Preparing for a Cryptocurrency World: China Edition

Over the past year, the cryptocurrency market has received a series of heavy blows from the Chinese government. The market took blows as a warrior, but the combinations have hurt many cryptocurrency investors. The weakest market performance in 2018 fades compared to its stellar profits by one thousand percent in 2017.

What happened?

Since 2013, the Chinese government has taken steps to regulate the cryptocurrency, but nothing compared to what was implemented in 2017. (See this article for a detailed analysis of the official announcement issued by the Chinese government)

2017 was a flag year for the cryptocurrency market with all the attention and growth it has achieved. Extreme price volatility forced the Central Bank to adopt more extreme measures, including a ban on initial currency offerings (ICOs) and austerity in domestic cryptocurrency exchanges. Shortly afterwards, mining factories in China were forced to close, citing excessive electricity consumption. Many stock exchanges and factories have relocated overseas to circumvent regulations, but have remained accessible to Chinese investors. However, they still do not manage to escape the nails of the Chinese Dragon.

In the latest series of government-led efforts to monitor and ban cryptocurrency trading among Chinese investors, China extended the Eagle Eye to monitor foreign exchange. Companies and bank accounts suspected of conducting transactions with foreign crypto-exchanges and related activities are subject to measures from limiting withdrawal limits to freezing accounts. There have even been constant rumors among the Chinese community about more extreme measures to be implemented on foreign platforms allowing trade between Chinese investors.

“As for whether there will be further regulatory measures, we will have to wait for orders from higher authorities.” Excerpts from an interview with the team leader of China Public Information Network Security Oversight Agency under the Ministry of Public Security, February 28

WHY WHY WHY !?

Imagine your child investing his or her savings to invest in a digital product (in this case, cryptocurrency) that he or she has no way of verifying its authenticity and value. He or she may be lucky enough to hit the rich one, or lose it all when the crypto-bubbles burst. Now scale this to millions of Chinese citizens and we are talking about billions of Chinese yuan.

The market is full of scams and meaningless ICOs. (I’m sure you’ve heard news of people sending coins to random addresses with the promise of doubling their investments and ICOs that just don’t make sense). Many bad investors are looking for money and would care less about the technology and innovation behind it. The value of many cryptocurrencies stems from market speculation. During the crypto-boom in 2017, attend any ICO or with a famous advisor on board, a promising team or a worthy hype and you are guaranteed at least 3X your investment.

The lack of understanding of the firm and the technology behind it, combined with the proliferation of ICOs, is a recipe for disaster. Central bank members report that almost 90% of ICOs are fraudulent or involve illegal fundraising. In my opinion, the Chinese government wants to ensure that cryptocurrencies remain ‘controllable’ and not too large to fail within the Chinese community. China is taking the right steps toward a more secure, regulated, albeit aggressive and controversial, world of cryptocurrencies. In fact, it may be the best move the country has undertaken in decades.

Will China issue an ultimatum and make cryptocurrency illegal? I very much doubt so it is very pointless to do so. Currently, financial institutions are prohibited from holding any crypto assets while individuals are allowed but are prohibited from conducting any form of trading.

A state-run cryptocurrency exchange?

In the annual “Two Sessions” (Named because the two major parties – the National People’s Congress (NPC) and the National Committee of the Chinese People’s Political Consultative Conference (CPCC) both attend the forum held in the first week of March, leaders gather for discuss recent issues and make necessary changes to the law.

Wang Pengjie, a member of the NPCC plunged into the prospects of a state-run digital asset trading platform, as well as launch educational projects on blockchain and cryptocurrency in China. However, the proposed platform would require a certified account to allow trading.

“With the establishment of relevant regulations and the cooperation of the People’s Bank of China (PBoC) and the China Securities Regulatory Commission (CSRC), a regulated and efficient currency exchange platform would serve as a formal way for companies to raise funds (through ICOs) and investors to retain their digital assets and achieve capital appreciation “Part of Wang Pengjie’s presentation in Two Sessions.

Marching to a Blockchain Nation

Governments and central banks around the world have struggled to cope with the growing popularity of cryptocurrencies; but one thing is for sure, everyone has embraced blockchain.

Despite the cryptocurrency cracking, blockchain has gained popularity and approval at various levels. The Chinese government has supported blocking initiatives and embracing technology. In fact, the People’s Bank of China (PBoC) has been working on a digital currency and has conducted mock transactions with some of the country’s commercial banks. It is still unconfirmed whether digital currency will be decentralized and offer cryptocurrency features such as anonymity and immutability. It would not be a surprise if it turns out to be just a Chinese digital yuan, given that anonymity is the last thing China wants in their country. However, created as an imminent replacement of the Chinese Yuan, the digital currency will be subject to existing monetary policies and laws.

Governor of the People’s Bank of China, Zhou Xiaochuan. Source: CNBC

“Many cryptocurrencies have seen an explosive rise which could have a significant negative impact on consumers and retail investors. We do not like products (cryptocurrencies) that use the great potential for speculation that gives people the illusion of overnight enrichment.” by Interview with Zhou Xiaochuan on Friday, March 9th.

In a media appearance on Friday, March 9, the People’s Bank of China Governor Zhou Xiaochuan criticized the cryptocurrency projects that used the crypto-boom to cash in and speculate in the fuel market. He also noted that the development of digital currency is ‘technologically inevitable’

At a regional level, many Chinese cities have spurred network blocking initiatives to boost growth in their region. Hangzhou, known for being the headquarters of Alibaba, have stated that blockchain technology will be one of the top priorities of the city in 2018. The local government in Chengdu city has also been proposed to build an incubation center to promote the adoption of blockchain technology in services financial of the city.

Local conglomerates Tencent and Alibaba have also partnered with blockchain firms or initiated separate projects. Blocked firms like VeChain have also secured multiple partnerships with Chinese firms to improve supply chain transparency in China.

All the evidence points to the fact that China is working towards a blockchain nation. China has always had an open mindset to emerging technologies such as mobile payments and Artificial Intelligence. From now on, it is undoubtedly that China will be the first country enabled by blockchain. Will we see the Chinese government withdraw and allow its citizens to trade again? Maybe, when the market is mature and is less volatile, but definitely not in 2018.