In 2008, after the financial crisis, the article “Bitcoin: peer-to-peer electronic monetary system” was published, which describes in detail the concepts of the payment system. Bitcoin was born. Bitcoin has attracted worldwide attention using blockchain technology and an alternative to fiat currencies and commodities. Named the next best technology after the Internet, the blockchain offered solutions to problems we hadn’t been able to solve or ignored over the past few decades. I won’t delve into its technical aspect, but here are a few articles and videos I recommend:
How bitcoin works under the hood
Gentle introduction to blockchain technology
Have you ever wondered how bitcoin (and other cryptocurrencies) actually work?
More precisely, today, February 5, the Chinese authorities have just introduced a new set of rules banning cryptocurrencies. The Chinese government already did this last year, but many have bypassed foreign exchanges. It has now enlisted the almighty “Great Firewall of China” to block access to foreign exchanges to stop its citizens from conducting any cryptocurrency transactions.
To learn more about the position of the Chinese government, let’s go back a couple of years back to 2013, when bitcoin was gaining popularity among Chinese citizens and prices were rising rapidly. Concerned by price fluctuations and speculation, the People’s Bank of China and five other government ministries issued an official statement in December 2013 entitled “Bitcoin Financial Risk Prevention Notice” (link to Mandarin). Several points were highlighted:
1. Due to various factors such as limited supply, anonymity and the absence of a centralized issuer, bitcoin is not an official currency but a virtual commodity that cannot be used on the open market.
2. All banks and financial institutions are prohibited from offering bitcoin-related financial services or engaging in bitcoin-related trading activities.
3. All companies and websites that offer bitcoin-related services must register with the required government ministries.
4. Due to the anonymity and cross-border nature of bitcoin, organizations providing bitcoin-related services should take 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 should educate the public about bitcoin and the underlying technologies, and not mislead society with misinformation.
Simply put, bitcoin is classified as a virtual commodity (such as in-game loans) that can be bought or sold in its original form rather than exchanged for fiat currency. It cannot be defined as money – that which serves as a medium of exchange, a unit of account and a stock of value.
Despite the report, dated 2013, it is still relevant to the Chinese government’s position on bitcoins, and, as mentioned, there are no signs of banning bitcoins and cryptocurrencies. Most likely, regulation and education about bitcoin and blockchain will play a role in the Chinese crypto market.
A similar message was published in January 2017, which again emphasizes that bitcoin is a virtual commodity, not a currency. In September 2017, a boom in initial coin offerings led to the publication of a separate post entitled “Financial Risk Prevention Notice for Issued Tokens”. Soon ICOs were banned, and Chinese stock exchanges were investigated and eventually closed. (Looking back 20/20, they made the right decision to ban ICOs and stop pointless gambling). Another blow was dealt to China’s cryptocurrency communities in January 2018, when mining faced serious overclocking, citing excessive electricity consumption.
Although there is no official explanation for the repression against cryptocurrencies, control over capital, illegal activities and protection of citizens from financial risk are among the main reasons cited by experts. Indeed, Chinese regulators have introduced tighter controls, such as restrictions on foreign withdrawals and regulation of foreign direct investment, to limit capital outflows and secure domestic investment. The anonymity and ease of cross-border transactions have also made cryptocurrency a favorite means of money laundering and fraud.
Since 2011, China has played a crucial role in the meteorite rise and fall of bitcoin. At its peak, China accounted for more than 95% of global bitcoin trade and three-quarters of mining operations. With regulators overseeing trade and mining operations, China’s dominance has declined significantly in exchange for stability.
Countries like Korea and India are following suit and are now casting a shadow over the future of cryptocurrencies. (Here I will repeat my opinion: countries regulate cryptocurrency, not ban it). Undoubtedly, we will see that in the coming months new countries will join, which will restrain the turbulent crypto market. Indeed, some order is long overdue. Over the past year, cryptocurrencies have experienced unprecedented price volatility, and ICOs occur literally every other day. In 2017, total market capitalization rose from $ 18 billion in January to a record $ 828 billion.
However, the Chinese community is surprisingly well-disposed, despite harsh measures. Online and offline communities are thriving (I have personally attended many events and visited some firms), and blockchain startups are growing all over China.
Such large blockchain firms as NEO, QTUM and VeChain are attracting huge attention in the country. Startups such as Nebulas, High Performance Blockchain (HPB) and Bibox are also gaining considerable strength. Even giants like Alibaba and Tencent are also exploring blockchain capabilities to enhance their platform. The list goes on and on, but you understand me; it will be HUGGEE!
The Chinese government has also adopted blockchain technology and in recent years has stepped up efforts to support the creation of a blockchain ecosystem.
In China’s 13th Five-Year Plan (2016-2020), it called for the development of advanced technologies, including blockchain and artificial intelligence. It also plans to step up research into the application of fintech in regulation, cloud computing and big data. Even the People’s Bank of China is also testing a prototype digital currency based on the blockchain; however, since it is likely to be a centralized digital currency that has been slapped by some encryption technology, its adoption by Chinese citizens will still have to wait.
The launch by the Ministry of Industry and Information Technology of the Trusted Blockchain Open Lab as well as the Chinese Technology and Industry Development Forum in China are some of the Chinese government’s other initiatives to support blockchain development in China.
A recent report titled “China Blockchain Development Report 2018” (English version of the link) of the China Blockchain Research Center details the development of the blockchain industry in China in 2017, including various measures to regulate the cryptocurrency on the mainland. In a separate section, the report highlighted the optimistic prospects of the blockchain industry and the much attention it received from venture companies and the Chinese government in 2017.
In general, the Chinese government has demonstrated a positive attitude towards blockchain technology, despite the fact that it applies to cryptocurrencies and mining operations. China wants to control the cryptocurrency, and China will get control. Repeated enforcement measures by regulators were designed to protect their citizens from the financial risks of cryptocurrencies and limit capital outflows. Today, Chinese citizens legally have cryptocurrencies, but they are not allowed to make any transactions; hence the ban on sharing. As the market stabilizes in the coming months (or years) we will undoubtedly see a revival of the Chinese crypto market. Blockchain and cryptocurrency go hand in hand (except for a private network where a token is not needed). Therefore, countries cannot ban cryptocurrency without banning amazing technology blockchain!
In one we can all agree: the blockchain is still in its infancy. We have a lot of interesting events ahead of us, and right now is probably the best time to lay the groundwork for a world involving a blockchain.
Last but not least HODL!