Overall, 2017 saw a largely positive regulatory response to cryptocurrencies, which has strongly supported the increase in price. Most notable is the significant spike in bitcoin prices following Japanese regulatory changes coming into effect on 31 March. Changes supporting price increases include:
- new Japanese regulatory regime to support investors;
- Russia’s moves to regulate cryptocurrencies (despite having historically outlawed them); and
- Australia’s changes to tax law to support cryptocurrency’s use (which the Lupercal Capital’s experts have been heavily involved in, in a consulting capacity).
Regulatory changes in China have been less positive (from a price perspective), as China appears uncertain how to treat cryptocurrencies. This culminated in China’s moves to tightly regulate Chinese cryptocurrency exchanges, and later moves to ban those exchanges from operating in the jurisdiction.
The Chinese government’s regulatory approach to cryptocurrencies is generally negative, as the government grapples with how to address a technology with potentially wide-reaching implications over which they have little control. This approach is largely consistent with the position taken by many Western governments over the past 5 years. However, Western governments have gradually begun to see the opportunities of cryptocurrencies as outweighing their nefarious uses, which resulted in policy changes as governments sought to encourage the growth in cryptocurrency’s mainstream use.
China may eventually take a different attitude to the regulation of cryptocurrency. Not all regulation is bad (particularly in the longer term) and if China’s moves to regulate cryptocurrency take the form of new consumer protection laws, it may be that Chinese regulations support increase in the bitcoin price as occurred in Japan.
However, we speculate that China seems weary of how cryptocurrencies could impact its government’s ability to control capital outflows from the jurisdiction. If China’s general approach towards cryptocurrency does not change, it seems likely that this may dampen the growth in the market. However, it is interesting to note that in mid September 2017 — when major Chinese laws regulating exchanges were expected to have the most impact on the market — the market corrected, but only briefly. It quickly recovered as it seems that the lost volume in Chinese cryptocurrency trading was largely assumed by South Korean (temporarily) and Japanese exchanges. This may signal an important step in the market’s resilience as a signal jurisdiction’s laws and trading (even in what was historically the key jurisdiction for cryptocurrency trading) have less impact on the market as a whole.