After the 2008 financial crisis, a paper entitled “Bitcoin” was published. It explained the concepts of a payment system. Bitcoin was created. Bitcoin was discovered by the world because of its use of blockchain technology. It is an alternative to fiat currencies, and it has been praised worldwide. Blockchain technology is being called the next best technology after the internet. It offers solutions to problems we have neglected or ignored for the past several decades. Ever wonder how Bitcoin and other cryptocurrencies work? Today, 5 February, is the date that authorities in China have unveiled new regulations to ban cryptocurrency.
Chinese Goverment
Although the Chinese government did this last year, many have evaded it by using foreign exchanges. In an effort to prevent its citizens from using cryptocurrency transactions, it has now called upon the mighty “Great Firewall of China” to block access foreign exchanges. Let’s go back to 2013, when Bitcoin was popular among Chinese citizens and prices were rising. Concerned about speculations and price volatility, the People’s Bank of China published a notice on December 2013, which included five other ministries and was entitled “Notice on Preventing Financial Riss of Bitcoin”. (Link is in Mandarin).
- Bitcoin is not an official currency. It is a virtual commodity that can’t be traded on the open market because of various factors, such as anonymity, limited supply, and lack of a central issuer.
- All banks and financial institutions are prohibited from offering Bitcoin-related financial services, or engaging in trading activity.
- All websites and companies offering Bitcoin-related services must register with the relevant government ministries.
- Organizations offering Bitcoin-related services should implement KYC to prevent money laundering due to its anonymity and cross-border nature. All suspicious activity, including fraud, gambling, and money laundering, should be reported to authorities.
- Organizations that provide services related to Bitcoin should educate the public about Bitcoin technology and not mislead them with misinformation.
Virtual Commodity
Bitcoin can be described as a virtual commodity (e.g. in-game credits) that can be bought and sold in its original form, but cannot be exchanged for fiat currency. It is not money. It serves as a medium for exchange, a unit in accounting, and a store-of-value. The notice, although it was dated 2013 and relevant to the Chinese government’s stance on Bitcoin, is not a ban. Instead, regulation and education regarding Bitcoin and blockchain will play a part in the Chinese crypto-market.
Similar notices were issued in January 2017, highlighting that Bitcoin is not a currency but a virtual commodity. A separate notice was published in September 2017 regarding the “Notice on Preventing Financial Risis of Issued Tokens” following the explosion of initial coin offerings (ICOs). Soon after, ICOs were outlawed and Chinese exchanges were investigated. China’s cryptocurrency community was hit with another blow in January 2018. Mining operations were subject to severe crackdowns due to their excessive electricity consumption.
Main Reasons
Experts cite three main reasons for the crackdown on cryptocurrency mining operations in China. They are capital controls, illegal activities, and protection of citizens from financial risk. Chinese regulators have tightened controls, including an overseas withdrawal cap and regulations for foreign direct investment, to limit capital outflow and protect domestic investments. Because of its anonymity and ease, cryptocurrency has been a popular method for money laundering and fraudulent activities. China has been a key player in the rapid rise and fall of Bitcoin since 2011.
China accounted for more than 95% of global Bitcoin trading volume at its peak and three quarters the total mining operations. China’s dominance in the market has been reduced by regulators who have taken control of mining and trading operations. This has resulted in stability. As countries like India and Korea follow suit, a shadow has been cast over the future cryptocurrency. We will see more countries join the fight against the volatile crypto-market in the coming months. It was long overdue for some order.
Cryptocurrency Market
The cryptocurrency market has seen unprecedented volatility in the past year and ICOs are occurring almost every day. The total market capitalization grew from 18 billion USD in January 2017 to an all-time high 828 billion USD in 2017. Despite the crackdowns, the Chinese community is in remarkable good spirits. Both offline and online communities are flourishing (I have personally attended a number of events and visited some firms), and blockchain startups are popping up all over China. NEO, QTUM, and VeChain are some of the most prominent blockchain companies in China.
Startups such as Nebulas and High Performance Blockchain (HPB), Bibox, are also gaining significant traction. Even giants like Tencent and Alibaba are exploring blockchain’s potential to improve their platforms. It’s going to be huge! The Chinese government has also been open to blockchain technology and have increased their efforts in recent years for the creation of a Blockchain ecosystem. It called for the development and application of promising technologies, including blockchain and artificial Intelligence, in China’s 13th Five Year Plan (2016-2020).
It also plans to increase research on fintech’s use in regulation, cloud computing, and big data. The People’s Bank of China has also begun testing a prototype blockchain-based cryptocurrency. However, it is likely that it will be a centralized digital currency with some encryption technology. Its adoption by Chinese citizens is still to be seen. The Chinese government has shown a positive attitude to blockchain technology, despite its strict enforcement on cryptocurrency mining operations and cryptocurrency.
The Control
China wants to control cryptocurrency. China will get control. The regulators repeatedly enforced this ban to protect citizens from the financial risks of cryptocurrencies and reduce capital outflow. It is legal for Chinese citizens now to hold cryptocurrencies, but they are not allowed transaction. This is why the ban on exchanges. We will undoubtedly see a revival in the Chinese crypto-market as the market stabilizes over the next months (or years).
Blockchain and cryptocurrency go hand-in-hand (except for private chains where tokens are unnecessary). Therefore, countries cannot ban cryptocurrency without banning this amazing technology. We can all agree that blockchain is still in its infancy. We have many exciting developments ahead of us, and this is the best time to lay foundations for a blockchain-enabled future.