Fear not, China is not banning cryptocurrencies

In 2008, after the financial crisis, a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published, detailing the concept of a payment system. Bitcoin was born. Bitcoin has caught the world’s attention due to its use of blockchain technology and as an alternative to fiat currencies and commodities. Known as the next best technology after the internet, blockchain offers solutions to problems that we have failed to solve or overlooked in the past few decades. I won’t delve into the technical aspects of it, but here are some articles and videos I recommend:

How Bitcoin Works Behind the Scenes

A gentle introduction to blockchain technology

Ever wonder how Bitcoin (and other cryptocurrencies) actually work?

Fast forward to today, February 5th to be exact, and the Chinese authorities have just announced a new set of rules banning cryptocurrencies. The Chinese government has done this last year, but a lot of it is circumvented through foreign exchange. It has now blocked access to foreign exchange using the all-powerful “Great Firewall of China” to prevent its citizens from conducting any cryptocurrency transactions.

To learn more about the Chinese government’s stance, let’s go back to 2013, when Bitcoin was gaining popularity among Chinese citizens and its price soared. In view of price volatility and speculation, five ministries including the People’s Bank of China issued an official circular in December 2013 titled “Notice on Preventing Bitcoin Financial Risks” (link is in Mandarin). Several points were emphasized:

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 institutions shall not provide financial services related to Bitcoin or engage in trading activities related to Bitcoin.

3. All companies and websites that provide bitcoin-related services must be registered with the necessary government departments.

4. Due to the anonymity and cross-border nature of Bitcoin, organizations providing Bitcoin-related services should implement precautionary measures such as KYC to prevent money laundering. Any suspicious activity, including fraud, gambling and money laundering, should be reported to the authorities.

5. Institutions that provide bitcoin-related services should publicize bitcoin and the technology behind it to the public, and must not mislead the public with misinformation.

In layman’s terms, Bitcoin is classified as a virtual commodity (such as in-game credits) that can be bought and sold in its original form and cannot be exchanged for fiat currency. It cannot be defined as money – something that acts as a medium of exchange, a unit of account and a store of value.

Even though the notice is dated in 2013, it still pertains to the Chinese government’s stance on Bitcoin, and as mentioned earlier, there is no indication of a ban on Bitcoin and cryptocurrencies. Instead, regulation and education about Bitcoin and blockchain will play a role in the Chinese crypto market.

A similar notice was issued in January 2017, re-emphasizing that Bitcoin is a virtual commodity and not a currency. In September 2017, the boom in initial coin offerings (ICOs) led to the issuance of a separate notice titled “Notice on Protection against Financial Risks of Tokens Issued.” Soon after, ICOs were banned, and Chinese exchanges were investigated and eventually shut down. (20/20 in hindsight, they made the right decision to ban ICOs and stop pointless gambling). The cryptocurrency community in China suffered another blow in January 2018, when mining operations faced a crackdown on excessive electricity usage.

While there is no official explanation for the crackdown on cryptocurrencies, some of the main reasons cited by experts are capital controls, illegal activities and protecting their citizens from financial risks. In fact, Chinese regulators have imposed stricter controls, such as caps on overseas divestments and regulation of foreign direct investment, to limit capital outflows and ensure domestic investment. The anonymity and ease of cross-border transactions also make cryptocurrencies the preferred means of money laundering and fraudulent activities.

Since 2011, China has played a vital role in the rise and fall of Bitcoin. At its peak, China accounted for more than 95 percent of global bitcoin trading volume and three-quarters of mining operations. China’s dominance has narrowed significantly in exchange for stability as regulators stepped in to control trade and mining operations.

The future of cryptocurrencies is clouded as countries like South Korea and India follow suit. (I will reiterate my point here: countries are regulating cryptocurrency, not banning it). There is no doubt that we will see more countries joining in in the coming months to take control of the volatile crypto market. Indeed, some sort of order is long overdue. Price volatility in cryptocurrencies is unheard of over the past year, and ICOs happen almost every other day. In 2017, the total market capitalization rose to an all-time high of $828 billion from $18 billion in January.

Still, despite the repression, the spirit of the Chinese community is surprisingly good. Online and offline communities are thriving (I personally attended quite a few events and visited a few companies), and blockchain startups are popping up all over China.

Major blockchain companies such as NEO, QTUM, and VeChain have received a lot of attention in the country. Startups such as Nebula, High Performance Blockchain (HPB) and Bibox have also gained considerable traction. Even giants like Alibaba and Tencent are exploring the capabilities of blockchain to enhance their platforms. The list goes on and on, but you know what I mean; it will be HUGGEE!

The Chinese government has also been embracing blockchain technology, increasing its support for 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. Strengthen the application research of financial technology in supervision, cloud computing, big data, etc. Even the People’s Bank of China is testing a blockchain-based digital currency prototype; however, since it may be a centralized digital currency with some encryption, it remains to be seen whether it will be adopted by Chinese citizens.

The Trusted Blockchain Open Lab initiated by the Ministry of Industry and Information Technology and the China Blockchain Technology and Industry Development Forum are other initiatives by the Chinese government to support the development of blockchain in China.

A recent report by the China Blockchain Research Center titled “China Blockchain Development Report 2018” (English version in the link) details the development of China’s blockchain industry in 2017, including the mainland’s efforts to regulate cryptocurrencies various measures taken. In a separate section, the report highlights the optimistic outlook for the blockchain industry and the broad focus on the industry from venture capital firms and the Chinese government in 2017.

All in all, despite the Chinese government’s coercive measures against cryptocurrencies and mining operations, there is still a positive attitude towards blockchain technology. China wants to control cryptocurrencies, and China will gain control. Repeated enforcement by regulators aims to protect its citizens from the financial risks of cryptocurrencies and limit capital outflows. Currently, it is legal for Chinese citizens to hold cryptocurrencies, but trading of any kind is not allowed; exchanges are therefore prohibited. As the market stabilizes in the coming months (or years), we will undoubtedly see a recovery in the Chinese crypto market. Blockchain and cryptocurrencies go hand in hand (except for private chains that don’t require tokens). Therefore, countries cannot ban cryptocurrencies without banning the awesome technology of blockchain!

One thing we can all agree on is that blockchain is still in its infancy. Many exciting developments await us, and now is definitely the right time to lay the foundations for the blockchain world.

Last but not least, HODL!