On Feb 8. 2017, two biggest Chinese exchanges announced they will suspend bitcoin withdraws for one month effective immediately. Unlike earlier announcements, this is indeed negative for digital assets ecosystem, if such action expands in either the length of suspension and/or in the number of participating exchanges.
For one thing, think about what is an exchange? It is a place where people convert their fiat money to electronic coins and vice versa. Without the ability to withdraw, the direction from fiat to electronic is impaired. Since Yuan withdrawals will not be affected, the other direction is still functional.
With half of it function gone, an exchange loss more than half its utility. In fact, I would ague it is NOT an exchange any more. Is this what Chinese government would like to see? Definitely not! Otherwise, it would not bother asking exchanges to stop marginal trading and to start charge transactions fees. These earlier actions aimed at bring down volatility.
So what is this trying achieve? It is obvious the move is to prevent capital outflow, money laundering, etc. via digital. Government wants to control capital flow. But being able to moving value over the Internet without a 3rd party is the very core value of electronic coins. It is the battle between central authority and decentralization. Will the government achieve its goal? Doubtfully. When the official channel is shut down, activities go underground or to other jurisdictions. Just take a look at the LocalBitcoin volume chart below (source: Coin Dance), which shows a 10-fold increase following withdraw suspension at major exchanges.
The current bitcoin’s market cap is $15 billion, which is tiny compared to other established markets. The tension between authority and decentralization will increase with the increase of electronic coins’ market cap. After all, representing value in fiat money is the most intuitive and convenient way that most people can understand.
What draws less attention in the event is the fact it clearly demonstrates one of the utility of electronic coins: cross-border value transfer. Just like what email has enabled for information, electronic coins makes transferring value over the Internet equally easy, no matter it is just over a street or cross the borders. In his presentation “Bitcoin Speculation“, Tone Vays surveyed the speculative aspect of Bitcoin history, and touched upon its supply-and-demand dynamics. Tone was a Wall Street veteran, before becoming active in spreading the relevance and importance of this technology as it helps promote economic freedom.
On June 1, 2017, almost 4 months after withdrawal freeze, 2 of the three biggest exchanges in China restored withdrawal services.