In 2008, after the financial crisis, an article titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published detailing the concepts of a payment system. Bitcoin was born. Bitcoin caught the world’s attention with its use of blockchain technology and as an alternative to fiat currencies and commodities. Dubbed the next best technology after the Internet, blockchain offers solutions to problems that we have failed to address or neglected over the past few decades. I won’t go 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
Have you ever wondered how Bitcoin (and other cryptocurrencies) actually work?
Fast forward to today, February 5th to be exact, authorities in China have just unveiled a new set of regulations to ban cryptocurrency. The Chinese government already did it last year, but many have bypassed through foreign exchanges. 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 transacting with cryptocurrency.
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 skyrocketing. 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 “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 in the open market.
2. All banks and financial organizations are not permitted to offer Bitcoin-related financial services or engage in Bitcoin-related commercial activity.
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 must 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 providing Bitcoin-related services must 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 must not 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.
Although the notice is from 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. Rather, regulation and education about Bitcoin and blockchain will play a role in China’s crypto market.
A similar notice was issued in January 2017, reiterating that Bitcoin is a virtual commodity and not a currency. In September 2017, the initial coin offering (ICO) boom led to the publication of a separate notice entitled “Notice to Prevent Financial Risk from 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 mindless gambling). Another blow was dealt to the cryptocurrency community in China in January 2018 when mining operations faced severe crackdowns citing excessive electricity consumption.
While there is no official explanation for the cryptocurrency crackdown, capital controls, illegal activities, and protecting citizens from financial risk are some of the main reasons cited by experts. Indeed, Chinese regulators have introduced tighter controls, such as a cap on overseas withdrawals and regulation of foreign direct investment, to curb capital flight and secure domestic investment. The anonymity and ease of cross-border transactions have also made cryptocurrency a favorite vehicle for money laundering and fraudulent activities.
Since 2011, China has played a crucial role in Bitcoin’s meteoric rise and fall. 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 shrunk significantly in exchange for stability.
With countries like Korea and India following suit in cracking down, a shadow has now been cast over the future of cryptocurrency. (I’ll repeat my point here: countries regulate cryptocurrency, not ban it). We will no doubt see more nations joining in the coming months to tame the tumultuous crypto market. Indeed, there should have been some kind of order a long time ago. Over the past year, cryptocurrencies have experienced unheard of price volatility and ICOs happen literally every other day. In 2017, total market capitalization rose from $18 billion in January to an all-time high of $828 billion.
However, the Chinese community is in surprisingly good spirits despite the crackdown. Online and offline communities are thriving (I personally attended quite a few events and visited some of the firms) and blockchain startups are popping up all over China.
Major blockchain firms such as NEO, QTUM and VeChain are attracting huge 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 HUGIE!
The Chinese government is also embracing blockchain technology and has stepped up efforts to support the creation of a blockchain ecosystem in recent years.
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 boost research on the application of fintech in regulation, cloud computing and big data. Even the People’s Bank of China is also testing a prototype blockchain-based digital currency; however, as it will likely be a centralized digital currency equipped 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 Technology and Industry Development Forum by the Ministry of Industry and Information Technology are some of the other initiatives by the Chinese government to support blockchain development in China.
A recent report titled “China Blockchain Development Report 2018” (English version in the link) by the China Blockchain Research Center details the development of China’s blockchain industry in 2017, including the various measures taken to regulate cryptocurrency in the mainland . In a separate section, the report highlighted the optimistic outlook of the blockchain industry and the huge attention it received from venture capital firms and the Chinese government in 2017.
In summary, the Chinese government has shown a positive attitude towards blockchain technology despite its enforcement of cryptocurrency and mining. China wants to control cryptocurrency and China will get control. Repeated measures by regulators aimed to protect their citizens from the financial risk of cryptocurrencies and limit capital flight. Currently, it is legal for Chinese citizens to hold cryptocurrencies, but they are not allowed to make any form of transaction; hence the ban on exchanges. As the market stabilizes in the coming months (or years), we will undoubtedly see a revival in the Chinese crypto market. Blockchain and cryptocurrency go hand in hand (except in the private chain where the token is not needed). Because of this, countries cannot ban cryptocurrency without banning blockchain, the great 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 foundations for a blockchain-enabled world.
Last but not least, HODL!