In 2008 after the financial crisis, a paper entitled “Bitcoin: Peer-to-Peer Electronic Cash System” was published, which introduced the concept of the payment system in detail. Bitcoin was born. Bitcoin has won the world’s attention because of its use of blockchain technology and as a substitute for legal tender and commodities. Blockchain is known as the second best technology after the Internet, and it provides solutions to problems that have not been resolved or ignored in the past few decades. I will not delve into its technical aspects, but I recommend the following articles and videos:
How Bitcoin works
A brief introduction to blockchain technology
Ever wondered how Bitcoin (and other cryptocurrencies) actually work?
Fast forward to today, on February 5 to be precise, the Chinese authorities just announced a new set of regulations banning cryptocurrencies. Last year, the Chinese government had done this, but many people used foreign exchange to avoid it. Now, it has invited the all-powerful “Great Firewall of China” to block foreign exchange entry to prevent its citizens from conducting any cryptocurrency transactions.
To learn more about the position of the Chinese government, let us go back to 2013, when Bitcoin became more and more popular among Chinese citizens and the price soared. Regarding price fluctuations and speculative activities, the People’s Bank of China and five other government departments issued an official announcement in December 2013, titled “Notice on Preventing Bitcoin Financial Risks” (link is in Mandarin). The following points are emphasized:
1. Due to various factors such as limited supply, anonymity, and lack of centralized issuers, Bitcoin is not an official currency, but a virtual commodity that cannot be used on the open market.
2. All banks and financial organizations are prohibited from providing financial services related to Bitcoin or engaging in transactions related to Bitcoin.
3. All companies and websites that provide bitcoin-related services should register with the necessary government departments.
4. Due to the anonymity and cross-border nature 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 activities, should be reported to the authorities.
5. Organizations providing Bitcoin-related services should educate the public about Bitcoin and the technology behind it, and should not mislead the public with wrong information.
In layman terms, Bitcoin is classified as a virtual commodity (such as points in a game), which can be bought and sold in its original form and cannot be exchanged with legal tender. It cannot be defined as currency, it is a medium of exchange, an accounting unit and a store of value.
Although the announcement date of the notice is 2013, it is still relevant to the Chinese government’s position on Bitcoin, and as mentioned above, there is no sign that Bitcoin and cryptocurrencies are banned. On the contrary, regulations 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 rather than a currency. In September 2017, the initial coin offering (ICO) boom led to a separate announcement titled “Notice on Preventing the Financial Risks of Issuing Tokens”. Soon thereafter, ICOs were banned, the Chinese exchanges were investigated and eventually closed. (Hindsight is 20/20 and they have made the right decision to ban ICO and stop meaningless gambling). In January 2018, the mining industry faced a severe blow, citing excessive electricity consumption, which caused another blow to the cryptocurrency community in China.
Although there is no official explanation for cracking down on cryptocurrencies, capital controls, illegal activities, and protecting citizens from financial risks are some of the main reasons cited by experts. In fact, Chinese regulators have implemented stricter control measures, such as overseas withdrawal limits and supervision of foreign direct investment, to limit capital outflows and ensure domestic investment. Anonymity and the convenience of cross-border transactions also make cryptocurrency a favorite means of money laundering and fraudulent activities.
Since 2011, China has played a vital role in the rise and fall of Bitcoin. In its heyday, China accounted for more than 95% of global Bitcoin transactions and three-quarters of mining operations. As regulators stepped in to control trade and mining operations, China’s dominance has been greatly reduced in exchange for stability.
As countries such as South Korea and India followed closely with repressive actions, it is now casting a shadow over the future of cryptocurrencies. (I repeat my point here: countries are regulating cryptocurrencies, not banning them). There is no doubt that in the coming months, we will see more countries join in to control the volatile crypto market. Indeed, some kind of order should have been executed long ago. In the past year, cryptocurrencies have experienced unheard of price fluctuations, and ICOs actually happen every other day. In 2017, the total market value rose from $18 billion in January to a record high of $828 billion.
Nevertheless, despite the suppression, the Chinese community still showed surprisingly good mood. Online and offline communities are booming (I personally participated in many events and visited some companies), and blockchain startups are emerging all over China.
Major blockchain companies such as NEO, QTUM and VeChain have received widespread attention in the country. Startups such as Nebula, High Performance Blockchain (HPB) and Bibox have also gained considerable traction. Even giants such as Alibaba and Tencent are exploring the functions of blockchain to enhance their platforms. The list continues, but you let me understand. This will be HUGGEE!
The Chinese government has also been embracing blockchain technology and has increased its efforts in recent years to support the establishment of a blockchain ecosystem.
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 financial technology in supervision, cloud computing and big data. Even the People’s Bank of China is testing a blockchain-based digital currency prototype. However, since it may be a centralized digital currency with some kind of encryption technology, it remains to be seen how Chinese citizens adopt it.
The launch of the Trusted Blockchain Open Laboratory and the China Blockchain Technology and Industry Development Forum organized by the Ministry of Industry and Information Technology are other measures taken by the Chinese government to support the development of China’s blockchain.
The report entitled “2018 China Blockchain Development Report” recently released by the China Blockchain Research Center detailed the development of China’s blockchain industry in 2017, including various measures taken to regulate mainland cryptocurrency. In another part of the report, the report focuses on the optimistic prospects of the blockchain industry and its extensive attention from venture capital and the Chinese government in 2017.
All in all, despite the Chinese government’s enforcement of cryptocurrency and mining businesses, it still shows a positive attitude towards blockchain technology. China wants to control cryptocurrency, and China will gain control. Repeated enforcement by regulators aims to protect their citizens from the financial risks of cryptocurrencies and limit capital outflows. As of now, it is legal for Chinese citizens to hold cryptocurrencies, but they are not allowed to conduct any form of transactions. Therefore, communication is prohibited. As the market stabilizes in the coming months (or years), we will undoubtedly see a resurgence in the Chinese crypto market. Blockchain and cryptocurrency go hand in hand (except for private chains that do not require tokens). Therefore, countries must ban cryptocurrencies without banning the awesome technology of blockchain!
One thing we can 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 world that supports blockchain.
Last but not least, HODL!