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. Dubbed as the next best technology after the internet, blockchain offered solutions to problems that we have not addressed or ignored in recent decades. I will not delve into the technical aspect of it but here are some articles and videos that 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 5 to be exact, China’s authorities have just unveiled a new set of regulations to ban cryptocurrencies. The Chinese government already did this last year, but many have circumvented it by exchanging currency. Now it has hired the all-powerful ‘Great Firewall of China’ to block access to foreign exchanges in a bid to prevent its citizens from transacting 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 the lack of a centralized issuer, Bitcoin is not an official currency, but rather a virtual product that cannot be used on the open market.
2. All banks and financial organizations cannot offer Bitcoin-related financial services or engage in Bitcoin-related business activities.
3. All companies and websites that offer services related to Bitcoin must register with the necessary government ministries.
4. Due to the anonymity and cross-border characteristics of Bitcoin, organizations that provide services related to Bitcoin should 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 services related to Bitcoin should 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 product (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 accounting, and a store of value.
Even though the notice is dated 2013, it is still relevant regarding the Chinese government’s stance on Bitcoin and as mentioned, there is no indication of a ban on Bitcoin and cryptocurrencies. Rather, regulation and education about Bitcoin and blockchain will play a role in the Chinese crypto market.
A similar notice was issued in January 2017, again emphasizing that Bitcoin is a virtual product and not a currency. In September 2017, the boom in Initial Coin Offerings (ICOs) led to the publication of a separate notice titled “Notice on Financial Risk Prevention of Issued Tokens.” Soon after, ICOs were banned and Chinese exchanges were investigated and finally closed. (Hindsight is 20/20, they have made the right decision to ban ICOs and stop mindless gambling.) Another blow took the Chinese crypto community in January 2018 when mining operations faced severe crackdowns, citing excessive electricity consumption.
While there is no official explanation for the crackdown on cryptocurrencies, 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 outflow and guarantee domestic investments. The anonymity and ease of cross-border transactions have also made cryptocurrency 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 the global Bitcoin trade volume and three-quarters of the mining operations. With regulators stepping in to control commercial and mining operations, China’s dominance has been significantly reduced in exchange for stability.
With countries like Korea and India following in the crackdown, a shadow is now being cast over the future of cryptocurrencies. (I’ll reiterate my point here: countries are regulating cryptocurrencies, not banning them.) We will undoubtedly see more nations come together in the coming months to curb the tumultuous crypto market. In fact, some kind of order was long overdue. Over the past year, cryptocurrencies have experienced unprecedented price volatility and ICOs are happening literally every other day. In 2017, the total market capitalization increased from $ 18 billion in January to an all-time high of $ 828 billion.
Nonetheless, the Chinese community is surprisingly in good spirits despite the crackdown. Online and offline communities are flourishing (I have personally 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 receiving 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 the capabilities of blockchain to improve their platform. The list goes on and on, but you get me; It’s going to be HUGE!
The Chinese government has also embraced blockchain technology and stepped up its efforts in recent years to support the creation of a blockchain ecosystem.
In China’s 13th Five-Year Plan (2016-2020), the development of promising technologies, including blockchain and artificial intelligence, was called for. 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 blockchain-based digital currency prototype; However, as 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 Industry and Technology Development Forum by the Ministry of Industry and Information Technology are some of the other initiatives of the Chinese government to support blockchain development in China. .
A recent report titled “China Blockchain Development Report 2018” by the China Blockchain Research Center detailed the development of the blockchain industry in China in 2017, including the various measures taken to regulate cryptocurrencies on the mainland. In a separate section, the report highlighted the optimistic 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 cryptocurrency and mining operations. China wants to control cryptocurrencies and China will have control. The repeated executions by regulators were intended to protect their citizens from the financial risk of cryptocurrencies and limit the outflow of capital. As of now, it is legal for Chinese citizens to own cryptocurrencies, but they are not allowed to make any kind of transaction; hence the prohibition of 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 unnecessary). Therefore, countries cannot ban cryptocurrencies without banning blockchain, the amazing technology!
One thing we all agree on is that blockchain is still in its infancy. Many exciting developments await us and now is definitely the best time to lay the foundation for a blockchain-enabled world.
Last but not least, HODL!