In 2008, after the financial crisis, an article titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published detailing the concepts of the payment system. Bitcoin was born. Bitcoin has gained worldwide attention due to its use of blockchain technology and as an alternative to fiat currencies and commodities. Dubbed as the next best technology after the Internet, blockchain has offered solutions to problems that we have not been able to solve or seen for the past few decades. I won’t go into the technical side of it, but here are some articles and videos I recommend:
How Bitcoin Works Under the Hood
A subtle introduction to blockchain technology
Have you ever wondered how Bitcoin (and other cryptocurrencies) actually work?
Fast forward to today, February 5th to be exact, Chinese authorities have introduced a new set of regulations banning cryptocurrency. The Chinese government already did this last year, but many avoided it through foreign currencies. It has now launched the mighty “Great Firewall of China” to block access to foreign currencies to prevent its citizens from conducting any cryptocurrency transactions.
To know more about the position of the Chinese government, let’s go back to 2013, a few years ago, when bitcoin gained popularity among Chinese citizens and prices soared. Concerned about price volatility and speculation, the People’s Bank of China and five other government ministries issued an official notice in December 2013 titled “Bitcoin Financial Risk Prevention Notice” (Link is in Mandarin). A few 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 institutions are prohibited from offering Bitcoin-related financial services or engaging in Bitcoin-related trading activities.
3. All companies and websites offering Bitcoin-related services must register with the appropriate government ministries.
4. Due to the anonymity and cross-border characteristics of Bitcoin, organizations providing 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 providing Bitcoin-related services should educate the public about Bitcoin and the technology behind it and not mislead the public with false information.
In layman’s terms, Bitcoin is classified as a virtual commodity (such as in-game credits) that can be bought or sold in its original form and cannot be exchanged for 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.
Although 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 that Bitcoin and cryptocurrency will be banned. Conversely, 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 commodity, not a currency. In September 2017, the boom in initial coin offerings (ICOs) led to the publication of a separate notice entitled “Notice on Financial Risk Prevention of Issued Tokens”. ICOs were soon banned and Chinese exchanges were investigated and eventually shut down. (Hindsight 20/20, they made the right decision to ban ICOs and stop pointless gambling). Another blow to China’s cryptocurrency community came in January 2018 when mining operations faced severe pressure due to excessive electricity consumption.
While there is no official explanation for the crackdown on cryptocurrencies, capital controls, illegal activities, and protecting citizens from financial risk are among the main reasons cited by experts. Indeed, Chinese regulators have imposed tighter controls, such as capping overseas withdrawals and regulating foreign direct investment, to limit capital inflows and ensure inward investment. Anonymity and the ease of cross-border transactions have made cryptocurrency a favorite vehicle for money laundering and fraudulent activity.
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. As regulators stepped in to monitor trade and mining operations, China’s dominance was significantly reduced in exchange for stability.
Countries like Korea and India are following these pressures, now casting a shadow over the future of cryptocurrency. (I’ll repeat my point here: countries regulate cryptocurrency, not ban it). We will no doubt see more countries joining in to rein in the stormy crypto market in the coming months. Indeed, some sort of order was long overdue. Over the past year, cryptocurrencies have experienced unheard of price volatility and ICOs are happening literally every day. In 2017, the total market capitalization increased from 18 billion US dollars in January to 828 billion US dollars.
Nevertheless, the Chinese community is surprisingly in good spirits despite the pressure. Online and offline communities are flourishing (I’ve personally attended several events and visited some firms) and blockchain startups are sprouting up all over China.
Big blockchain firms such as NEO, QTUM and VeChain are attracting 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 exploring the possibilities of blockchain to improve their platforms. The list goes on, but you get me; There will be a HUGGEE!
The Chinese government is also embracing blockchain technology and has increased its efforts to support the creation of a blockchain ecosystem in recent years.
In China’s 13th Five-Year Plan (2016-2020), it 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 testing a prototype blockchain-based digital currency; however, it remains to be seen whether it will be accepted by Chinese citizens as it is likely to be a centralized digital currency injected with some encryption technology.
The launch of the Secure Blockchain Open Lab by the Ministry of Industry and Information Technology as well as the China Blockchain Technology and Industry Development Forum are some of the other initiatives by the Chinese government to support the development of blockchain in China.
A recent report by the China Blockchain Research Center titled “China Blockchain Development Report 2018” detailed the development of the blockchain industry in China in 2017, including the various measures taken to regulate cryptocurrency on the mainland. In a separate section, the report highlighted the optimistic outlook of the blockchain industry and the massive attention it received from VCs and the Chinese government in 2017.
In summary, the Chinese government has shown a positive attitude toward blockchain technology despite its application to cryptocurrency and mining operations. China wants to control cryptocurrency, and China will get control. Repeated enforcement by regulators was intended to protect citizens from the financial risk of cryptocurrencies and limit capital flows. Currently, it is legal for Chinese citizens to hold cryptocurrencies, but they are not allowed to carry out any form of transactions; therefore, exchange is prohibited. As the market stabilizes in the coming months (or years), we will undoubtedly witness a revival of the Chinese crypto market. Blockchain and cryptocurrency go hand in hand (except on a private chain where a token is redundant). So countries can’t ban cryptocurrency without banning blockchain, which is an awesome technology!
One thing we can all agree on is that blockchain is still in its infancy. We have many exciting developments ahead of us and right now is definitely the best time to lay the groundwork for a blockchain-powered world.