After the financial crisis in 2008, a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published, detailing the concepts of a payment system. Bitcoin was born. Bitcoin has gained worldwide 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 offers solutions to problems that we have failed to solve or ignored for the past few decades. I won’t delve 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
Ever wonder how Bitcoin (and other cryptocurrencies) actually work?
Fast forward to today, February 5th to be exact, Chinese authorities unveiled a new regulation banning cryptocurrencies. The Chinese government has already done so last year, but many have dispersed through foreign exchange. It has now enlisted the almighty ‘Great Firewall of China’ to block access to foreign exchanges to prevent its citizens from transacting any cryptocurrencies.
To learn more about the Chinese government’s position, let’s go back a few years to 2013 when Bitcoin was gaining popularity among Chinese citizens and prices were soaring. Concerned about price volatility and speculation, the People’s Bank of China and five other government ministries issued an official notice titled “Bitcoin Financial Risk Prevention Notice” in December 2013 (link is in Mandarin). Several points were highlighted:
1. Due to various factors such as limited supply, anonymity and lack of 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 institutions are not permitted to offer Bitcoin-related financial services or engage in business activities related to Bitcoin.
3. All companies and websites offering Bitcoin-related services must register with the necessary government ministries.
4. Due to the anonymous and cross-border nature of Bitcoin, organizations providing Bitcoin-related services 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. Companies 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 accounting, and a store of value.
Despite the notice being dated 2013, it is still relevant to the Chinese government’s stance on Bitcoin and, as noted, has no indication of banning Bitcoin and cryptocurrencies. Rather, regulation and education about Bitcoin and blockchain will play a role in the Chinese crypto-market.
A similar notification was issued in January 2017, again emphasizing that Bitcoin is a virtual commodity and not a currency. In September 2017, the boom in Initial Coin Offerings (ICOs) led to the release of a separate notice titled “Notice to Prevent Financial Risks of Issued Tokens”. Soon, 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). China’s cryptocurrency community was dealt another blow in January 2018 when mining operations faced a severe crackdown citing excessive electricity consumption.
While there is no official explanation for the cryptocurrency crackdown, capital controls, illegal activities and protection of its citizens from financial risks are some of the main reasons cited by experts. Indeed, Chinese regulators have implemented strict controls such as foreign withdrawal caps and foreign direct investment controls to limit capital outflows and ensure domestic investment. The anonymity and ease of cross-border transactions have made cryptocurrency a favorite medium for money laundering and fraudulent activities.
Since 2011, China has played an important role in the rise and fall of Bitcoin. At its peak, China accounted for 95% of global bitcoin trading volume and three quarters of mining activity. With regulators moving to control trade and mining activities, China’s dominance has shrunk significantly in exchange for stability.
Countries like Korea and India followed suit in the crackdown, now casting a shadow over the future of cryptocurrency. (I’ll repeat my point here: countries are regulating cryptocurrency, not banning it). Undoubtedly, we will see more nations take the reins in the turbulent crypto-market in the coming months. In fact, some types of orders were long overdue. Over the past year, cryptocurrencies have been experiencing unprecedented price volatility and ICOs are happening literally every day. In 2017, total market capitalization rose to an all-time high of 828 billion USD from 18 billion USD in January.
Nevertheless, the Chinese community remains in surprisingly good spirits despite the crackdown. Online and offline communities are flourishing (I personally attended several events and visited a few firms) and blockchain startups are spreading all over China.
Major blockchain companies like NEO, QTUM and VeChain are gaining massive attention in the country. Startups like Nebulas, High Performance Blockchain (HPB) and Bibox are also gaining traction. Even giants like Alibaba and Tencent are exploring the capabilities of blockchain to enhance their platforms. The list goes on but you get me; It’s going to be HUGGEE!
The Chinese government is also embracing blockchain technology and has stepped up efforts to help build the 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 plans to strengthen research on applications 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, while it may be a centralized digital currency slapped with some encryption technology, its adoption by Chinese citizens is yet to be seen.
In addition to the launch of the Trusted Blockchain Open Lab, the China Blockchain Technology and Industry Development Forum by the Ministry of Industry and Information Technology is another Chinese government initiative to support the development of blockchain in China.
A recent report titled “China Blockchain Development Report 2018” by the China Blockchain Research Center (English version at the link) detailed the development of the blockchain industry in China in 2017, including various measures taken to regulate cryptocurrencies on the mainland. In a separate section, the report highlights the optimistic outlook of the blockchain industry and the massive attention it 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 get control. Repeated enforcement by regulators was aimed at protecting citizens from the financial risks of cryptocurrencies and limiting capital outflows. As of now, it is legal for Chinese citizens to hold cryptocurrencies but they are not allowed to make any kind of transactions; So the exchange is prohibited. 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 (except for private chains where a token is unnecessary). Countries can’t ban cryptocurrencies without banning blockchain this way great technology!
One thing we can all agree on is that blockchain is still in its infancy. Many exciting developments await us and right now is definitely the best time to lay the foundations for a blockchain-enabled world.
Last but not least, HODL!