In 2008 after the financial crisis, an article titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published detailing the concepts of a payment system. Bitcoin was born. Bitcoin gained world attention for its use of blockchain technology and as an alternative to fiat currencies and commodities. Called the best technology since the Internet, blockchain offered solutions to problems that we have either been unable to solve or ignored for the past few decades. I won’t go 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
Have you ever wondered how Bitcoin (and other cryptocurrencies) really work?
Fast forward to today, February 5th to be exact, the authorities in China have just unveiled a new set of regulations to ban cryptocurrency. The Chinese government already did this last year, but many circumvented it through foreign exchange. It has now enlisted the all-powerful “Great Firewall of China” to block access to foreign currencies with the aim of preventing its citizens from making cryptocurrency transactions.
To learn more about the Chinese government’s position, let’s go back a couple of years 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 issued 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 in the open market.
2. All banks and financial organizations are prohibited from providing Bitcoin-related financial services or engaging in Bitcoin-related commercial 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 providing Bitcoin-related services should implement preventive measures such as KYC to prevent money laundering. Any suspicious activity, such as fraud, gambling and money laundering, should be reported to the authorities.
5. Organizations that provide Bitcoin-related services should educate the public about Bitcoin and the technology behind it and not mislead the public with misinformation.
Generally speaking, Bitcoin is classified as a virtual commodity (eg 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 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 of a ban on Bitcoin and cryptocurrency. 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 commodity and not a currency. In September 2017, the initial coin offering (ICO) boom led to the publication of a separate notice entitled “Notice on Financial Risk Prevention of Issued Tokens”. Soon after, ICOs were banned and Chinese exchanges were investigated and eventually shut down. (Hindsight is 20/20, they made the right decision to ban ICOs and stop mindless gambling). January 2018 dealt another blow to China’s cryptocurrency community when mining operations faced severe crackdowns, citing excessive electricity consumption.
Although there is no official explanation for the crackdown on cryptocurrencies, capital controls, illegal activities and the protection of its citizens from financial risk are some of the main reasons cited by experts. Indeed, Chinese regulators have implemented tighter controls, such as the overseas withdrawal limit and foreign direct investment regulation to limit capital outflows and ensure domestic investments. The anonymity and ease of cross-border transactions have also made cryptocurrency a preferred 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 cryptocurrency, not banning it). We will no doubt see more nations come together in the coming months to curb the tumultuous crypto market. In fact, some sort 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, total market capitalization rose from $18 billion in January to an all-time high of $828 billion.
However, the Chinese community is surprisingly in good spirits despite the crackdown. Online and offline communities are flourishing (I personally attended many events and visited some of the companies) and blockchain startups are popping up all over China.
Major blockchain companies such as 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 traction. Even giants like Alibaba and Tencent are also exploring blockchain capabilities to enhance their platform. The list goes on and on but you get my point; she will be HUGED!
The Chinese government has also been embracing blockchain technology and stepped up efforts in recent years to support the creation of a blockchain ecosystem.
In China’s 13th Five-Year Plan (2016-2020), it called for the development of promising technologies such as 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 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 Technology and Industry Development Forum by the Ministry of Industry and Information Technology are some of the other initiatives of the Chinese government to support the development of blockchain in China.
A recent report titled “China Blockchain Development Report 2018” (English version at the link) by 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 optimistic outlook of the blockchain industry and the massive attention it has 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 cryptocurrency and mining operations. China wants to control cryptocurrency and China will control it. The regulators’ repeated applications were aimed at protecting their citizens from the financial risk of cryptocurrencies and limiting 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; hence the ban on exchanges. As the market stabilizes in the coming months (or years), we will undoubtedly see a revival of the Chinese crypto market. Blockchain and cryptocurrency go hand in hand (with the exception of the private chain where a token is not required). Therefore, countries cannot ban cryptocurrency without banning blockchain technology!
One thing we can all agree on is that blockchain is still in its infancy. There are many exciting developments ahead and now is definitely the best time to lay the foundations for a blockchain-enabled world.
Last but not least, HODL!