Afaics, the only practical technical way this can be accomplished is to ensure that the users never hold the private keys and thus ensuring that the exchanges do not allow any transfers to any Bitcoin address which is not controlled by the exchange (or another compliant exchange). To ensure that no exchange user can reside outside of China and that no such user can withdraw in fiat outside of the Chinese banking system. If they were to allow users to control private keys, then they would have to enforce such tracking on each user which is impractical to enforce.
Thus this proposal means that the Chinese could no longer participate in for example a social network (such as the project I am working on) where the crypto-currency moves from user-to-user regardless of their financial jurisdiction and in which the users control their private keys.
In other words, China would effectively be removing their citizens from the Bitcoin (and crypto-currency) ecosystem.
I don't see any way they can do this and not render China a 2nd class citizen on the future of the Internet economics. They will stunt the development of their own Internet software technology sector.
If China was going to do this, I think they would have done it a long time ago. I would tend to think this is some rumor put out there by those who wanted to make a lot of money shorting. Another sign that the corruption in governance also exists in the government of China's finance bureaucrats (and who would be surprised). Nevertheless before this could actually become a regulation, I think very astute people would have to sign off on it, and I just don't see China shooting themselves in the foot. They are too cunning for that. That Bloomberg has pulled the news off their website is another indication that this was probably malfeasance.
I see this as very likely a buying opportunity and a bear trap due to some errant malfeasance within the Chinese bureaucracy.
And also that the China's oligarchy control over Bitcoin mining and price is growing. If true, this corrupt influence over Bitcoin is what Bitcoin was supposed to eliminate. But the problem is Satoshi's proof-of-work design naturally centralizes due to economies-of-scale.
I have a video which explains this in some detail. And also we can see the control over the exchanges by governments is another choke point of control leading to such malfeasance.
We need to do something about this technically. I am working on it. I have a design
for unprofitable proof-of-work to address this problem. TPTB_need_war (who some think is me since I am reputed to be AnonyMint) has also done
conceptual technical design work on decentralized exchange (and there is some new research on that I haven't yet published). But decentralized exchange probably isn't really the solution because speculators don't want to trade where volume is low and trades aren't instantaneous. Instead the solution is probably about how we onboard millions of users and thus create an ecosystem where fiat is irrelevant for the users, i.e. the crypto-unit becomes the unit-of-account. In that case, the speculators become orthogonal to the users to a great extent (not entirely of course). If China were to wall off their population from this sort of Internet ecosystem, they would I think fall to 2nd class citizens on the Internet. Building their own walled gardens for such would again mean centralized control over private keys, which would mean massive failure due to hackers.
China will lose this gambit (of control over crypto-currency) eventually.
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