China saw the game-changing potential of blockchain early on, and over the last few years it has steadily increased its support for developing and implementing the technology (under strict government control) across several key national industries. But despite its enthusiasm for blockchain, China’s approach to cryptocurrencies – the technology’s most prominent and established use-case – has been markedly less exuberant.
Since September 2017, when the government passed a blanket ban on ICO’s and crypto exchanges, it has been taking an increasingly hard line on cryptocurrencies. China is currently intent on stamping it out completely, and most recently, has even gone as far as banning any crypto-related discussion and events in the media, online and in public spaces. A stance which is being followed by Chinese private institutions as well.
To unpack the motives of the typically tight-lipped Chinese regulators, it is essential to understand China’s central role in the development of the global blockchain and cryptocurrency industry. It is against this background that China’s “pro-blockchain, anti-bitcoin” regulatory approach can be best examined.
This article seeks to provide an overview of China’s blockchain and cryptocurrency industry and how it is regulated. This overview will provide a clearer understanding of the competing influences and motivations guiding China’s regulatory approach, both now and into the future.
China’s Pivotal Role in Developing the Global Cryptocurrency Industry
China has played a central role in the development and growth of the cryptocurrency industry. To better understand the scope of China’s involvement some key facts and figures must be considered, let’s take a look at them:
• China is the world’s dominant cryptocurrency miner. Its mining companies, including giants like F2Pool, BW and BTCC own and operate 60 percent or more of the global processing power devoted to crypto mining.
• China is home to several of the world’s leading crypto mining hardware manufacturers, such as the Beijing-based Bitmain.
• Prior to its September 2017 ban China was the world’s biggest crypto-market in terms of volume.
• Despite the ban on ICOs and exchanges it remains legal for Chinese citizens to hold or mine cryptocurrencies in China.
• The People’s Bank of China appears to be closer to issuing a digital currency than almost any other central bank in the world.
• In May this year the government-backed China Electronic and Information Industry Development research group began releasing its monthly ratings of the most innovative cryptocurrencies globally – notably, the rankings ignore market value as a factor.
• China has outpaced the United States in the number of blockchain related patents it registers each year.
• This year alone the Chinese government has earmarked over US$3 billion in funding for research and development of blockchain technology.
Examining China’s Regulation of the Cryptocurrency Industry
Given the above facts, China appears to have embraced all things blockchain and cryptocurrency related – which is what makes the recent escalation of its crackdown on crypto-related activity all the more puzzling. The government is adamant that its strict regulations are aimed at protecting Chinese investors from fraud and preventing financial crime. Undoubtedly, this is an important factor motivating the ban, as there have been numerous high-profile cases of fraudulent ICOs swindling millions from investors.
However, many analysts believe the government is also concerned about maintaining its control over the economy, protecting its national currency the yuan and regulating the flow of capital in and out of the country. Analysts have also pointed to a range of wider geopolitical factors that could be influencing China’s approach to crypto regulation, but for the purposes of this article we will leave them to one side.
Although China’s recent escalation of the crackdown has gained worldwide attention, it is not a marked change in regulatory direction, but rather an expansion of existing regulatory aims. From the outset Chinese regulators have felt threatened by the disruptive potential of cryptocurrencies, which due to their decentralized nature, are difficult to track and control.
Although China has to date passed no specific legislation on cryptocurrencies, it has enacted a series of regulatory measures over the last five years that steadily trend toward restricting their use. The most glaring inconsistency in China’s approach so far has been to forbid the exchange of cryptocurrencies, while turning a blind eye to crypto mining operations, it’s a regulatory gap that must be addressed. The following timeline highlights key developments in China’s regulation of the crypto industry:
A Timeline of Key Cryptocurrency Regulation Events in China
December 2013: The People’s Bank of China (PBoC) and four other financial regulators issue a joint notice, outlining the risks associated with bitcoin, which sets the tone for its regulatory approach over the following years. It states that bitcoin is not a currency, prohibits banks and other financial institutions from trading in it, but still allows the public to buy and sell it at their own risk.
Key Stipulations of the 2013 Notice:
• Due to various factors such as limited supply, anonymity and lack of a centralized issuer, bitcoin is not a official currency but a virtual commodity that cannot be used in the open market.
• All banks and financial organizations are not allowed to offer bitcoin-related financial services or engage in trading activity related to Bitcoin.
• All companies and websites that offer Bitcoin-related services are to register with the necessary government ministries.
• Due to the anonymity and cross-border features of Bitcoin, organizations providing Bitcoin-related services ought to implement preventive measures such as know your customer (KYC) to prevent money laundering.
• Organizations providing Bitcoin-related services ought to educate the public about Bitcoin and the technology behind it and not mislead the public with misinformation.
• April 2014: The People’s Bank of China’s (PBoC) Governor Zhou Xiaochuan describes bitcoin as an asset class – like rare stamps – and says the government is not even considering banning it.
• January 2016: The PBoC announces it plans to issue a sovereign digital currency that could help to reduce the cost of circulating banknotes, promote economic activity and aid the fight against money laundering.
• September 2016: China is a founding member of the 38-country ISO/TC 307 group working on the standardisation of blockchain and distributed ledger technologies.
• October 2016: The Chinese government publishes its official Blockchain Whitepaper detailing the potential applications of blockchain technology, with a particular focus on the financial sector. The whitepaper also highlights the urgent need for international standardisation of the blockchain industry to enable more effective regulation.
• December 2016: China adds blockchain technology to its 13th Five-Year Plan, the overarching road map for the country’s development from 2016 to 2020. In the plan, according to the state-owned People’s Daily, blockchain was depicted as one of the major tasks and projects for the nation to pursue.
• January 2017: After investigating China’s three biggest bitcoin exchanges – BTC China, Huobi and OkCoin – the PBoC accuses them of a lack of internal risk controls and issues a warning to investors to that effect. Following the inspections, the exchanges began upgrading their security and anti-money-laundering systems, leading to a temporary suspension on all withdrawals of bitcoin and Litecoin in February. The PBoC also announces that it is setting up a research institute dedicated to digital currencies.
• June 2017: The PBoC begins testing a prototype state-backed digital currency – sending several transactions between it and some of the country’s commercial banks.
• July 2017: Chinese exchanges lift their suspension on withdrawals of cryptocurrencies.
• August 2017: China Blockchain Application Research Center holds an ICO symposium, convening more than 10 heads of blockchain institutions in Beijing, where they clearly express their opinions on regulatory intervention and market risk control. Huo Xuewen, party secretary of the Beijing Financial Bureau, delivers a speech demanding that the governing bodies affiliated with the center, and the relevant institutions in Beijing, do not participate in the issuance and trading of any ICO and strictly practice self-discipline and compliance under relevant laws. The conference was widely recognized and disseminated by the industry.
• September 2017: Beijing deems ICOs and crypto-to-fiat exchanges illegal and orders all mainland-based cryptocurrency exchanges to shut down. Crypto trading by individuals remains in a murky area, many businessmen relocate to Hong Kong or Japan, while still raising funds from mainland investors and individual traders move to mobile chat applications to conduct trades.
• January 2018: The PBoC orders financial institutions to stop providing banking services or funding for any activity related to cryptocurrencies and bans P2P sales and over-the-counter markets. China’s top internet-finance regulator issues a notice asking local governments to “actively guide” bitcoin-mining operations to “orderly” quit the business.
• February 2018: The Chinese government blocks access to all websites related to cryptocurrency trading and ICOs, including foreign platforms, in a bid to finally quash the market completely. Advertisements for cryptocurrencies stop appearing on Baidu, China’s biggest search engine, and social media platform Weibo.
• April 2018: In a joint statement provided by several regulators, the PBoC states that it will continue to fight risks from internet financing and highlights that ICO projects and trading platforms have been closed for the benefit of public safety. According to the statement, the regulations have managed to partly reduce illegal fundraising in China, however, “the situation remains severe.” According to China’s supreme court, illegal fundraising poses an immense harm for the national market and financial security.
• May 2018: China’s Ministry of Industry and Information Technology confirms that it is working toward establishing national standards for blockchain technology to be rolled out before the end of 2019. The ministry points to “positive progress” in the international ISO effort to develop standards covering core blockchain facets but stresses the importance of developing a “complete blockchain standard system” domestically.
July 2018: The PBoC releases a report confirming the success of its ban, noting that the Yuan now accounts for less than 1 percent of bitcoin trades, down from over 90 percent in 2017. The report states PBoC policies had ensured a “zero-risk” exit for the 88 cryptocurrency exchanges and 85 ICO trading platforms closed since late 2017.
• August 2018: Authorities in Beijing’s downtown Chaoyang district circulated an order barring public venues from hosting cryptocurrency-related events. Internet giants WeChat and Baidu begin removing crypto-related content from their platforms and the government begins blocking IP addresses of 124 cryptocurrency trading platforms still accessible from China.
• September 2018: The China National Internet Finance Association (NIFA), a self-regulatory organization founded by the PBoC adds a “token sales” category to its platform that allows the public to report on potentially illegal financial activities. The ban on crypto-related events is extended to the Guangzhou Development District, a special economic zone in southern China, close to Hong Kong, citing the need to “maintain the security and stability of the financial system.”
Explaining China’s Regulatory Approach Now and Into the Future
As can be seen from the timeline above, China is currently exercising all its power to completely stamp out cryptocurrencies. Reports on the state of the country’s vast crypto-mining industry are patchy, but it seems there has been a concurrent, but less hardline, push to close it down.
This recent escalation could indicate that the government is preparing the way for the release of its own national cryptocurrency. This would be a fascinating and ground-breaking development for the crypto industry, but as of now, there is no official indication that it will be rolling it out anytime soon.
Analysts have pointed out that China’s regulatory stance on crypto could be similar to the one it took on foreign internet giants. By banning the likes of Google, Facebook and Youtube it allowed Chinese companies like Baidu, WeChat, and Youku to flourish.
The crackdown also reduces the level of competition faced by local blockchain-based companies that will come online soon. China has expressed its support of platforms like VeChain, Qtum and other blockchain projects created in China and based in the country. There is also speculation that the ban aids the enforcement of strict capital controls, primarily to prevent the Chinese yuan from leaving the country.
These factors have all likely influenced China’s regulatory stance, and as such, it seems doubtful that the ban will be lifted or eased in the foreseeable future. By isolating itself from the global crypto industry, China risks stifling its own ability to innovate and could fall behind the rest of the world in the digital currency revolution.
China’s attempt to exert control over cryptocurrency is in many ways fundamentally at odds with the decentralized-control that makes blockchain technology so revolutionary. Decentralization, which requires many separate parties to form a consensus to determine the state of a currency, was designed precisely to prevent the kind of centralized power and authority that is the lifeblood of the Chinese Government. Nevertheless, it will be fascinating to watch how China’s local industry continues to evolve under these regulatory conditions. Watch this space.