The love-hate relationship of Chinas central bank with digital money shows no signs of resolving soon, as investors continue to back the industry leading bitcoin while Beijing lays the foundation for its own sovereign cryptocurrency.

The technological underpinnings of an electronic currency hold a strong allure for a government struggling to keep a tight grip on capital outflows, but that same technology makes digital money resistant to centralised control, industry experts say.

The Peoples Bank of China (PBOC) is struggling to maintain some rhetorical consistency. Bank governor Zhou Xiaochuan said in February last year that a digital currency must be issued by the central bank and the PBOC had been pouring money into the study of blockchain technology. Following two years of research, the bank had devised a test of its own digital currency and by the end of last year had set up an in-house research institute headed by a former deputy director at the banks payment department.

Bitcoin price triples since start of year to break through US$3,000 amid rising global demand

In a recent speech, Yao Qian, a PBOC official who heads the research institute, called for prudent tolerance towards regulating the virtual currency industry while speeding up the issuance of its sovereign digital currency.

Ten years ago, the value of 10,000 bitcoins could buy a piece of pizza. Now the price of one bitcoin is more than one unit of gold, Yao said. But the mainland also needed to provide an investment opportunity for companies that sought to rely on cryptocurrency market to make initial public offerings, where they offer digital tokens to raise capital. At least its better than buying some trash stocks, Yao said.

This perspective is in stark contrast to the banks hostility toward bitcoin in December 2013 when it issued a notice prohibiting all banks and payment service providers from accepting it as a way of payment. Bitcoins price immediately crashed and didnt bounce back until late last year.

It remains deeply volatile, with rampant speculation on the mainland, which produces most of the worlds bitcoins and counts the largest number of its investors, fuelling much of that fluctuation.

In January, prices plunged by about 40 per cent within a few hours. The PBOC subsequently raided three mainland bitcoin exchanges to check for foreign exchange violations and money-laundering.

It has since maintained a tight grip on bitcoin trading by requiring the exchanges to charge transaction fees, stop lending to investors for trading, and stop coin withdrawals, a ban that was only lifted in June. The exchanges were also required to adopt additional rules to strengthen verification of the personal information of clients seeking to make withdrawals.

Chinas bitcoin market: another ticking time bomb?

As a result, the Chinese mainlands share of global bitcoin trading fell to 16 per cent from 80 per cent, according to Huobi, a major bitcoin exchange on the mainland. Despite the central banks heavy-handed control over trading, the price of bitcoin continued to rise, thanks to investors from Japan and South Korea, and hovered around 19,000 yuan (US$2,780 or HK$21,690) this week more than triple its level earlier this year.

In 2017, essentially, the PBOC made bitcoin trading in China less desirable, compared to what happened in 2013, Arthur Hayes, chief executive of Hong Kong-based Bitcoin exchange BitMEX, said. It shows that regulators can only slow down the on-ramp [leading to] cryptocurrency, but the demand is still there for money that is not affiliated with any particular government.

The PBOCs zeal for its own digital currency is so pronounced that a few companies have started to sell digital currency in the name of the bank, leading the central bank to issue a statement alerting the public to misleading claims. The yuan remains the only legitimate currency on the Chinese mainland.

Hong Kong Bitcoin exchange hacked, US$66m stolen: thieves may have exploited market closure during typhoon

The central banks fondness for going digital has raised scepticism in the bitcoin community. Susanne Tarkowski Tempelhof, founder of Bitnation, an advocacy group, said that if the central bank tried to invent a currency with embedded centralised control and inflation rather than deflation, then it would have a hard time competing with bitcoin and similar more well-designed currencies over time.

Previous attempts to create geography-centric crypto currencies such as Aurora Coin, MintChip and Scotcoin have so far been failures, Tempelhof said.

And the PBOC continued to face a challenge in producing an alternative to bitcoin, she added, which was decentralised, untrusting and resistant of traditional central banking.

Go here to see the original:

Can China's central bank mint an answer to bitcoin? - South China Morning Post