In 2008, after the financial crisis, a document entitled “Bitcoin: Peer-to-Peer Electronic Cash System” was published, detailing the concepts of the payment system. Bitcoin was born. Bitcoin has attracted worldwide attention for its use of blockchain technology and as an alternative to fiat currencies and commodities. Named the next best technology after the Internet, blockchain has offered solutions to problems we have failed to solve or ignored over the past few decades. I won’t delve into the technical aspect, but here are a few articles and videos I recommend:
How Bitcoin works under the hood
Gentle introduction to blockchain technology
Have you ever wondered how bitcoin (and other cryptocurrencies) actually works?
Turning to today, on February 5, the Chinese authorities have just introduced a new set of rules banning cryptocurrency. The Chinese government already did this last year, but many have bypassed it with foreign currency. He has now enlisted the almighty “Great Chinese Firewall” to block access to foreign exchanges to prevent its citizens from making any cryptocurrency transactions.
To learn more about the Chinese government’s position, let’s go back a couple of years back 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 released in December 2013 an official statement entitled “Bitcoin Financial Risk Prevention Report” (link in Chinese). Several points were noted:
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 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 relevant government ministries.
4. Due to the anonymity 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. Organizations that provide services related to bitcoins should inform the public about bitcoins and the technologies behind it, and not mislead the public with misinformation.
Speaking to non-professionals, bitcoin belongs to the category of virtual goods (such as in-game loans) that can be bought or sold in its original form and not exchanged for fiat currency. It cannot be defined as money – that which serves as a medium of exchange, a unit of account and a storehouse of value.
Although the notice is dated 2013, it is still relevant to the Chinese government’s position on bitcoin, and, as mentioned, there are no signs of banning bitcoin and cryptocurrency. Rather, regulation and education about bitcoin and blockchain will play a role in the Chinese crypto market.
A similar message was published in January 2017, which reiterated that bitcoin is a virtual commodity, not a currency. In September 2017, the initial coin offer (ICO) boom led to the publication of a separate notice entitled “Notice on the Prevention of Financial Risks of Issued Tokens”. Shortly afterwards, ICOs were banned, and Chinese exchanges were investigated and eventually closed. (In retrospect 20/20, they made the right decision to ban ICOs and stop pointless gambling). Another blow was dealt to China’s cryptocurrency community in January 2018, when mining operations faced severe repression, citing excessive electricity consumption.
Although there are no official explanations for the theft of cryptocurrencies, control over capital, illegal activities and protection of citizens from financial risk are among the main reasons cited by experts. Indeed, Chinese regulators have introduced tighter controls, such as restricting foreign withdrawals and regulating foreign direct investment, to limit capital outflows and secure domestic investment. The anonymity and ease of cross-border transactions have also made cryptocurrency a favorite means of money laundering and fraud.
Since 2011, China has played a crucial role in the rapid rise and fall of Bitcoin. At its peak, China accounted for more than 95% of global bitcoin trading and three-quarters of mining operations. Due to the fact that regulators have come under control over trade and mining, China’s dominance has declined significantly in exchange for stability.
If countries like Korea and India followed the repression, now the shadow of the future of cryptocurrency is being cast. (I will repeat my opinion here: countries regulate cryptocurrency, not ban it). No doubt we will see new countries join in the coming months to curb the turbulent crypto market. Indeed, some order is long overdue. Over the past year, cryptocurrencies have experienced unprecedented price volatility, and ICOs occur literally every other day. In 2017, total market capitalization grew from $ 18 billion in January to $ 828 billion for all time.
However, the Chinese community is in a surprisingly good mood despite the repression. Online and offline communities are thriving (I’ve personally attended quite a few events and visited some firms), and blockchain startups are growing all over China.
Major blockchain firms such as NEO, QTUM and VeChain are paying close attention to the country. Startups like Nebulas, High Performance Blockchain (HPB) and Bibox are also gaining in popularity. Even giants like Alibaba and Tencent are also exploring blockchain capabilities to improve their platform. The list goes on and on, but you understand me; it will be HUGGEE!
The Chinese government is also using blockchain technology and in recent years has stepped up efforts to support the creation of a blockchain ecosystem.
In China’s 13th Five-Year Plan (2016-2020), he called for the development of advanced technologies, including blockchain and artificial intelligence. He also plans to step up research into the application of fintech technologies in regulation, cloud computing and big data. Even the People’s Bank of China is also testing a prototype digital currency based on a blockchain; however, since it is likely to be a centralized digital currency that has encryption technology, its adoption by Chinese citizens remains to be seen.
The launch of the Trusted Blockchain Open Lab as well as the Forum on Blockchain Technology Development and Industry Development in China by the Ministry of Industry and Information Technology are among other Chinese government initiatives to support blockchain development in China.
A recent report by the China Blockchain Development Center entitled “China Blockchain Development Report 2018” details the development of the blockchain industry in China in 2017, including various measures taken to regulate the cryptocurrency on the mainland. A separate section of the report highlights the optimistic prospects of the blockchain industry and the much attention it has received from venture companies and the Chinese government in 2017.
Summing up, the Chinese government has demonstrated a positive attitude towards blockchain technology, despite its application to cryptocurrencies and mining operations. China wants to control the cryptocurrency, and China will get control. Repeated demands from regulators have been designed to protect their citizens from the financial risks of cryptocurrencies and limit capital outflows. Currently, Chinese citizens legally keep cryptocurrencies, but they are not allowed to make any forms of transactions; hence the ban on exchange. 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 a private network where a token is not needed). Therefore, countries cannot ban cryptocurrency without banning blockchain – amazing technology!
One thing we can all agree on is that the blockchain is still in its infancy. We have a lot of interesting events ahead of us, and right now is definitely the best time to lay the foundation for a world with blockchain support.
And last but not least, HODL!