In 2008, following the financial crisis, a report entitled “Bitcoin: Electronic Cash System” was published, detailing the concepts of the payment system. Bitcoin was born. Bitcoin has gained worldwide attention with the use of blockchain technology and as an alternative to fiat currencies and commodities. Named the next best technology after the Internet, the blockchain offers solutions to problems we have failed to address or ignore over the past few decades. I will not go into the technical aspect, but here are some articles and videos that I recommend:
How bitcoin works under the hood
Gentle introduction to blockchain technology
Have you ever wondered how bitcoins (and other cryptocurrencies) actually work?
Fast forward to today, on February 5, the Chinese authorities have just introduced a new set of regulations banning cryptocurrency. The Chinese government already did this last year, but many have been circumvented through a foreign exchange. It has now activated the all-powerful Great Wall of China to block access to foreign exchanges in an attempt to stop its citizens from making any cryptocurrency transactions.
To learn more about the position of the Chinese government, let’s go 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 issued a formal notice in December 2013 entitled “Bitcoin Financial Risk Prevention Notice” (Link 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 free market.
2. All banks and financial institutions are not allowed to offer bitcoin-related financial services or engage in commercial activities related to bitcoin.
3. All companies and websites that offer bitcoin-related services must register with the necessary government ministries.
4. Due to the anonymity and cross-border characteristics of Bitcoin, organizations providing Bitcoin-related services should apply 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 bitcoin services should educate the public about bitcoins and the technology behind them and not mislead the public with misinformation.
In a non-specialized mandate, Bitcoin is categorized as a virtual commodity (eg in-game credits) that can be bought or sold in its original form and not exchanged with fiat currency. It cannot be defined as money – something that serves as a medium of exchange, an accounting unit and a stock of value.
Despite the 2013 notice, it is still relevant to the Chinese government’s position on bitcoins and, as mentioned, there are no indications of a ban on bitcoin and cryptocurrency. Rather, regulation and education for bitcoin and blockchain will play a role in the Chinese crypto market.
A similar notice was issued in January 2017, reiterating 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 risk from issued tokens”. Soon after, ICOs were banned and Chinese stock exchanges were investigated and eventually closed. (Hindsight is 20/20, they made the right decision to ban ICO and stop pointless gambling). Another blow was dealt to the Chinese cryptocurrency community in January 2018, when mining operations faced severe repression, citing excessive electricity consumption.
Although there is no official explanation for the repression against cryptocurrencies, control over capital, illegal activities and protection of its citizens from financial risk are some of the main reasons cited by experts. In fact, Chinese regulators have introduced stricter controls, such as withdrawals abroad and regulation of foreign direct investment, in order to limit capital outflows and ensure 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 meteoric rise and fall of bitcoins. At its peak, China accounted for more than 95% of global bitcoin trade and three-quarters of mining operations. With regulators intervening to control trade and mining, China’s dominance has shrunk significantly in exchange for stability.
With countries like Korea and India following the example of repression, the future of cryptocurrency is now being overshadowed. (I will repeat my opinion here: countries regulate cryptocurrency, not ban it). No doubt we will see more nations join in the coming months to take over the turbulent crypto market. In fact, an order was long overdue. Over the past year, cryptocurrencies have experienced unprecedented price volatility and ICOs are happening literally every other day. In 2017, the total market capitalization increased from $ 18 billion in January to a record $ 828 billion.
However, the Chinese community is in a surprisingly good mood despite the repression. Online and offline communities are thriving (I’ve personally attended a lot of events and visited some of the companies), and blockchain startups are springing up all over China.
Major blockchain companies such as NEO, QTUM and VeChain are attracting a lot of attention in the country. Startups like Nebulas, High Performance Blockchain (HPB) and Bibox also get a lot of traction. 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; will be HUGGEE!
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. He also plans to step up research into the application of fintech 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, as it is likely to be a centralized digital currency, flooded with some encryption technology, its acceptance by Chinese citizens remains to be seen.
The launch of the Trusted Blockchain Open Lab, as well as the China Blockchain Technological and Industrial Development Forum by the Ministry of Industry and Information Technology, are some of the other Chinese government initiatives to support blockchain development in China.
A recent report entitled “China Blockchain Development Report 2018” (English version in the link) by the China Blockchain Research Center details the development of the blockchain industry in China in 2017, including the various measures taken to regulate the cryptocurrency in the continent. In a separate section, the report highlighted the optimistic outlook for the blockchain industry and the huge attention it received from VC 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 operations. China wants to control the cryptocurrency and China will gain control. Repeated coercive measures by regulators were aimed at protecting their citizens from the financial risk of cryptocurrencies and limiting capital outflows. It is currently legal for Chinese citizens to hold cryptocurrencies, but they are not allowed to make 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 crypto market. Blockchain and cryptocurrency come hand in hand (except for a private chain where the token is unnecessary). That way, countries can’t ban cryptocurrency without banning blockchain great technology!
One thing we can all agree on is that the blockchain is still in its infancy. Many exciting events await us and right now is definitely the best time to lay the foundations of a world activated by a blockchain.
Last but not least, HODL!