In 2008, after the financial crisis, a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published, which detailed the concepts of the payment system. Bitcoin was born. Bitcoin has gained world attention for its use of blockchain technology and as an alternative to fiat currencies and commodities. Dubbed 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 get into the technical side of it, 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 authorities in China have just unveiled a new set of regulations to ban cryptocurrencies. The Chinese government already did this last year, but many bypassed it through exchange rates. 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 few years to 2013 when Bitcoin was gaining popularity among Chinese citizens and prices skyrocketed. 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 “Bitcoin Financial Risk Prevention Notice” (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 on the open market.
2. Not all banks and financial organizations are allowed to offer financial services related to Bitcoin or engage in trading activities related to Bitcoin.
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 services related to Bitcoin 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 Bitcoin should educate the public about Bitcoin and the technology behind it and not mislead the public with misinformation.
In layman’s terms, Bitcoin is categorized as a virtual commodity (eg 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 account and a store of value.
Despite the notification being dated 2013, it is still relevant in terms of the Chinese government’s stance on Bitcoin and as mentioned, there is no indication of a ban on Bitcoin and cryptocurrency. Instead, regulation and education about Bitcoin and blockchain will play a role in China’s crypto market.
A similar notice was issued in January 2017, again emphasizing that Bitcoin is a virtual commodity, not a currency. In September 2017, the initial coin offering (ICO) boom led to the publication of a special 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 the senseless gambling). Another blow was dealt to the Chinese cryptocurrency community in January 2018 when mining operations faced severe measures, citing excessive electricity consumption.
Although there is no official explanation for the crackdown on cryptocurrencies, capital control, illegal activities and protection of citizens from financial risk are some of the main reasons cited by experts. Indeed, Chinese regulators have introduced tighter controls such as restrictions on foreign withdrawals and regulation of foreign direct investment to limit capital outflows and ensure domestic investment. The anonymity and ease of cross-border transactions have also made cryptocurrency a favorite vehicle for money laundering and fraudulent activities.
China has played a key role in Bitcoin’s meteoric rise and fall since 2011. At its peak, China accounted for over 95% of global bitcoin trading volume and three-quarters of mining operations. With regulators stepping in to control trade and mining operations, China’s dominance has diminished significantly in exchange for stability.
With countries like Korea and India following suit in cracking down on the measures, a shadow has now been cast over the future of cryptocurrency. (I’ll repeat my point here: countries regulate cryptocurrency, not ban it). Undoubtedly, we will see more nations join in the coming months to rein in the tumultuous crypto-market. Indeed, some sort of order is long overdue. Over the past year, cryptocurrencies have experienced unprecedented price volatility, with ICOs happening literally every other day. In 2017, total market capitalization rose from $18 billion in January to a record $828 billion in history.
Regardless, the Chinese community is in surprisingly good spirits despite the restrictions. Online and offline communities are flourishing (I personally attended quite a few events and visited some of the firms), and blockchain startups are springing up all over China.
Major blockchain firms such as NEO, QTUM and VeChain are gaining immense attention in the country. Startups like Nebulas, High Performance Blockchain (HPB) and Bibox are also gaining quite a bit 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 will be a HUGGEE!
The Chinese government is also embracing blockchain technology and has stepped up efforts in recent years to support the creation of a blockchain ecosystem.
In China’s 13th Five-Year Plan (2016-2020), it calls for the development of promising technologies including 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, given that it will likely be a centralized digital currency with some encryption technology, it remains to be seen how it will be adopted by Chinese citizens.
The launch of the Trusted Blockchain Open Lab as well as the China Blockchain and Industry Development Forum by the Ministry of Industry and Information Technology are some of the other initiatives of the Chinese government to support blockchain development 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 in the mainland. In a separate section, the report highlighted the blockchain industry’s optimistic outlook and the tremendous 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 cryptocurrencies, and China will get control. Repeated measures by the regulator aimed to protect its citizens from the financial risk of cryptocurrencies and limit capital outflows. As of now, it is legal for Chinese citizens to hold cryptocurrencies, but they are not allowed to do any form of transaction; hence the ban on exchange. As the market stabilizes in the coming months (or years), we will undoubtedly see a resurgence in China’s crypto market. Blockchain and cryptocurrency go hand in hand (with the exception of a private chain where a token is unnecessary). Countries therefore cannot ban cryptocurrencies without banning blockchain awesome technology!
One thing we can all agree on is that blockchain is still in its infancy. There are many exciting developments ahead and right now is definitely the best time to lay the groundwork for a blockchain-enabled world.
Last but not least, HODL!