Three years ago, China was the Wild West of cryptocurrency. As the blockchain-based digital tokens gained in global popularity, Chinese traders and miners led the way. By the beginning of 2017, 80% of all blockchain currency transactions were conducted in yuan, and a majority of the world’s crypto mining activity took place in mainland China. It was a time of tremendous growth in the cryptocurrency market. According to Coinwatch.com data, crypto’s total market cap rose that year from $16 billion to more than $160 billion in just eight months.
Today, Bitcoin’s (BTC) yuan transactions make up barely 1% of the cryptocurrency’s global volume, and a majority of the mining operations are hosted in Siberia.
The Chinese love affair with crypto was supported by the hands-off attitude of the government. The Beijing authorities, for a long time, simply let crypto be, and watched to see how the industry would develop. That worked until the authorities in Beijing decided that they could not abide the existence of an online trading system that persisted outside the channels of official government control and observation.
The change came on Sept. 4, 2017. That day, the Chinese government, in a combined announcement from seven government and financial regulatory agencies led by the People’s Bank of China, issued a notice banning Initial Coin Offerings (ICOs) in China. The order also included provisions requiring the return of funds and assets in ICOs to the original investors.
It’s important to put the Chinese crypto crackdown into perspective as part of a pattern of increasing regulation in China’s political and social structure by the Beijing government over the last several years. Where Deng Xiaoping pushed a more open economic structure in the 1980s, Xi Jinping has been developing policies to tighten controls in other areas of Chinese life while maintaining the economic engine.
In 2014, the Chinese government introduced its controversial ‘social credit’ system, whereby Chinese citizens would be given a rating based on their level of social trustworthiness. In 2016 and 2017, China cracked down first on international currency trading and then on cryptocurrency. At the Chinese Communist Party Congress in early 2018, President Xi pushed through changes to China’s laws which would allow him to remain, if he wished, President-for-Life. The political crackdown begun at Tiananmen Square in 1989 has continued over the years, with less violence but greater success.
This has been the tradeoff of modern China. The economy is freer than it was in Communism’s heyday, at least in the cities, insofar as individuals are able to build a business and make a fortune (if they can), but at the cost of greater social and political control. In that milieu, the only surprise about the bitcoin regulation is that the government took so long to implement them.
The Economic Logic behind the Regulation
The People’s Bank of China (PBOC) has not only slapped regulations on cryptocurrency trading. The Bank has also imposed controls on P2P lending and microloan platforms, in an effort to reduce financial risks and provide greater stability to the financial system. Additionally, the government imposed greater controls on cross-border currency transactions, especially around Hong Kong and Macau. The financial policies come partly from above and partly from below, as China’s economic growth has been powered – in the popular mind – by an undue accumulation financial leverage.
In that environment, the popularity of Bitcoin in China becomes clear: it was a way around the government’s watchful eyes. Blockchain-driven cryptocurrency permitted users and investors to move money securely, away from the new regulations, and especially while evading foreign exchange rules. And it also becomes clear that the PBOC crackdown was only a matter of time.
The new regulation very effectively killed crypto trading in China. In the year after implementation, Chinese investment in the cryptocurrency market fell to near nothing. Nothing exists in a vacuum, of course, and when China withdrew from the cryptomarkets others rushed in to fill the void. The Japanese yen now accounts for approximately 45% of the global volume in cryptocurrency trading.
The Ironies of Blockchain
There are some interesting twists to all of this. The first is that Bitcoin – and cryptocurrency generally – is not actually illegal in China. Chinese citizens and investors may still hold Bitcoin, and even trade it. This is in line with a 2013 PBOC ruling that Bitcoin is not a currency, but rather a virtual commodity. As such, it likely falls under an October 2017 provision of Chinese Civil Law, “on the protection of data and internet virtual properties.”
Some legal experts hold that, under this provision, cryptocurrencies are considered a form of property in China. This is borne out by PBOC actions to establish a Digital Currency Research Institute, whose goal is to introduce and issue digital money based on a secure blockchain system. The system would differ from Bitcoin, however, in that it would come strictly under the government’s aegis, rather than existing as an independent entity.
The other irony is that the foundation of cryptocurrencies, the blockchain technology, receives public approval and encouragement byChinese government bodies. From the PBOC initiative above, to the official support of blockchain startups, the Chinese government sees blockchain technology as an asset and seeks to boost it. In line with this, as many as 41% of China’s tech startups in 2017 were related to blockchain, and the largest internet companies in China – Alibaba, Baidu, and Tencent – are all involved in blockchain initiatives.
Gazing into the Crystal Ball
Looking at the history of cryptocurrency trading and Chinese regulation, it’s clear that the Chinese government did not disapprove of the concept of Bitcoin; a secure online trading unit has clear advantages. While the imposition of strict regulations dealt a swift death to the cryptocurrency market in China, the government is moving to co-opt the underlying blockchain technology for its own uses.
The future shape of cryptocurrency and blockchain technology is still in flux in China. It’s obvious from their past embrace of Bitcoin that what Chinese traders want a system capable of evading the controls imposed from above, but for now, the Chinese government has the advantage and is considering using blockchain tech to introduce a digital currency in place of cash. According to Bloomberg Businessweek, “It would enhance the PBOC’s ability to root out risks and crack down on money laundering. It could also give the government an unprecedented window into individuals’ private lives.”
Will it happen? Will the tech and finance savvy Chinese find a workaround? It’s only a matter of time until this tug-of-war between China’s government regulators and online traders finds a new field.