Fear not, China does not ban cryptocurrency

In 2008, after the financial crisis, a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published detailing 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. Blockchain technology has been called the second best after the Internet, as it has provided solutions to problems that we either failed to address or ignored over the past few decades. I won’t go into the technical side of it but here are some articles and videos that I recommend:

How does bitcoin work under the hood?

Nice 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 cryptocurrency. The Chinese government has already done so last year, but many have been circumvented through foreign exchanges. It has now enlisted the almighty ‘Great Firewall of China’ to block access to foreign exchanges in an effort to prevent its citizens from conducting any cryptocurrency transactions.

To learn more about the position of the Chinese government, let’s step back a few 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 published an official notice in December 2013 titled “Notice on Bitcoin Financial Risk Prevention” (link in Mandarin). Several points were highlighted:

1. Due to various factors such as limited supply, anonymity and no central issuer, Bitcoin is not an official currency but a virtual good that cannot be used in the open market.

2. Not all banks and financial institutions are allowed to provide bitcoin-related financial services or engage in bitcoin-related trading activity.

3. All companies and websites that provide services related to Bitcoin are required to register with the necessary government ministries.

4. Due to the anonymity and cross-border features of Bitcoin, organizations that provide Bitcoin-related services must implement preventive measures such as KYC to prevent money laundering. Any suspicious activity including fraud, gambling and money laundering must be reported to the authorities.

5. Organizations providing services related to Bitcoin must educate the public about Bitcoin and the technology behind it and not mislead the public with misleading information.

In layman’s term, Bitcoin is classified as a virtual good (for example, 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 accounting, and a store of value.

Although the notice is dated 2013, it is still relevant regarding the Chinese government’s stance on Bitcoin and as mentioned, there is no indication that Bitcoin and cryptocurrencies are banned. Instead, regulation and education around Bitcoin and blockchain will play a role in the Chinese crypto market.

A similar notice was issued in January 2017, once again confirming that bitcoin is a virtual commodity and not a currency. In September 2017, the surge in Initial Coin Offerings (ICOs) led to the publication of a separate notice titled “Notice on Preventing Financial Risks for Issued Tokens.” Soon, ICOs were banned and Chinese exchanges were investigated and eventually shut down. (His realization is 20/20, they made the right decision to ban ICOs and stop meaningless gambling.) Another blow to the crypto community in China was dealt in January 2018 when mining operations faced crackdown, due to excessive electricity consumption.

Although there is no official explanation regarding the crackdown on cryptocurrencies, capital controls, illegal activities and protecting its citizens from financial risks are some of the main reasons cited by experts. In fact, Chinese regulators have implemented stricter controls such as an external withdrawal cap and regulation of foreign direct investment to limit capital outflows and ensure domestic investment. Anonymity and ease of cross-border transactions have made cryptocurrencies a preferred method for money laundering and fraudulent activities.

Since 2011, China has played a crucial role in the rise and fall of Bitcoin. 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 trading and mining operations, China’s dominance has shrunk dramatically in exchange for stability.

With countries like Korea and India following suit in the crackdown, a shadow is now casting on the future of cryptocurrency. (I will repeat my point here: countries regulate cryptocurrency, not ban it). Without a doubt, we will see more countries joining in the coming months to rein in the turbulent cryptocurrency market. In fact, it was some kind of order that was long overdue. Over the past year, cryptocurrencies have experienced unheard of price fluctuations, and initial coin offerings (ICOs) happen literally every day. In 2017, the total market capitalization increased from $18 billion in January to an all-time high of $828 billion.

However, the Chinese community is in surprisingly good spirits despite the repression. Both online and offline communities are booming (I have personally attended quite a few events and visited some companies) and blockchain companies are starting to spread all over China.

Major blockchain companies like NEO, QTUM, and VeChain are getting a lot of attention in the country. Startups like Nebulas, High Performance Blockchain (HPB), and Bibox are also gaining a fair amount of traction. Even giants like Alibaba and Tencent are also exploring the capabilities of the blockchain to improve their platform. The list goes on and on but you understand me; It will be hoggy!

The Chinese government is also embracing blockchain technology and has intensified its 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 including blockchain and artificial intelligence. It also plans to promote research on the application of financial technology in regulation, cloud computing, and big data. Even the People’s Bank of China is also testing a prototype of a blockchain-based digital currency; However, it is likely that it is a centralized digital currency connected to some crypto technology, and its adoption by Chinese citizens is still unclear.

The launch of the Trusted Blockchain Open Lab as well as the China Forum on Blockchain Technology and Industry Development by the Ministry of Industry and Information Technology are some of the other initiatives taken by the Chinese government to support the development of blockchain in China.

A recent report titled “China Blockchain Development Report 2018” (English version in the link) by the China Blockchain Research Center detailed the development of the blockchain industry in China in 2017, including various measures taken to regulate cryptocurrency in the mainland. In a separate section, the report highlights the optimistic outlook for the blockchain industry and the massive interest 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 cryptocurrencies and mining operations. China wants to control cryptocurrency, and China will take control. The aim of the frequent enforcements by the regulators was to protect its citizens from the financial risks of cryptocurrencies and to limit the flow of capital. As of now, it is legal for Chinese citizens to hold cryptocurrencies but they are not allowed to carry out any form of transaction; Hence the ban on exchange. As the market stabilizes in the coming months (or years), we will undoubtedly see a revival of the Chinese cryptocurrency market. Blockchain and cryptocurrency come hand in hand (except for the private chain where the token is unnecessary). Thus, countries cannot ban cryptocurrencies without banning blockchain, a wonderful technology!

One thing we can all agree on is that blockchain is still in its infancy. Many exciting developments lie ahead, and now is definitely the best time to lay the foundation for a blockchain-enabled world.

Last but not least, HODL!