China has a somewhat confusing but altogether fascinating relationship with cryptocurrency. At one time China was the country with the leading miner of Bitcoin in the world and with the largest exchange by volume. Many of the people who became overnight millionaires when Bitcoin exploded in 2017 were located in China. But now Initial Coin Offerings and any other cryptocurrency activity, even just interpersonal, is completely banned. Even writing about and promoting cryptocurrency is banned.
A Blockchain for China?
What makes it confusing is the fact that the Chinese government not only thinks blockchain technology is key to the future of the nation, but they are developing their own digital currency: Digital Currency/Electronic Payments (DCEP). So, while the Chinese government has decided Bitcoin and other cryptocurrencies are bad, the underlying technology is of interest to them, and they want to create their own digital currency.
In addition it is easy to forget just how dominant China was in the cryptocurrency sphere during its ascension into the mainstream, and how large a role the nation’s citizens played in the market price of Bitcoin.
Let’s take a look at the history of cryptocurrency in China.
Early Days (2008-2010)
The idea for cryptocurrency first began in the 1990s. The idea was for a currency which could be sent un-traceably and in a trust-less manner, in essence a decentralized digital currency. In 1995, American cryptographer David Chaum implemented an anonymous cryptographic electronic money called Digicash. Bit Gold, often called a direct precursor to Bitcoin, was designed in 1998 by Nick Szabo. It required a participant to dedicate 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 called Bitcoin – A Peer to Peer Electronic Cash System, describing 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 Pasting” digital money, as well as collaboration between any number of anonymous individuals.
With the publication of the white paper the history of Bitcoin and cryptocurrency was now underway. Bitcoins had almost no value for the first few months of their existence. Six months after they started trading in April 2010, the value of one Bitcoin was less than 14 cents
In 2007 in China, Tencent, the countries largest provider of internet and phone services, created the Q Coin, a rewards program for its QQ instant messaging service. Q Coin was intended to be a rewards service for add-ons, but when users created a secondary market to buy and sell the coins the government stepped in a shut it down. At that time more than 221 million people were using QQ.
In 2009, the government banned all trading of virtual goods for real currency due to people in China mining virtual gold for games such as World of Warcraft and Runescape, as a market had emerged where wealthier gamers would pay these people for their accounts to avoid doing the work themselves and be able to get ahead.
What’s most important to note about this period of time is that Chinese citizens became aware and familiar with systems of virtual value, cryptocurrency became a relatable concept when comparing it to Q Coin.
An Investment Opportunity (2010-2014)
As with most other nations in the world, China chose to adopt a “wait and see” approach when it came to regulating Bitcoin. Apart from a ban by the government that prevented banks and traditional domestic exchanges from investing/trading Bitcoin in 2013, there was no strict regulation implemented until 2016. This allowed Bitcoin to flourish in China in its early years.
In 2011 the first Chinese Bitcoin exchange, BTCChina, was launched. It was not until 2013 that Bitcoin really started to gain traction in China. Up until this point the only real headlines involving Bitcoin were negative, related to skepticism, scams, and its links to the black market.
This changed in April 2013, when a Chinese charity called the One Foundation announced that it was accepting Bitcoin (the only crypto in the world at this time). After an earthquake hit China that year the charity was received 230 BTC, worth around $30,000 at the time, and 1% of all fund raised for relief. State media released positive reports and likened Bitcoin to other digital centralized currencies like Q Coin.
In May 2013, the Huobi crypto exchange was founded, as was Bitmain, a company who in 2018 was the world’s largest designer of computer chips specifically for Bitcoin mining. The Chinese state search engine, Baidu, began accepting Bitcoin. Taobao, the world’s largest e-commerce site followed their lead, and demand for Bitcoin soared. BTTChina became the largest crypto exchange in the world by volume, surpassing the now infamous Mt. Gox.
The increase in interest for 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 biggest e-commerce website accepting Bitcoin as payment seemed to have the crypto on a path to legitimate and widespread adoption.
But in early December 2013, the Chinese central bank, along with five other government ministries, released a statement saying that Bitcoin could not be used for products and services, and that financial institutions could not buy or sell them. It was declared illegal tender. Baidu and Taobao removed their Bitcoin payment options, and the next day Bitcoin dropped 20% in value.
China Dominates Mining Market (2014-2016)
While Bitcoin became illegal to use as tender for good and services, it could still be traded and mined. Low electricity costs and local manufacturing facilities that could create low-cost, high-efficiency mining hardware helped foster a Bitcoin mining environment in China. Bitmain remains the world’s largest mining operation to this day, 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 were also founded in China, in addition to BTCC and Huobi, OKCoin and KuCoin were also founded in China. BTCC and Huobi would go on to become the world leading exchanges by volume over these years, and Goldman Sachs issued a report in 2015 saying that 80% of BTC trades were paired against the Chinese yuan. By 2016 it was 90%. Today it is barely 1%.
In 2016, Huobi’s total volume surpassed $250 billion, and accounted for over 60% of all Bitcoin activity, and Bitcoin’s price went up 120% to $952. Initial Coin Offerings (ICOs) started to emerge.
China Moves to Ban Cryptocurrency Exchanges (2016-2018)
Initial Coin Offerings signaled 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 securities sales, but at this time cryptos 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 entirely on September 4. This was due to the high-risk nature of the investments. All funds and assets in ICOs were to be returned to the original investors.
On September 17 another measure was put in place prohibiting all Chinese crypto exchanges from trading crypto for fiat. In response many exchanges moved operation out of the country or into Hong Kong, ceased operations entirely, or became fiat-free, no longer accepting cash deposits but providing crypto-to-crypto exchanges and some derivatives. However, international exchanges were 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 crypto trading was now under embargo.
China Considers its Own Digital Currency (2018-Present)
Furthering its strict regulatory stance on crypto is the government’s decision to ban crypto mining last year, companies such as Bitmain are slowly moving their operations out of the country. Skirting national regulations on crypto has become nearly impossible, you cannot even discuss crypto on WeChat.
Despite its strict regulatory stance on cryptocurrencies, regardless of whether it’s Bitcoin, Ethereum, Litecoin or EOS, China is extremely interested in blockchain technology. In November 2019, Chinese state media released a front-page report praising Bitcoin as a successful application of blockchain technology.
This came a month after Chinese President Xi Jinping declared blockchain an important technological advancement and that China would seize the opportunity it presents. He detailed the ways the Chinese government would support blockchain, research, development, and standardization.
On top of this, China, more than five years ago at this point, discussed creating its own digital currency called Digital Currency/Electronic Payments (DCEP). China’s DCEP is not only an idea, but may soon be a reality, some thought it would be debuted by the end of 2019, and while that did not come to fruition, it seems likely to happen before the end of 2020.
Though nearing completion, the DCEP is a stark centralized contrast when compared to Bitcoin and other existing crypto assets.
First, the government plans to distribute the currency through traditional banks and the monetary system, making it fully centralized and just like traditional paper money. Secondly, the blockchain ledger, rather than being distributed across the network, will be controlled by the government, a single source. Finally, it is going to operate exactly like a normal currency and will be integrated into the commercial system and will be pegged to the Chinese yuan.
Overall, the DCEP is just another way for the Chinese government to regulate currency within the country. Cryptocurrencies posed a threat to social stability because they allow capital flight, even traditional currency is prevented from being moved out of the country in large amounts, and it is difficult to exchange it abroad.
While the Chinese DCEP will be an interesting step for blockchain technology, it is counter to the disruptive waves cryptocurrencies are hoping to make in traditional world systems.