It looks like China is shutting down its blockchain economy

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When the Chinese government announced a ban on initial coin offerings last week, it looked like an attempt to rein in the speculative excesses of the cryptocurrency economy. But now it seems like it might have been the start of something more ambitious: a coordinated campaign to shut down use of cryptocurrency in the Middle Kingdom.

The full extent of the Chinese crackdown isn’t clear yet, in part because key decisions have only been communicated privately to Chinese Bitcoin exchanges. But a couple of Bitcoin exchanges have now announced that they are shutting down. And leaked documents suggest that the rest will be required to do so before the end of the month. Chinese users will be given a chance to withdraw their funds before the exchanges shut down.

“BTCChina encourages customers to withdraw their funds as quickly as possible,” one of the exchanges wrote in a Friday tweet. “Customers can withdraw their funds whenever they want.”

Bitcoin has always been something of an awkward fit for China, which strictly regulates financial markets and limits the flow of funds overseas. Chinese officials have apparently concluded that Bitcoin has become too popular as a way to circumvent those regulations.

Reuters quoted a Friday comment by a senior Chinese official that may explain the Chinese government’s thinking:

Li Lihui, a senior official at the National Internet Finance Association of China and a former president of the Bank of China, told a conference in Shanghai that global regulators should work together to supervise cryptocurrencies.

“Digital tokens like bitcoin, ethereum that are stateless, do not have sovereign endorsement, a qualified issuing body or a country’s trust, are not legal currencies and should not be spoken of as digital currencies,” he said. “They can become a tool for illegal fund flows and investment deals.”

He said there should be a distinction between digital currencies, which were being studied and developed by authorities such as the Chinese central bank, and digital tokens such as bitcoin. Digital currencies developed by authorities could be used for good, with the right regulation, he said.

The Internet finance association was set up by China’s central bank, and according to Reuters, it “urged members to abide by Chinese laws and not deal in cryptocurrencies.”

If Li’s comments reflect the thinking of the Chinese authorities, that suggests that this is much more than a temporary halt to Chinese Bitcoin trading. The government seems to be laying the groundwork to ban independent digital currencies from the Chinese economy altogether.

If so, that will raise some awkward questions for other Chinese entrepreneurs participating in the blockchain industry. For example, four of the world’s largest Bitcoin mining operations are based in China. Miners process Bitcoin transactions and, in exchange, are rewarded with newly created bitcoin. They also exercise significant power over changes to the Bitcoin protocol. So if Chinese mining pools were shut down, it would have a big impact on the distribution of power in the global Bitcoin economy.

Right now, it doesn’t look very likely that other countries will follow China’s lead. US regulators clearly signaled their acceptance of Bitcoin in 2013, and since then there has been little sign that they’re changing their minds. Investors have poured more than a billion dollars into cryptocurrency startups since then.

While a US cryptocurrency ban isn’t likely, we are likely to see increased regulatory scrutiny of the cryptocurrency economy—especially from the Securities and Exchange Commission. The SEC enforces securities laws, and recently there have been a number of new cryptocurrency offerings that look suspiciously like illegal stock offerings. The SEC issued a warning about the issue in July and is widely expected to do more on the issue in the coming months and years.