Following the 2008 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 attracted worldwide attention for its use of blockchain technology and as an alternative to Fiat currency and products. Dubbed the next best technology after the Internet, blockchain offers solutions to problems that we have failed to address or overlooked for decades. I won’t explore the technical side of it but here are some articles and videos that I recommend:
How Bitcoin Works Under the Hood
A gentle introduction to blockchain technology
Ever wondered how Bitcoin (and other cryptocurrencies) actually works?
Fast forward to today, February 5th, to be exact, Chinese authorities unveiled a new set of bans on cryptocurrency. The Chinese government has already done so last year, but many have dispersed through foreign exchange. It now lists the almighty ‘Great Firewall of China’ to block access to foreign exchanges to prevent its citizens from transacting any cryptocurrency.
To learn more about the Chinese government’s position, let’s go back to a few years back in 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 an official notice in December 2013 entitled “Bitcoin Financial Risk Prevention Notice” (link is in Mandarin). Several points were highlighted:
1. Due to various reasons such as limited supply, anonymity and lack of centralized issuers, Bitcoin is not an official currency but a virtual product that cannot be used in the open market.
2. Not all banks and financial institutions are allowed to offer Bitcoin-related financial services or engage in Bitcoin-related business activities.
3. All organizations and websites offering bitcoin-related services must register with the required government ministry.
4. Due to the anonymous and cross-border nature of Bitcoin, Bitcoin-related service providers should implement preventive measures such as KYC to prevent money laundering. Authorities must report any suspicious activity, including fraud, gambling and money laundering.
5. Bitcoin-related service providers should educate the public about Bitcoin and the technology behind it, and not mislead the public with misinformation.
In general terms, Bitcoin is classified as a virtual product (such as in-game credit) that can be bought or sold in its original form and cannot be exchanged for Fiat currency. It cannot be defined as money কিছু something that acts as a medium of exchange, a unit of accounting, and a repository of value.
Although the notice is dated 2013, it is still relevant to the Chinese government’s position on Bitcoin and, as mentioned, there is no indication of a ban on Bitcoin and cryptocurrency. Rather, regulations and education about bitcoin and blockchain will play a role in the Chinese crypto-market.
A similar notification was issued in January 2017, again emphasizing that Bitcoin is a virtual product and not a currency. In September 2017, the boom of initial currency offerings (ICOs) led to the publication of a separate notice entitled “Notice to Prevent Financial Risk of Issued Tokens”. Soon, ICOs were banned and Chinese exchanges were investigated and eventually shut down. (Hindsite is 20/20, they made the right decision to ban ICO and stop stupid gambling). Another blow to China’s cryptocurrency community came in January 2018 when mining operations faced serious crackdowns, citing excessive power consumption.
Although there is no formal explanation for the crackdown on cryptocurrencies, there are some key reasons cited by experts on capital control, illegal activity and protection of its citizens from financial risk. Indeed, Chinese regulators have imposed strict controls such as foreign direct investment controls to limit foreign withdrawal caps and capital outflows and ensure domestic investment. The ease of anonymity and cross-border transactions has also made cryptocurrency a favorite medium for money laundering and fraudulent activities.
Since 2011, China has played a key role in the rise and fall of Bitcoin. At its peak, China accounted for 95% of global bitcoin trading volume and three-quarters of mining activity. With regulators taking steps to control trade and mining activities, China’s dominance in exchange for stability has shrunk significantly.
Countries such as Korea and India, following suit in the crackdown, now cast a shadow over the future of cryptocurrency. (I will repeat my point here: countries are controlling cryptocurrency, not banning it). Undoubtedly, we will see more nations pull the reins in the turbulent crypto-market in the coming months. In fact, some sort of order was overdue. Over the past year, cryptocurrencies have been experiencing price volatility that has not been heard of and ICOs are literally happening every day. In 2017, total market capitalization increased from 18 billion USD in January to an all-time high of 828 billion USD.
Yet, despite the crackdown, the Chinese community is in surprisingly good spirits. Online and offline communities are evolving (I have personally attended several events and visited a few firms) and blockchain startups are spreading across China.
Major blockchain companies like NEO, QTUM and VeChain are getting a lot of attention in the country. Startups like Nebulas, High Performance Blockchain (HPB) and Bibox are also gaining traction. Even giants like Alibaba and Tencent are exploring the power of blockchain to expand their platform. The list goes on but you get me; It’s going to be HUGGEE!
The Chinese government is also embracing blockchain technology and has stepped up efforts in recent years to help build blockchain ecosystems.
In China’s 13th Five-Year Plan (2016-2020), it called for the development of promising technologies, including blockchain and artificial intelligence. It plans to intensify research on control, cloud computing and the application of fintech to big data. Even the People’s Bank of China is testing a prototype blockchain-based digital currency; However, while it may be a centralized digital currency that has been slapped with some encryption technology, it is still seen to be adopted by Chinese citizens.
In addition to launching the trusted blockchain open lab, the China Blockchain Technology and Industry Development Forum by the Ministry of Industry and Information Technology is another initiative of the Chinese government to assist in the development of blockchain in China.
A recent report entitled “China Blockchain Development Report 2018” (English version of the link) by China Blockchain Research Center details the development of the blockchain industry in China in 2017, including various measures taken to control cryptocurrency on the mainland. In a separate section, the report highlights the optimistic outlook for the blockchain industry and the widespread attention it received in 2017 from the VC and the Chinese government.
In short, the Chinese government has shown a positive attitude towards blockchain technology, despite its use in cryptocurrency and mining operations. China wants to control cryptocurrency, and China will get control. The purpose of repeated enforcement by regulators was to protect citizens from the financial risks of cryptocurrency and to limit the outflow of capital. Until now, Chinese citizens have been allowed to hold cryptocurrencies but are not allowed to make any transactions; So the exchange is forbidden. As the market stabilizes in the coming months (or years), we will undoubtedly see a resurgence of the Chinese crypto-market. Blockchain and cryptocurrency come hand in hand (except for personal chains where a token is unnecessary). Countries can’t ban cryptocurrency without banning blockchain like this Great technology!
One thing we can all agree on is that the blockchain is still in its infancy. Many exciting developments await us and this is definitely the best time to lay the foundation for a blockchain-enabled world right now.
Last but not least, HODL!