In 2008, following the financial crisis, a document titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published, detailing the concepts of a payment system. Bitcoin was born. Bitcoin caught the world’s attention for its use of blockchain technology and as an alternative to fiat currencies and commodities. Known as the next best technology after the internet, blockchain offered solutions to problems that we have been unable to address or ignored for the past few decades. I won’t delve into the technical side, but here are some articles and videos I recommend:
How Bitcoin works under the hood
A gentle introduction to blockchain technology
Ever wonder how Bitcoin (and other cryptocurrencies) really work?
Fast forward to today, February 5th to be exact, the authorities in China have just introduced a new set of regulations to ban cryptocurrencies. The Chinese government already did this last year, but many have circumvented it through currency exchange. It has now enlisted the all-powerful ‘Great Firewall of China’ to block access to foreign exchanges in a bid to prevent its citizens from transacting with cryptocurrencies.
To learn more about the Chinese government’s stance, let’s go back a couple of years to 2013, when Bitcoin was gaining popularity among Chinese citizens and prices were skyrocketing. Concerned about price volatility and speculation, the People’s Bank of China and five other government ministries released an official notice in December 2013 titled “Notice on Bitcoin Financial Risk Prevention” (link is in Mandarin). Several points were highlighted:
1. Due to various factors such as limited supply, anonymity, and lack of a centralized issuer, Bitcoin is not an official currency but a virtual commodity that cannot be used on the open market.
2. All banks and financial organizations may not offer Bitcoin-related financial services or engage in Bitcoin-related business activities.
3. All companies and websites offering Bitcoin related services must register with the necessary government ministries.
4. Due to the anonymity and cross-border characteristics of Bitcoin, organizations that provide Bitcoin-related services must implement preventive measures such as KYC to prevent money laundering. Any suspicious activity, including fraud, gambling, and money laundering, should be reported to the authorities.
5. Organizations that provide Bitcoin-related services must educate the public about Bitcoin and the technology behind it and not mislead the public with misinformation.
In simple terms, Bitcoin is classified as a virtual commodity (for example, in-game credits) that can be bought or sold in its original form and cannot be exchanged with fiat currency. It cannot be defined as money, something that serves as a medium of exchange, a unit of account, and a store of value.
Even though the notice dates back to 2013, it is still relevant to the Chinese government’s stance on Bitcoin and, as mentioned, there is no indication of a ban on Bitcoin and the cryptocurrency. Rather, Bitcoin and blockchain regulation and education will play a role in the Chinese crypto market.
A similar notice was issued in January 2017, again emphasizing that Bitcoin is a virtual commodity and not a currency. In September 2017, the rise of Initial Coin Offerings (ICOs) led to the publication of a separate notice titled “Notice Regarding Financial Risk Prevention of Issued Tokens.” Soon after, ICOs were banned and Chinese exchanges were investigated and eventually shut down. (In hindsight, 20/20, they have made the right decision by banning ICOs and stopping pointless gambling.) China’s cryptocurrency community received another blow in January 2018 when mining operations faced serious crackdowns, citing excessive electricity consumption.
While there is no official explanation for the crackdown on cryptocurrency, capital controls, illegal activities, and protecting its citizens from financial risk are some of the top reasons cited by experts. In fact, Chinese regulators have implemented stricter controls such as the overseas withdrawal limit and foreign direct investment regulation to limit capital outflows and guarantee domestic investments. The anonymity and ease of cross-border transactions have also made cryptocurrencies a favorite medium for money laundering and fraudulent activities.
Since 2011, China has played a crucial role in Bitcoin’s meteoric rise and fall. At its peak, China accounted for more than 95% of global Bitcoin trading volume and three-quarters of mining operations. With regulators stepping in to control trading and mining operations, China’s dominance has been significantly reduced in exchange for stability.
With countries like Korea and India following suit in the crackdown, a shadow is now cast over the future of cryptocurrency. (I’ll reiterate my point here: countries are regulating cryptocurrencies, not banning them.) We will no doubt see more nations coming together in the coming months to control the tumultuous crypto market. In fact, some kind of order was long overdue. Over the past year, cryptocurrencies have experienced unprecedented price volatility with ICOs happening literally every other day. In 2017, total market capitalization rose from $18 billion in January to an all-time high of $828 billion.
However, the Chinese community is in surprisingly good spirits despite the crackdown. Online and offline communities are flourishing (I personally have attended quite a few events and visited some of the companies) and blockchain startups are springing up all over China.
Major blockchain companies like NEO, QTUM, and VeChain are getting a lot of attention in the country. Startups like Nebulas, High Performance Blockchain (HPB) and Bibox are also gaining quite a bit of traction. Even giants like Alibaba and Tencent are also exploring blockchain capabilities to improve their platform. The list goes on and on, but you get my drift; it’s going to be HUGE!
The Chinese government has also been embracing blockchain technology and has intensified its efforts in recent years to support the creation of a blockchain ecosystem.
In China’s 13th Five-Year Plan (2016-2020), he called for the development of promising technologies, including blockchain and artificial intelligence. It also plans to strengthen research on the application of fintech in regulation, cloud computing, and big data. Even the People’s Bank of China is also testing a prototype blockchain-based digital currency; however, since it is likely to be a centralized digital currency with some encryption technology, its adoption by Chinese citizens remains to be seen.
The launch of the Trusted Blockchain Open Lab as well as the China Blockchain Technology and Industry Development Forum by the Ministry of Industry and Information Technology are some of the other Chinese government initiatives to support blockchain development in China.
A recent report titled “China Blockchain Development Report 2018” (English version at the link) from the China Blockchain Research Center detailed the development of the blockchain industry in China in 2017, including the various measures taken to regulate cryptocurrency on the continent. In a separate section, the report highlighted the upbeat outlook for the blockchain industry and the massive attention it has received from venture capitalists and the Chinese government in 2017.
In short, the Chinese government has shown a positive attitude towards blockchain technology despite its application in mining and cryptocurrency operations. China wants to control cryptocurrencies and China will get control. Repeated executions by regulators were meant to protect its citizens from the financial risk of cryptocurrencies and limit the outflow of capital. As of now, it is legal for Chinese citizens to hold cryptocurrencies, but they are not allowed to carry out any type of transaction; hence the ban on exchanges. As the market stabilizes in the coming months (or years), we will undoubtedly see a resurgence of the Chinese crypto market. Blockchain and cryptocurrency go hand in hand (with the exception of the private chain where a token is not necessary). Therefore, countries cannot ban cryptocurrencies without banning blockchain, the amazing technology!
One thing we can all agree on is that blockchain is still in its infancy. Many exciting developments await us and this is definitely the best time to lay the foundation for a blockchain-enabled world.
Last but not least, HODL!