China has a somewhat confusing but entirely fascinating relationship with cryptocurrency. China was once the country with the leading Bitcoin miner in the world and with the largest exchange by volume. Many of the people who became overnight millionaires when Bitcoin exploded in 2017 were in China. But now initial coin offerings and any other cryptocurrency activity, even if only interpersonal, are completely prohibited. Writing and promoting cryptocurrency is also prohibited.
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A blockchain for China?
What makes it confusing is the fact that the Chinese government not only thinks blockchain technology is key to the nation’s future, but is developing its own digital currency: Digital Currency/Electronic Payments (DCEP). So while the Chinese government has decided that Bitcoin and other cryptocurrencies are bad, the underlying technology is of interest to them and they want to create their own digital currency.
It is also easy to forget how dominant China was in the cryptocurrency sphere during its rise into the mainstream and how great the role played by the nation’s citizens in Bitcoin’s market price was.
Let’s take a look at the history of cryptocurrency in China.
The beginnings (2008-2010)
The idea of cryptocurrency began in 1990. The idea was that of a currency that could be sent in an untraceable and trustless way, essentially a decentralized digital currency. In 1995, American cryptographer David Chaum implemented an anonymous cryptographic electronic money called Digicash. Bit Gold, often referred to as a direct precursor to Bitcoin, was designed in 1998 by Nick Szabo. It required a participant to devote computer power to solving cryptographic puzzles, and those who solved the puzzle received the reward, something that sounds a lot like mining.
On October 31, 2008, Satoshi Nakamoto published the white paper titled Bitcoin – A Peer to Peer Electronic Cash System, which describes the functionality of the Bitcoin blockchain network. It is worth noting that Bitcoin, and all cryptocurrencies, would not be possible without blockchain technology. Simply put, Blockchain prevents counterfeiting or “copy and paste” of digital money, as well as collaboration between any number of anonymous individuals.
With the publication of the white paper the story of Bitcoin and cryptocurrency was now underway. Bitcoins had almost no value for the first few months of their existence. Six months after I started trading in April 2010, the value of one Bitcoin was less than 14 cents.
In 2007 in China, Tencent, the largest provider of Internet and telephone services, created Q Coin, a rewards program for its QQ instant messaging service. Q Coin was supposed to be a reward service for add-ons, but when users created a secondary market to buy and sell the coins, the government intervened in a shutdown. At that time more than 221 million people were using QQ.
In 2009, the government banned all trade in virtual goods for real currency due to people in China mining virtual gold for games like World of Warcraft and Runescape, as a market had emerged where wealthier players would pay these people for their bills to avoid doing the work themselves and be able to get ahead.
The most important thing to note about this time period is that Chinese citizens have become aware and familiar with virtual value systems, cryptocurrency has become a recognizable concept when comparing it to Q Coin.
An investment opportunity (2010-2014)
As with most other nations in the world, China has chosen to adopt a “wait and see” approach when it comes to regulating Bitcoin. Aside from a ban by the government that prevented banks and traditional domestic exchanges from investing/trading Bitcoin in 2013, no strict regulation was implemented until 2016. This allowed Bitcoin to thrive in China in its early years.
In 2011, China’s first Bitcoin exchange, BTCChina, was launched. It wasn’t until 2013 that Bitcoin really started gaining traction in China. Up to this point, the only real headlines involving Bitcoin were negative, related to skepticism, scams, and its links to the black market.
That changed in April 2013, when a Chinese charity called One Foundation announced it was accepting Bitcoin (the only cryptocurrency in the world right now). After an earthquake hit China that year, the charity received 230 BTC, worth about $30,000 at the time, and 1% of all funds raised for relief efforts. State media published positive reports and compared Bitcoin to other centralized digital currencies such as Q Coin.
In May 2013, crypto exchange Huobi was founded, as was Bitmain, a company that in 2018 was the world’s largest designer of computer chips specifically for Bitcoin mining. China’s state-owned search engine, Baidu, has started accepting Bitcoin. Taobao, the world’s largest e-commerce site, followed their example, and demand for Bitcoin skyrocketed. BTTChina has become the world’s largest cryptocurrency exchange by volume, surpassing the now infamous Mt. Gox.
The increase in
interest in Bitcoin in China pushed the price from $50 to new record highs, seeing an 800% price increase in just two months. The national search engine and the largest e-commerce site that accepts Bitcoin as payment seemed to have crypto on a legitimate and widespread adoption path.
But in early December 2013, China’s central bank, along with five other government ministries, issued a statement stating that Bitcoin could not be used for products and services and that financial institutions could not buy or sell them. It was declared an illegal tender. Baidu and Taobao removed their Bitcoin payment options and the next day Bitcoin lost 20% in value.
China dominates the mining market (2014-2016)
While Bitcoin has become illegal to use as an offering for goods and services, it could still be traded and mined. Low electricity costs and local production facilities that could create low-cost, high-efficiency mining hardware have helped foster a Bitcoin mining environment in China. Bitmain remains the world’s largest mining operation to date, and Chinese Bitcoin miners produce two-thirds of the world’s supply.
In August 2015, four Chinese Bitcoin mining pools accounted for half of the Bitcoin network’s hashrate.
Most of the world’s largest crypto exchanges have also been founded in China, in addition to BTCC and Huobi, OKCoin and KuCoin have also been founded in China. BTCC and Huobi would become the world’s leading exchanges by volume in these years, and Goldman Sachs released a report in 2015 stating that 80% of BTC trades were paired against the Chinese yuan. In 2016 it was 90%. Today it is just 1%.
In 2016, Huobi’s total volume exceeded $250 billion and accounted for more than 60% of all Bitcoin assets, and Bitcoin’s price increased by 120% to $952. Initial coin offerings (ICOs) began to emerge.
China moves to ban cryptocurrency exchanges (2016-2018)
The initial coin offerings marked the beginning of the end of crypto dominance for China. ICOs at this time involved investors buying a new crypto token using Bitcoin and essentially mirrored the process of selling securities, but at this time cryptocurrencies were not explicitly regulated in China.
This changed in early September 2017. Chinese ICOs had raised over $400 million up to this point in the year, which prompted the Chinese government to ban ICOs completely on September 4. This was due to the high-risk nature of the investments. All funds and assets in ICOs had to be returned to the original investors.
On September 17, another measure was put in place banning all Chinese crypto exchanges from exchanging cryptocurrencies for fiat. In response, many exchanges moved operations out of the country or into Hong Kong, ceased operations altogether or became fiat-free, no longer accepting cash deposits but providing crypto-to-crypto exchanges and some derivatives. However, international trade was still an option.
In early 2018 the Chinese government completed its ban by cracking down on crypto-to-crypto exchanges and over-the-counter markets, then blocking access to out-of-country crypto exchanges and ICO websites using its Great Firewall. All cryptocurrency trading was now under embargo.
China considers its own digital currency (2018-present)
Furthering its strict regulatory stance on cryptocurrencies is the government’s decision to ban cryptocurrency mining last year, companies like Bitmain are slowly moving their operations out of the country. Getting around national regulations on cryptocurrencies has become almost impossible, you can’t even discuss cryptocurrencies on WeChat.
Despite its strict regulatory stance on cryptocurrencies, regardless of whether it is Bitcoin, Ethereum, Litecoin or EOS, China is extremely interested in blockchain technology. In November 2019, Chinese state media published a front-page report praising Bitcoin as a successful application of blockchain technology.
This came a month after Chinese President Xi Jinping declared that blockchain is a major technological advance and that China would seize the opportunity it presents. He detailed the ways in which the Chinese government would support blockchain, research, development, and standardization.
In addition, China, more than five years ago at this point, discussed the creation of its own digital currency called Digital Currency / Electronic Payments (DCEP). China’s DCEP is not just an idea, but it may soon become a reality, some thought it would debut by the end of 2019, and although this hasn’t come to pass, it seems likely to happen before the end of 2020.
Although close to completion, DCEP is a stark centralized contrast to Bitcoin and other existing crypto assets.
First, the
government plans to distribute the currency through traditional banks and the monetary system, making it completely centralized and just like traditional paper money. Second, the blockchain ledger, rather than being distributed through the network, will be controlled by the government, a single source. Finally, it will function exactly like a regular currency and will be integrated into the trading system and will be pegged to the Chinese yuan.
Overall, DCEP is just another way for the Chinese government to regulate currency within the country. Cryptocurrencies pose a threat to social stability because they allow capital flight, even traditional currency cannot be moved out of the country in large quantities and it is difficult to exchange it abroad.
While China’s DCEP will be an interesting step for blockchain technology, it is at odds with the disruptive waves that cryptocurrencies hope to make in systems of the traditional world.
