China created waves in the blockchain industry during 2021 by imposing stringent restrictions on Bitcoin (BTC) mining and cryptocurrency trading. This move, announced in phases, eventually culminated in a complete halt of all crypto transactions by the Chinese government by late-September 2021. The consequences were significant, as Bitcoin's hash rate experienced a sharp decline, and Chinese crypto exchanges exited the country, leaving many BTC proponents uncertain about the industry's recovery following Beijing's decision.
Given China's position as the world's second-largest economy, its actions reverberated throughout the global crypto community, impacting the adoption of cryptocurrencies worldwide. Nonetheless, despite these setbacks, Bitcoin still holds potential for the future. It is worth noting that the answer to the question why China banned crypto can present many valuable insights into the challenges associated with outlawing these digital assets.
How China banned cryptocurrencies: a complete recap
China's crypto ban in 2021, although the most severe to date, did not come as a surprise to industry insiders. Those involved in the crypto space have witnessed multiple instances of China declaring bans on Bitcoin, making it a recurring event. To comprehend the context behind the crypto mining ban in 2021, it is crucial to examine China's historical restrictions on Bitcoin.
Bitcoin hype is starting to build up
In 2011, Bitcoin started gaining traction in China as more citizens began taking an interest in cryptocurrencies. Bitcoin China, a centralized exchange established by software engineer Bobby C. Lee (brother of Litecoin's Charlie Lee), played a significant role in driving Bitcoin adoption. It became a major player in global Bitcoin trading during the early days of the crypto industry.
As Bitcoin's popularity grew in China, businesses started accepting it as a form of payment. Notably, Baidu, the country's largest search engine, announced its acceptance of BTC payments in 2013. Concurrently, Chinese individuals became familiar with Bitcoin's proof-of-work (PoW) algorithm, leading to the rise of the BTC mining industry in the country. To cater to the increasing demand for mining, Micree Zhan and Jihan Wu founded Bitmain, a prominent ASIC manufacturing company. ASICs are specialized computers designed for solving algorithms on the Bitcoin blockchain. Even today, Bitmain remains a major player in Bitcoin mining equipment manufacturing.
First attempts to ban crypto
However, in 2013, China made its first attempt to restrict Bitcoin trading. The People's Bank of China (PBC) introduced regulations prohibiting financial institutions from conducting crypto transactions. Chinese banks were no longer allowed to hold or transact in virtual currencies like BTC.
While this initial ban did not render it illegal for Chinese citizens to purchase, store, or send crypto, it made accessing cryptocurrencies from exchanges like Bitcoin China more challenging. In response to the PBC's regulations, Bitcoin China abruptly announced the cessation of yuan deposits. Although it did not entirely hinder Chinese individuals from engaging with cryptocurrencies, it introduced obstacles to their participation.
Crypto ICOs are outlawed
Amidst the 2017 cryptocurrency bull market, Chinese authorities imposed stricter measures on crypto trading. However, their focus was not primarily on bank transfers or Bitcoin mining but on the rising prevalence of "initial coin offerings" (ICOs). ICOs involve digital tokens that represent ownership stakes in new crypto projects.
With the emergence of smart contract blockchains like Ethereum (ETH) and the surge of speculation during the 2017 bull market, the trading of ICOs experienced a significant upswing. Unfortunately, the lack of regulatory oversight in the crypto space resulted in numerous fraudulent ICOs.
To address the excessive demand and mitigate the risks associated with the ICO frenzy, China implemented a ban on all platforms offering ICOs. Exchanges that had facilitated ICO trading were required to refund the invested funds to the participants. Additionally, many centralized crypto exchanges (CEXs) were compelled to halt their operations. In response to these developments, Bitcoin China underwent a name change to BTCC and relocated its headquarters to the United Kingdom.
Crypto mining ban
China's contemplation of a Bitcoin mining ban began in 2019, but it wasn't until 2021 that the authorities implemented stringent measures in this sector. The announcement of a formal ban on crypto mining came when Bitcoin's value hovered around $55,000 per coin. The repercussions were swift, as the hash rate on the Bitcoin network experienced a drastic 50% decline, leading to a significant drop in BTC's price to approximately $30,000 in the subsequent months.
In conjunction with the ban on Bitcoin mining, Chinese regulatory bodies enacted prohibitions on all forms of crypto trading and transactions. Currently, individuals working for Chinese tech firms associated with cryptocurrencies can face potential imprisonment. Sending crypto has become illegal for residents, and businesses and banks are prohibited from accepting popular coins such as Bitcoin and Ethereum. These measures underscore the strict stance China has taken on the crypto industry.
A breakdown of the ban of crypto in China
China's comprehensive crypto ban encompasses three major aspects of engaging with digital assets.
Bitcoin mining: The ban prohibits Chinese residents and businesses from engaging in the mining of proof-of-work (PoW) cryptocurrencies. It is now illegal to mine digital currencies like Bitcoin using computational power within China.
Crypto trading and transactions: Chinese investors are restricted from buying, sending, or engaging in any transactions involving digital currencies such as Bitcoin or Ethereum. The ban extends to include trading of digital collectibles like non-fungible tokens (NFTs), with several policies in place to regulate and restrict such activities.
Employment in the crypto sector: The Chinese government aims to discourage innovation in the crypto industry. Tech companies and entrepreneurs involved in cryptocurrency-related activities may face significant penalties. The objective is to discourage individuals and organizations from venturing into the crypto sector.
While the use and purchase of cryptocurrencies are deemed illegal, there are currently no specific policies against holding digital assets like Bitcoin, Dogecoin, or Ethereum. Therefore, Chinese residents who possess cryptocurrencies in their wallets are not in violation of existing laws.
Why did China ban crypto? Six possible reasons
There have been speculations that China's restrictions on decentralized digital assets may be a precursor to the introduction of its centrally controlled cryptocurrencies. The country’s officials have publicly stated several reasons for the ban of crypto in China.
Consumer protection: The Chinese government emphasizes the association of cryptocurrencies with scams and money laundering as a primary reason for introducing restrictions. They caution citizens against engaging with cryptocurrencies due to their link to illegal activities, aiming to safeguard consumers.
Lack of legal framework: Since 2013, the Chinese government has raised concerns about the ambiguous legal status of digital currencies like Bitcoin. As Bitcoin is not issued by any sovereign nation, the People's Bank of China (PBC) does not recognize it as a valid currency, highlighting the absence of a well-defined legal framework.
Capital outflow concerns: With cryptocurrencies being borderless, many countries are apprehensive about potential capital leaving their local economies. China's government expressed concerns that digital currencies could make it more challenging to regulate and control the flow of capital within the country.
Yuan depreciation: As the value of Bitcoin continued to rise, the Chinese yuan struggled to keep pace with other competing currencies in the foreign exchange market. The Chinese government suggested that the increasing popularity of BTC could pose heightened competition to the national currency, raising concerns about yuan depreciation.
Environmental considerations: China, as a signatory to the 2015 Paris Agreement, has committed to reducing its carbon footprint. The Chinese government cites Bitcoin's significant energy requirements as conflicting with the nation's goal of achieving an eco-friendly future, thereby expressing environmental concerns.
Control over central bank digital currencies (CBDCs) and metaverse projects: While China opposes decentralized cryptocurrencies, it does not wholly reject Web3 technologies. The country actively develops an official CBDC called the "digital yuan," and cities like Shanghai have pledged substantial investments in national metaverse projects. China may seek to eliminate competing coins like Bitcoin and Ethereum as it rolls out these blockchain initiatives, aiming to maintain control over CBDCs and metaverse developments.
These reasons collectively contribute to China's stance on crypto, providing insight into the motivations behind the imposed restrictions and the government's broader goals in the digital asset space.
The consequences of the ban of crypto in China
China's ban on Bitcoin mining had a substantial impact on the hash power of the Bitcoin blockchain. According to the Cambridge Bitcoin Electricity Consumption Index (CBECI), China contributed 70.9 exahashes per second (Eh/s) to the Bitcoin network in May 2021. However, this contribution dropped to zero in July 2021. Consequently, Bitcoin's total hash rate declined from over 150 Eh/s to 100 Eh/s during the same period.
Following the mining ban, many of China's Bitcoin miners sought refuge in countries that displayed a more favorable stance towards the crypto industry. For instance, Kazakhstan experienced a notable increase in its percentage of Bitcoin's total hash rate.
Surprisingly, in the subsequent months, Bitcoin's overall hash rate gradually rebounded. By January 2022, it reached nearly 200 Eh/s, surpassing the pre-ban levels in China.
The CBECI also observed that mining activities associated with China reappeared on the Bitcoin network in September 2021, indicating that several Chinese mining pools continued to operate clandestinely. In early 2022, China accounted for more than 20% of Bitcoin's hash rate, making it the second-largest contributor after the United States.
A frequently asked question: is it hard to ban cryptocurrency?
Despite China's attempts to restrict crypto adoption, research conducted by Cambridge University reveals that Bitcoin mining has not completely disappeared. The difficulty in regulating cryptocurrencies stems from the following factors.
Decentralized nature: Cryptocurrencies such as Bitcoin and Ethereum are designed to be decentralized. This means that there are no central authorities or individuals to target behind these crypto projects. As a result, governments find it challenging to shut down or control digital assets since there is no single point of control.
Internet accessibility: As long as individuals have access to the internet, they can run a node or access digital assets through self-custodial wallets. This accessibility ensures that cryptocurrencies remain available and functional, regardless of attempts to restrict or ban them.
Global reach: For an effective crypto ban to be implemented, it would require a global consensus among nations. Cryptocurrencies are borderless, making it difficult for a single country's ban to outlaw these digital currencies entirely. Some countries, like El Salvador and the United Arab Emirates, have even embraced cryptocurrencies, making it unlikely for a globally coordinated crypto ban to be enforced.
These factors collectively contribute to the resilience of cryptocurrencies and the challenges governments face when attempting to regulate or prohibit their use.
Hong Kong as China's testing ground for cryptocurrencies
Hong Kong has recently positioned itself as a prominent crypto hub in the region by reopening crypto trading to retail investors. This move is significant considering the historical anti-crypto stance of the People's Republic of China (PRC). Experts suggest that Hong Kong's new crypto regulations could serve as a model for adoption within mainland China.
The regulatory requirements for virtual asset trading platforms now include stringent onboarding processes, enhanced disclosures, and more. Tokens listed on these platforms must meet a minimum set of criteria to ensure that retail investors are less susceptible to market manipulation.
The implementation of these guidelines took effect on June 1, 2023, with the Securities and Futures Commission (SFC) granting licenses to only two crypto firms thus far. Lennix Lai, Chief Commercial Officer of OKX, expressed appreciation for the SFC's commitment to enabling virtual asset trading by retail investors in Hong Kong. Lai views this as a significant milestone for the growth and development of the virtual assets industry in the region.
Major tokens such as Bitcoin and Ethereum are expected to meet the listing criteria, while there may be more uncertainty for lower-cap tokens.
Given Hong Kong's status as a Special Administrative Region controlled by China, the recent rule changes may also pave the way for the reintroduction of crypto in mainland China. China had effectively banned cryptocurrencies in 2017. According to Anne-Sophie Cissey, the head of legal and compliance at Flowdesk, this development reflects a major shift in Chinese thinking since the country's long-standing ban on digital assets. It indicates a willingness to embrace a more crypto-friendly approach, with Hong Kong serving as a testing ground for the PRC.
As Flowdesk provides trading infrastructure for crypto-financial services and has offices in Paris and Singapore, Cissey highlights that authoritarian regimes typically have reservations about decentralization and transparency, which are core principles of blockchain technology. Thus, Beijing's acceptance of a more crypto-friendly stance in Hong Kong suggests a strategic intention to explore the potential benefits of crypto in a controlled environment.
Final thoughts on the ban of crypto in China
The recent crypto regulations in Hong Kong have brought a new perspective to the overall landscape of crypto adoption in the region. While China's crypto ban remains in effect, the emergence of Hong Kong as a crypto hub and its revised regulations demonstrate a potential shift in the broader stance toward digital currencies.
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