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Crypto in China: A Detailed History
Last year, Chinese regulators banned ICOs and cryptocurrency exchanges from the country. In the wake of these bans, it’s tempting to think that China is anti-blockchain. However, the truth about China’s relationship with crypto and blockchain is much more complicated than love or hate.
The Chinese government recognizes the unique potential of blockchain technology. The government and Chinese corporations have invested millions in blockchain development. Behind the bans and crackdowns that have received much of the press, China is quietly building a complete blockchain ecosystem to support and supply the coming techno-economic revolutions of distributed ledger technology.
This article explores China’s complex relationship with crypto. We’ll see that while state control is an important factor, directed and thoughtful investments in projects from hardware to marketing are making China one of the world’s first major economies to embrace blockchain. The implications for the future of the blockchain industry are enormous if China’s long-term plans take shape.
For blockchain enthusiasts living in the western world, it’s easy to forget how big of a hold Asia, and specifically China, has on mining, investing, and research. At its peak, 90% of transactions on global cryptocurrency exchanges originated in China. Blockchain has penetrated the public consciousness in China farther than anywhere else. Millions of retail investors bought into Bitcoin prior to China banning exchanges. In addition, ICOs and altcoins saw enormous success in the Chinese market. A significant portion of cryptocurrency ownership belongs to Chinese citizens.
China is also the heart of crypto mining in the world. It is host to inexpensive power, local factories to produce specialized chips, and cheap labor to operate facilities. Bitmain and BTC.com, for instance, are both China-native. At one point, three-quarters of the world’s mining hash power came from Chinese miners. The majority of Bitcoin mining still comes from China, although that may change soon.
For western blockchain enthusiasts, it’s easy to forget the extent to which China has historically dominated the cryptocurrency marketplace. China is home to many Bitcoin millionaires who invested early and are now reaping the rewards. These early movers are increasingly reinvesting in smaller projects. They’re also diversifying into western real estate holdings and new startup ventures. As this capital continues to get reinvested, Chinese crypto influence only continues to grow.
2. Regulation & Crackdown
Due in part to the sheer number of retail investors pouring their savings into crypto, the Chinese government took measures to protect investors and cleanse the financial market of high-risk investments. Aside from crypto, the Chinese government has been battling a host of shadow banking organizations that offer unregulated, high-interest loans to speculators in the most recent investment fads. These factors were the stated reasons for China’s national ban on ICO offerings and investment that went into effect in September 2017.
The government also had a vested interest in protecting the yuan and maintaining control over the country’s trade and economic variables. Cryptocurrency is a way to move value across borders, outside the control of regulators. Chinese officials have spent the past few years aggressively tracking and limiting the outflow of wealth from the country. Restricting access to crypto was a clear way to close a channel of wealth.
The further tightening of regulations came in February 2018 as China extended the ban to the operation and participation in any cryptocurrency exchange, foreign or domestic. Legally, Chinese citizens now have highly limited access to cryptocurrencies. Currently, the only way to acquire a currency is through peer to peer transaction. Even those transactions are being smothered by a new blanket ban on all crypto-related activities and messaging as of August 2018. Several crypto-related publications and WeChat groups had to close their doors as a result of the new ban. The series of crackdowns suggests that the state wants to control investment and development of the blockchain industry in China as much as possible. Activities that don’t build national wealth or are outside of the traditional monetary system will receive tighter scrutiny from Chinese officials.
3. The Largest Country for Mining, Falling
In the midst of changing regulations about buying and selling cryptocurrencies, China has also recently cracked down on cryptocurrency mining.
In the early days, China was the obvious choice for mining operations. Low electricity costs were the primary driver for miners, along with local manufacturing facilities for low-cost, high-efficiency mining hardware. Indeed, provincial governments were happy to welcome Bitcoin miners at first as they used up excess electricity from hydropower facilities. As government attitudes toward cryptocurrencies have become increasingly hostile, miners have begun to look elsewhere for future locations.
It’s worth remembering that the world’s largest mining operations started and grew in China. Bitmain, for instance, the world’s largest Bitcoin mining operator and hardware manufacturer, operates most of its mining farms and manufactures its Antminer chips in China. Today, the company is worth $9 billion. Combined, Chinese miners produce two-thirds of the world’s Bitcoin. Jihan Wu, Bitmain CEO, won’t comment on Chinese regulatory policy because of how sensitive the situation is. The company has recently expanded operations in Europe, North America, and the Middle East as the Chinese government requests companies make an orderly exit from the country over the coming years.
Electricity consumption is surely one concern for the Chinese government. Chinese mining uses 4 gigawatts, the equivalent of three nuclear reactors worth of power. However, the tightening mining regulations also fit into the larger narrative of monetary control. Cryptocurrencies have long been associated with money laundering and fraud in China. Rather than try to regulate Bitcoin and other crypto-economies, the government has decided to shut down operations across the board.
4. Official Government Rankings
China has banned nearly all cryptocurrency activity, from mining to exchanging. Regardless if it’s Bitcoin or the latest fad ICO, all activity beyond interpersonal, over the counter transfers is illegal. Even writing about and promoting cryptocurrency isn’t allowed in China at the moment.
That being the case, it struck many investors as odd when the Chinese government began releasing official ratings of crypto projects. The China Center for Information Industry Development (CCID) released its first set of rankings on May 17, 2018, listing Ethereum as the top overall blockchain project. Every month, the CCID updates these rankings to reflect changes in the blockchain ecosystem.
Although the methodology for deriving the scores is not public, the CCID does break the scores down across three categories: technology, application, and innovation. Technology seeks to quantify how strong a technical foundation the project has and whether the technical team has implemented the idea in a safe, efficient manner. Application judges the platform’s usefulness for real-world use cases and engagement with major corporations, governments, etc. Innovation refers to how groundbreaking the project is and to what extent the project would disrupt current systems if successfully implemented.
Official government cryptocurrency rankings indicate that the Chinese government is watching the blockchain ecosystem very closely. Blockchain adds traceability to transactions. It’s also highly secure. For those reasons, the Chinese government is interested in blockchain as a technology to better monitor, secure, and control the Chinese economy. Of course, a centralized authority operating and controlling a blockchain completely defeats many of the decentralizing benefits blockchain was originally invented to create.
Far from wanting to shut blockchain down completely, it seems the government wants to harness and exercise control over the power of blockchain systems. By limiting Chinese citizens’ access to blockchain and filtering information about blockchain, the government can decide how it gets implemented in China. Ultimately, the goal is for blockchain to serve the Chinese government’s interests instead of subverting them. The government’s interest in blockchain is directly opposed to the openness, transparency, and decentralizing nature of the technology, but that hasn’t stopped them from investing heavily in a new way to secure and scrutinize the Chinese economy.
5. Government Bullish on Blockchain
There’s lots of evidence that the Chinese government is optimistic about the future of blockchain technology. A recent special feature on state-run television stated that blockchain will be the infrastructure for the future global economy. The television program claimed that blockchain is “ten times more valuable than the internet.” The fact that party officials are using state media to inform the public about blockchain indicates that China expects blockchain to play a major role in the country’s future.
It’s no secret that China wants to dominate this new area of innovation. The state is openly funding blockchain initiatives, both within the government and private companies. The Communist Party even included blockchain development in the most recent five-year plan for the country. On provincial and municipal government levels as well, Chinese officials are prioritizing blockchain. Hangzhou, the city that’s home to Alibaba and 9.5 million residents, committed $1.6 billion to blockchain firms and the establishment of a Hangzhou Blockchain Industrial Park. Shenzhen, the major tech manufacturing hub, is subsidizing blockchain firms that locate in the city to the tune of $79 million.
The People’s Bank of China, the country’s national bank, currently has a blockchain-based digital currency under development. If implemented, Chinese fiat currency would rely on a blockchain ledger for interbank transfers and transactions. The national bank would operate the currency as a closed blockchain, guaranteeing state control over monetary policy while reaping the usability and efficiency benefits of blockchain. Digital currency is also highly traceable, allowing the government to monitor usage and reduce fraud, counterfeiting, and money laundering. Small-scale transactions are already in early testing on a very limited basis.
This private blockchain would give the Chinese government access to all kinds of information about economic activity happening in the country. Additionally, depending on how consensus is reached in the private blockchain, it could allow the government to manipulate transactions and the currency to their own liking. Of course, with centralized databases and a powerful central bank China (and many other countries) already operates this way. A blockchain, however, would create an immutable record of transactions and manipulations that would be more difficult to hide than in a traditional closed database.
It’s clear that the Chinese government sees enormous potential in blockchain. Dominating the blockchain development industry would bring a lot of economic wealth to China. Additionally, it would increase China’s geopolitical power in the region and around the world. Since blockchains are global and distributed, becoming a major developer and manufacturer of blockchain platforms and components makes China a major player in the new economy in a few decades.
6. Corporations Investing Heavily
Major Chinese corporations are also interested in blockchain and investing heavily. Alibaba, China’s second largest company, filed 43 international patents for various blockchain technologies over the course of 2017, the most of any company in the world. Overall, Chinese companies filed more than 200 international patents for blockchain applications. Nearly twice as many patents as the next highest country, the United States, with 91.
Alibaba’s subsidiaries are exploring blockchain applications in supply chain management, import certification, and IoT applications for data management. JD.com, China’s largest online retailer, is already using blockchain in its supply chain for food products. Blockchain tokens allow JD.com to track individual items from production facility to warehouse to customer’s doorstep in one integrated system. Tencent, China’s largest company and the fifth largest company in the world, recently began blockchain R&D and published a whitepaper earlier this year on the implementation of an open trusted database for goods and logistics management to prevent tampering, with initial applications in prescription drugs.
This momentum toward enterprise blockchain development will only continue. Considering that China’s two largest companies are leading the way, the future seems bright for China to remain on the cutting edge of blockchain applications. Over time, that advantage could translate into China becoming a blockchain technology powerhouse. Talent, resources, and platforms will accumulate and build upon one another over time.
China is also home to some of the leading projects in blockchain today. NEO, QTUM, and VeChain, some of the leading cryptocurrencies with great promise, are all China-based. Restricted trading of these companies’ assets in their home country has forced them to expand elsewhere in order to operate and use their assets. However, the teams behind these projects are all Chinese-led and will continue to feel China’s influence in their decisions, considering China is an economic and political leader in the region.
7. Is China the Future Blockchain Hub?
It’s clear that China’s goals for blockchain aren’t of the decentralizing nature. The country hopes to dominate development and research in blockchain because it can then gain greater control and power over the services and platforms built on Chinese-backed closed blockchains. This is a clear contradiction of the transparent and decentralizing motivations of much of the blockchain community.
Banning cryptocurrency while making strategic investments in blockchain projects is China’s attempt to maximize control over the blockchain ecosystem while minimizing risk. The government has framed cryptocurrency as a negative influence on society, filled with scams and facilitating fraud. Meanwhile, the same government recognizes that the technology behind these currencies is potent and could form the foundation of the future economy. Between government and corporate investment, China’s role in the blockchain industry will be huge in the years to come.