By Christopher Beddor
(The author is a Reuters Breakingviews columnist.)
WASHINGTON, Sept 6 (Reuters Breakingviews) – China has its limits when it comes to reinventing finance. The central bank and other regulators this week banned a popular new method of fundraising through token-based digital currencies known as initial coin offerings. It follows a similar crackdown in the United States, but Beijing may have a different reason for policing crypto-currencies.
Crypto-currencies illustrate the People’s Bank of China’s conflicted position. It has acknowledged the utility of developing financial services, including for people with less access to the banking system. The bank is also investing heavily in research and development of its own crypto-currency based on blockchain technology, in large part to disintermediate payments, reduce transaction costs and limit corruption.
At the same time, the PBOC faces unresolved issues confronting authorities around the world, namely how to assess the potential systemic risks of new kinds of money. It also must deal with problems unique to China, including overzealous retail investors and the threat of capital outflows.
The primary issue, however, is control. Chinese officials have been uncomfortable with shadow currencies developing outside their purview. Tellingly, Zhou Xiaochuan has expressed hope that crypto-currencies might allow central banks to engineer negative interest rates in future. It’s a move that would grant the government even greater power over monetary conditions.
Tension over financial technology is mounting. Central bank officials, for example, are laying the groundwork for more action against Yu’e Bao, a money-market product linked to Alipay – a payment system developed by Alibaba’s Ant Financial – which competes with state banks for deposits. Its sheer size could present a challenge to the state’s grip on capital allocation. As China’s leverage problems mount, the central bank knows the government’s ability to directly influence lending to indebted firms could be a vital tool.
Ant Financial took the hint last month and lowered personal account caps. That may not be enough, though. Restraining ICOs could be just the latest sign that regulators in China want more than mere prudence.
– The People’s Bank of China said on Sept. 4 it would ban initial coin offerings, a new way of raising funds using token-based digital currencies. The central bank, along with six other regulators, called for organizations and individuals that have completed such offerings to return the funds.
– Crypto-currency bitcoin tumbled 8 percent following the news while that of rival ethereum fell 20 percent.
– Chinese state media reported in July that 65 ICOs had been launched so far in 2017, raising some 2.62 billion yuan, or nearly $400 million, from 105,000 individuals in China, according to Reuters.