In 2008 after the financial crisis, a paper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published, detailing the concepts of a payment system. Bitcoin was born. Bitcoin has garnered worldwide attention for its use of blockchain technology and as an option for fiat currencies and commodities. Called the next best technology after the internet, blockchain offers solutions to issues we have failed to deliver, or have ignored over the past few decades. I will not examine the technical aspects of it but here are some articles and videos that I recommend:
How Bitcoin Works Under the Hood
A gentle introduction to blockchain technology
Wondering how Bitcoin (and other cryptocurrencies) work?
Soon today, February 5 exactly, Chinese authorities have recently unveiled a new set of regulations to ban cryptocurrency. This was done by the Chinese government last year, but many avoided foreign exchanges. The most powerful ‘Great Firewall of China’ is now being asked to block the entry of foreign exchanges into a request to prevent citizens from conducting any cryptocurrency transactions.
To find out more about China’s government stance, we will go back a few years back to 2013 where Bitcoin is increasingly popular among Chinese citizens and rising prices. Concerned about falling prices and speculation, the People’s Bank of China and five other government ministers issued an official announcement in December 2013 entitled “Bitcoin Risk Control Notice” (Link at Mandarin). Many points are 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 is not available in the open market.
2. All banks and financial organizations are not permitted to offer Bitcoin-related financial services or participate in Bitcoin-related trading activities.
3. All companies and websites offering Bitcoin-related services must register government service requirements.
4. Due to the anonymity of Bitcoin’s cross-border name and features, organizations providing Bitcoin-related services should take precautionary measures such as KYC to prevent money laundering. Any suspicious activity including fraud, gambling and money laundering should be reported by the authorities.
5. Organizations that provide Bitcoin-related services should educate the public about Bitcoin and the technology behind it and not mislead the public with misinformation.
In layman’s terms, Bitcoin is classified as a virtual commodity (for example, in-game credits,) that can be bought or sold in its original form and not exchanged for fast money. It is not defined as money- something that serves as a medium of exchange, an accounting unit, and a store of value.
Despite the announcement dated in 2013, it is still relevant to the Chinese government’s stance on Bitcoin and as mentioned, there is no indication of a ban on Bitcoin and cryptocurrency. However, regulation and education about Bitcoin and blockchain play a role in the Chinese crypto-market.
A similar announcement was issued in January 2017, also emphasizing that Bitcoin is a virtual commodity and not a currency. In September 2017, the development of initial coin offerings (ICOs) led to the issuance of a special announcement entitled “Risk Prevention Issues Token Issues”. Shortly afterwards, the ICO was banned and Chinese exchanges were investigated and eventually closed. (Hindsight is 20/20, they made the right decision to ban ICOs and stop unethical gambling). Another blow hit China’s cryptocurrency community in January 2018 when mining operations faced severe restrictions, citing excessive electricity consumption.
While there is no official explanation for cracking down on cryptocurrencies, controlling capital, illegal activity and protecting citizens from financial risk are some of the key factors cited by experts. In fact, Chinese regulators have imposed stricter controls such as withdrawing abroad and controlling foreign direct investment to limit the flow of capital and ensure home investments. Anonymity and ease of cross-border transactions also make cryptocurrency a favorite method for money laundering and fraudulent activities.
Since 2011, China has played an important role in the rise and fall of Bitcoin. At its peak, China has more than 95% of the world’s Bitcoin trading and three-quarters of mining operations. In the recent administrations to control trade and mining operations, China’s control over dominance has become increasingly strong.
With countries like Korea and India following the crackdown, a shadow is now being thrown at the future cryptocurrency. (I will also explain here my point: countries control cryptocurrency, it is not banned). Without a doubt, we will see many countries join in the coming months to end the tumultuous crypto-market. In fact, the different order is long overdue. In the past year, cryptocurrencies have experienced unpredictable price declines and ICOs happen literally every day. In 2017, total market capitalization rose from 18 billion USD in January to an all-time high of 828 billion USD.
However, the Chinese community is in a strange good spirit despite the persecution. The online and offline communities are thriving (I personally attend a number of events and have visited some companies) and blockchain startups have started all over China.
Leading blockchain companies like NEO, QTUM and VeChain have garnered a lot of attention in the country. Startups like Nebulas, High Performance Blockchain (HPB) and Bibox also get a fair amount of energy. Even giants like Alibaba and Tencent are also exploring blockchain capabilities to improve their platform. The list goes on and on but you got me; it could be a GREAT one!
The Chinese government has also embraced blockchain technology and stepped up 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 advancement of promising technologies including blockchain and artificial intelligence. It also plans to strengthen research on fintech application regulation, cloud computing and mass data. Even the People’s Bank of China is also testing a blockchain-based digital currency prototype; however, with the possibility that it is a centralized digital currency slapped by some encryption technology, the adoption of 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 of the Ministry of Industry and Information Technology are some of the initiatives of the Chinese government to support China’s blockchain development.
A new report titled “China Blockchain Development Report 2018” (English version with link) at the China Blockchain Research Center details the growth of the Chinese blockchain industry in 2017 including various steps created to control cryptocurrency on the mainland. In a separate section, the report highlights the optimistic outlook for the blockchain industry and the enormous attention it received from VCs and the Chinese government in 2017.
In summary, the Chinese government has shown a positive attitude to blockchain technology despite its implementation in cryptocurrency and mining operations. China wants to control cryptocurrency, and China can control. Repeated enforcement by regulators is intended to protect its citizens from the financial risk of cryptocurrencies and limit the flow of capital. As of now, it is legal for Chinese citizens to hold cryptocurrencies but they are not allowed to carry any form of transaction; hence the prohibition of exchange. As the market continues in the coming months (or years), it is clear that we will see a revival in the Chinese crypto-market. Blockchain and cryptocurrency come in handy (except in private chains where a token is not required). Countries thus cannot ban cryptocurrency without blockchain the awesome technology!
One thing we can all agree on is that the blockchain is still in its infancy. A lot of exciting developments are waiting for us and right now is definitely the best time to lay the foundation for a world with blockchain capabilities.
Last but not least, HODL!