In 2008 after the financial crisis, a paper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published, detailing the concepts of the payment system. Bitcoin was born. Bitcoin has gained world attention for its use of blockchain technology and as an alternative to currencies and paper goods. Blockchain is known to be the second best technology after the internet, as it has provided solutions to problems that we failed to address or ignore over the past few decades. I will not go into the technical side of it but here are some articles and videos that I recommend:
How does Bitcoin work under the hood
A nice introduction to blockchain technology
Have you ever wondered how Bitcoin (and other cryptocurrencies) actually works?
Fast forward to today, February 5th to be exact, authorities in China just unveiled a new set of regulations to ban cryptocurrency. The Chinese government did this already last year, but many circumvented it through foreign exchanges. It has now enlisted the powerful “ Great Firewall of China ” to block access to foreign exchanges in an effort to prevent its citizens from making any cryptocurrency transactions.
To find out more about the position of the Chinese government, let’s take a few years back to 2013 when Bitcoin was gaining popularity among Chinese citizens and prices were rising. Concerned about price volatility and speculation, the People’s Bank of China and five other government ministries published an official notice in December 2013 titled “Notice on Preventing Bitcoin Financial Risks” (Mandarin link). Several points are highlighted:
1. Due to various factors such as limited supply, anonymity and lack of a central issuer, Bitcoin is not an official currency but a virtual good that cannot be used in the open market.
2. Not all banks and financial institutions are permitted to provide Bitcoin-related financial services or engage in Bitcoin-related trading activity.
3. All companies and websites that provide services related to Bitcoin must register with the necessary government ministries.
4. Due to Bitcoin’s anonymity and cross-border features, organizations that provide services related to Bitcoin should implement precautionary measures such as KYC to prevent money laundering. Any suspicious activity including fraud, gambling and money laundering must be reported to the authorities.
5. Organizations providing services related to Bitcoin should educate the public about Bitcoin and the technology behind it and not mislead the public with misleading information.
In layman’s term, Bitcoin is categorized as a virtual good (for example, in-game credits) that can be bought or sold in its original form and not exchanged for fiat currency. It cannot be defined as money – something that acts as a medium of exchange, an accounting unit, and a store of value.
Although the notice is dated 2013, it is still relevant regarding the position of the Chinese government on Bitcoin and as mentioned, there is no indication of Bitcoin and cryptocurrencies being banned. Instead, regulation and education around Bitcoin and the blockchain will play a role in the Chinese crypto market.
A similar notice was issued in January 2017, once again confirming that Bitcoin is a hypothetical commodity, not a currency. In September 2017, the boom in Initial Coin Offerings (ICOs) led to the publication of a separate notice titled “Notice about Preventing Financial Risks for Issued Tokens”. Soon after, ICOs were banned and Chinese exchanges were investigated and eventually closed. (Hindsight is 20/20, they made the right decision to ban ICOs and stop gambling that doesn’t make sense.) Another blow to the Chinese cryptocurrency community was dealt in January 2018 when mining operations faced draconian measures due to excessive electricity consumption.
Although there is no official explanation regarding the crackdown on cryptocurrencies, capital controls and illegal activities and protecting their citizens from financial risks are some of the main reasons the experts cited. Indeed, Chinese regulators have implemented stricter controls such as an external withdrawal ceiling and regulation of foreign direct investment to limit capital outflows and ensure domestic investment. The anonymity and ease of cross-border transactions have made cryptocurrencies a preferred method for money laundering and fraudulent activities.
Since 2011, China has played a crucial role in the rise and fall of Bitcoin. At its peak, China accounted for more than 95% of global bitcoin trading volume and three quarters of mining operations. As regulators step in to control trade and mining operations, China’s dominance has diminished dramatically in exchange for stability.
With countries like Korea and India following suit in the crackdown, it now casts a shadow over the future of cryptocurrencies. (I’ll repeat my point here: Countries regulate cryptocurrency, not ban it.) Without a doubt, we will see more countries joining in in the coming months to rein in the turbulent cryptocurrency market. Indeed, some kind of order was long overdue. Over the past year, cryptocurrencies have experienced price volatility never heard before, and Initial Coin Offerings (ICOs) happen literally every day. In 2017, the total market cap increased from $ 18 billion in January to an all-time high of $ 828 billion.
However, the Chinese community is in surprisingly good spirits despite the repression. Online and offline communities are thriving (I’ve personally attended quite a few events and visited a few companies) and blockchain companies are spreading across China.
Big 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 a fair amount 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 understand me; It will be hoggie!
The Chinese government has also adopted blockchain technology and has intensified its efforts in recent years to support the creation of a blockchain ecosystem.
In China’s Thirteenth Five-Year Plan (2016-2020), it called for the development of promising technologies including blockchain and artificial intelligence. It also plans to boost research on the application of fintech to regulation, cloud computing and big data. Even the People’s Bank of China is also testing a prototype of a blockchain-based digital currency; However, it is possible that a central digital currency may be linked to some cryptocurrency, but its adoption by Chinese citizens remains unclear.
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 initiatives taken by the Chinese government to support blockchain development in China.
A recent report entitled “China Blockchain Development Report 2018” (English version at link) was presented by the China Blockchain Research Center detailing the development of the blockchain industry in China in 2017 including the various measures taken to regulate cryptocurrency in the mainland in a separate section, the report highlighted On the optimistic outlook of the blockchain industry and the tremendous attention it received from VCs and the Chinese government in 2017.
In short, the Chinese government has shown a positive attitude towards blockchain technology despite its application to cryptocurrencies and mining operations. China wants to control the cryptocurrency, and China will take control. The aim of the frequent enforcement operations by the regulators was to protect their citizens from the financial risks of cryptocurrencies and reduce the flow of capital. As of now, it is legal for Chinese citizens to hold cryptocurrencies but are not allowed to conduct any form of transactions; Hence the ban on exchange. As the market stabilizes in the coming months (or years), we will undoubtedly see a recovery in the Chinese crypto market. Blockchain and cryptocurrency come side by side (except for the special chain where the token is not necessary). Thus, countries cannot block cryptocurrencies without blocking the blockchain.
One thing we can all agree on is that blockchain is still in its infancy. Many exciting developments await, and now is definitely the best time to lay the groundwork for a blockchain enabled world.
Last but not least, HODL!