Preparing for the world of cryptocurrencies: China’s edition

Over the past year, the cryptocurrency market has taken a number of heavy blows from the Chinese government. The market has taken hits like a warrior, but the combinations have hit many cryptocurrency investors. The weak performance of the market in 2018 is fading compared to its stellar thousand percent growth in 2017.

What happened?

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

2017 was a landmark year for the cryptocurrency market with all the attention and growth it has achieved. Extreme price volatility has forced the Central Bank to take more extreme measures, including a ban on primary coin placement (ICO) and restrictions on domestic cryptocurrency exchanges. Shortly afterwards, mining plants in China were forced to close, citing excessive electricity consumption. Many exchanges and factories moved abroad to evade the rules, but remained available to Chinese investors. However, they still fail to escape the claws of the Chinese dragon.

In a recent series of government efforts to monitor and ban cryptocurrency trading among Chinese investors, China has expanded its “Eagles Eye” to monitor foreign cryptocurrency exchanges. Companies and bank accounts suspected of operating with foreign cryptocurrencies and related activities are subject to measures ranging from limits on withdrawal limits to account freezes. There are even rumors among the Chinese community about more extreme measures to be taken on foreign platforms that allow trading among 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 head of the group of the Chinese Agency for Security Oversight of the Public Information Network at the Ministry of Public Security, February 28


Imagine that your child invests his savings in a digital product (in this case in cryptocurrency), which he does not have the opportunity to verify the authenticity and value. He or she may get lucky and get rich, or lose everything if the crypto-bubble bursts. Now distribute this to millions of Chinese citizens and we are talking about billions of Chinese yuan.

The market is full of scams and pointless ICOs. (I’m sure you’ve heard news of people sending coins to random addresses with a promise to double their investment and ICOs that just don’t make sense). Many inexperienced investors do this for money and care less about the technology and innovation behind it. The value of many cryptocurrencies is derived from market speculation. During the crypto boom in 2017, participate in any ICO with a reputable advisor, a promising team or a decent hype, and you are guaranteed at least 3 times your investment.

The lack of understanding of the firm and the technology behind it, coupled with the proliferation of ICOs, is a recipe for disaster. Central Bank members report that nearly 90% of ICOs are fraudulent or involve illegal fundraising. In my view, the Chinese government wants to ensure that the cryptocurrency remains “controlled” and will not be too large to fail in the Chinese community. China is taking the right steps toward a safer, more regulated world of cryptocurrencies, albeit aggressive and controversial. In fact, it may be the best step the country has taken in decades.

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

State cryptocurrency exchange?

At the annual “Two Sessions” (named because the two main parties – the National People’s Congress (NPC) and the National Committee of the People’s Political Advisory Council of China (CPC) take part in a forum in the first week of March, leaders gather to discuss recent problems and make necessary amendments to the law.

Wang Pengjie, a member of the NPCC, learned about the prospects of the state-owned digital asset trading platform, and initiated educational projects on blockchain and cryptocurrency in China. However, the proposed platform will require an authenticated account to allow trading.

“Following the establishment of appropriate rules and cooperation between the People’s Bank of China (PBoC) and the China Securities Regulatory Commission (CSRC), a regulated and efficient cryptocurrency exchange platform will serve as a formal way for fundraising companies (through ICOs) and investors to preserve their digital assets and achieve capital growth “Excerpts from Wang Pengjie’s presentation at two sessions.

March to the Blockchain Nation

Governments and central banks around the world are struggling with the growing popularity of cryptocurrencies; but one thing is for sure: everyone has accepted the blockchain.

Despite the dispersal of cryptocurrency, the blockchain is gaining popularity and proliferation at various levels. The Chinese government supports blockchain initiatives and adopts technology. In fact, the People’s Bank of China (PBoC) has been working on digital currency and conducting bogus transactions with some of the country’s commercial banks. It has not yet been confirmed whether the digital currency will be decentralized and will offer cryptocurrency features such as anonymity and immutability. It will not be a surprise if it turns out to be just a digital Chinese yuan, given that anonymity is the last thing China wants in its country. However, created as a close replacement for the Chinese yuan, the digital currency will be subject to existing monetary policy and law.

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

“Many cryptocurrencies have experienced explosive growth, which could have a significant negative impact on consumers and retail investors. We don’t like (cryptocurrencies) products that use huge opportunities for speculation, which gives people the illusion of getting rich overnight ”Excerpts from an interview with Zhou Xiaochuan on Friday, March 9th.

Speaking to the media on Friday, March 9, the head of the People’s Bank of China Zhou Xiaochuan criticized cryptocurrency projects that used the crypto-boom to raise money and fuel market speculation. He also noted that the development of digital currency is “technologically inevitable”

At the regional level, many Chinese cities are running blockchain initiatives to promote growth in their region. Hangzhou, known as Alibaba’s headquarters, has named blockchain technology one of the city’s top priorities in 2018. Chengdu City Government has also been asked to build an incubation center to facilitate the introduction of blockchain technology in the city’s financial services.

Local conglomerates such as Tencent and Alibaba have also partnered with blockchain firms or initiated projects themselves. Blockchain firms, such as VeChain, have also provided multiple partnerships with Chinese firms to improve supply chain transparency in China.

All indications are that China is working to create a blockchain nation. China has always been open to new technologies such as mobile payments and artificial intelligence. From now on, without a doubt, China will become the first country to support the blockchain. Will we see the Chinese government back down and allow its citizens to trade again? Maybe when the market matures and becomes less volatile, but definitely not in 2018.