In 2008, after the financial crisis, a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published, detailing the concepts behind the payment system. Bitcoin was born. Bitcoin has gained world attention due to its use of blockchain technology and as an alternative to fiat currencies and commodities. Touted as the next best technology after the Internet, blockchain offers solutions to problems we have been unable to solve or ignored for the past few decades. I won’t go into the technical side of this, 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) actually work?
Fast forward to today, February 5th to be exact, the Chinese authorities have just introduced a new set of regulations banning cryptocurrency. The Chinese government already did this last year, but many of them went through foreign exchanges. It has now enlisted the all-powerful “Great Firewall of China” to block access to foreign exchanges in an attempt to prevent its citizens from conducting any cryptocurrency transactions.
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 fluctuations 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 in Chinese). Several points were noted:
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 necessary government ministries.
4. Due to the anonymity and cross-border nature 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 that provide Bitcoin-related services must inform 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 commodity (such as in-game credits) that can be bought or sold in its original form, rather than 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.
from 2013, it is still relevant to the Chinese government’s stance on Bitcoin, and as mentioned, there is no sign of a ban on Bitcoin and the cryptocurrency. Rather, Bitcoin and blockchain regulation and education will play a role in China’s crypto market.
A similar message was published in January 2017, which again emphasized that Bitcoin is a virtual commodity and not a currency. In September 2017, the boom in Initial Coin Offerings (ICOs) led to the publication of a separate notice entitled “Financial Risk Prevention Notice of Issued Tokens”. Soon after, ICOs were banned and Chinese exchanges were investigated and eventually shut down. (Hindsight being 20/20, they made the right decision to ban ICOs and stop pointless gambling). Another blow was dealt to the Chinese cryptocurrency community in January 2018, when mining faced a major crackdown due to excessive power consumption.
Although there is no official explanation for the crackdown on cryptocurrencies, capital controls, illegal activities and protection of citizens from financial risks are among the main reasons cited by experts. Indeed, Chinese regulators have imposed tighter controls, such as restrictions on withdrawals and regulation of foreign direct investment, to limit capital flight and ensure domestic investment. The anonymity and ease of cross-border transactions have also made cryptocurrency a favorite vehicle for money laundering and fraud.
Since 2011, China has played a crucial role in the meteoric rise and fall of Bitcoin. At its peak, China accounted for more than 95% of the world’s bitcoin trading volume and three-quarters of its mining operations. With the intervention of regulators overseeing trade and mining operations, China’s dominance has been greatly reduced in exchange for stability.
With countries like Korea and India following their lead in cracking down, the future of cryptocurrency is now being cast in shadow. (I’ll repeat my point here: countries regulate cryptocurrency, not ban it). There is no doubt that in the coming months we will see more countries join in taming the booming crypto market. Indeed, some kind of order was long overdue. Cryptocurrencies have experienced unprecedented price volatility over the past year, with ICOs happening literally every other day. In 2017, total market capitalization rose from $18 billion in January to an all-time high of $828 billion.
Still, the Chinese community is in surprisingly good spirits despite the crackdown. Online and offline communities are thriving (I personally attended quite a few events and visited some firms) and blockchain startups are popping up all over China.
Major 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 a significant amount of traction. Even giants like Alibaba and Tencent are also exploring the possibilities of blockchain to improve their platform. The list goes on and on, but you get my point; it’s going to be HUGE!
The Chinese government is also using blockchain technology and has stepped up efforts to support the creation of a blockchain ecosystem in recent years.
China’s 13th Five-Year Plan (2016-2020) envisioned the development of promising technologies, including blockchain and artificial intelligence. It also plans to strengthen research on fintech applications in regulation, cloud computing and big data. Even the People’s Bank of China is also testing a blockchain-based digital currency prototype; however, since it will most likely be a centralized digital currency with encryption technology, its acceptance by Chinese citizens remains to be seen.
The launch of the Trusted Blockchain Open Lab and the China Blockchain Technology and Industry Development Forum by the Ministry of Industry and Information Technology are among other initiatives by the Chinese government to support blockchain development in China.
A recent report titled “2018 China Blockchain Development Report” (English version at the link) by the China Blockchain Research Center details the development of China’s blockchain industry in 2017, including the various measures taken to regulate cryptocurrency on the mainland. A separate section of the report highlights the optimistic outlook of the blockchain industry and the massive attention it has received from VCs and the Chinese government in 2017.
In summary, the Chinese government has shown a positive attitude towards blockchain technology, despite its application to cryptocurrencies and mining. China wants to control cryptocurrency, and China will get control. Repeated control measures by regulators were aimed at protecting citizens from the financial risks of cryptocurrencies and limiting capital outflows. At the moment, it is legal for Chinese citizens to hold cryptocurrencies, but they are prohibited from transacting in any form; hence the ban on exchanges. If 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 (except on a private chain where a token is not needed). So countries can’t ban cryptocurrency without banning blockchain – great 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 groundwork for a blockchain-enabled world.
Last but not least: HODL!