It’s all under control

It’s all under control. That is what Chinese regulators are thinking as they release plans to halt exchange-trading of the cryptocurrency bitcoin. This is in follow up to the announcement earlier this month which outlawed Initial Coin Offerings (ICOs) – a clever play on words for Initial Public Offerings (IPOs) in the traded equity market – used to launch offshoots of the currency. The result is a drop of as much of 40% in the value of digital asset from its September 1st high. It is understandable that the global bitcoin community is a bit nervous. It is estimated that China accounts for 23% of bitcoin trades while also being the domicile of several of the biggest bitcoin miners.  It is not the first market where Chinese regulators have tried to contain a speculative mood. Like their play-on-word cousins, the Chinese also took measures to rein in froth in local equity markets in years past which are also notoriously speculative and driven by retail traders.

It should also not be much of a surprise – China is still a closed-economy and tightly controls how much official currency (yuan) is allowed to leave the country. Just as bitcoin was perceived as a tool of choice by criminal elements looking to exchange value outside regulated channels, why wouldn’t a country of over 1 billion people seek to use it to move money outside the realm in which it has been contained? The excessive level of volatility in the currency this summer, both up and down, has brought attention by financial leaders such as Jamie Dimon and Howard Marks. That said, it is important we should not let excessive speculation in a new financial invention (which is common in investment history) distract from the underlying distributed ledger technology (often called blockchain). Large companies outside the financial world are innovating with distributed ledgers as ways to better track shipments, execute legal contracts, or certify the provenance of diamonds for example. In an ironic twist, blockchain is about more control not less.