on the horizon, want to get off the sinking ship and convert their yuan into the dollar, euro, pound, or something else with staying power, hence bitcoin is the perfect vehicle.

The operation is quite simple: bitcoin and ether move into China by various means such as direct purchase (exchange for yuan), sales or product (in exchange for bitcoin), mining, or ICOs. The bitcoin is then exchanged for yuan cash by various brokers or individuals and easily transferred out of the country either physically (in an electronic wallet) or by simply exchanging it for a foreign currency by means of an exchange or service (without alerting regulators). Many internet banking operations will allow the conversion of bitcoin to a number of other currencies, but to do so with yuan directly may be traced and a penalty incurred, with possible criminal charges for money laundering.

China is correct that bitcoin and ether may be used to launder money and/or remove it out of China; however, this ban on ICOs and exchanges is unlikely to dampen the mobility and decentralization of the cryptocurrency phenomenon. The more they crack down on the free flow of currency, the more its people will figure out ways to skirt their government’s hegemony.

With China’s crackdown on crypto coins, can we make an educated guess that mining will also be banned in the near future?