Preparing for a world of cryptocurrencies: China edition

Over the past year, the cryptocurrency market has received a number of strong blows from the Chinese government. The market received success as a warrior, but the combos have taken their toll on many cryptocurrency investors. The dull market performance in 2018 pales in comparison to its stellar gains of 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 enforced in 2017. (See this article for a detailed analysis of the official notice issued by the Chinese government)

2017 was an iconic year for the cryptocurrency market with all the attention and growth it has achieved. Extreme price volatility forced the Central Bank to take more extreme measures, such as a ban on initial currency offerings (ICOs) and restrictive measures on domestic cryptocurrency exchanges. Shortly afterwards, mining factories in China were forced to close, citing excessive electricity consumption. Many exchanges and factories have moved abroad to circumvent regulations, but they remained accessible to Chinese investors. However, they still fail to escape the clutches of the Chinese dragon.

In the latest series of government-led efforts to control and ban cryptocurrency trading among Chinese investors, China has expanded its “Eagle’s Eye” to oversee foreign currency exchanges. Companies and bank accounts suspected of conducting transactions with foreign crypto-exchanges and related activities are subject to measures from limiting withdrawal limits to account freezing. There have even been rumors among the Chinese community about more extreme measures to be applied to foreign platforms that allow trade between Chinese investors.

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

WHY, WHY, WHY!?

Imagine your child investing their savings to invest in a digital product (in this case, cryptocurrency) that has no way of verifying its authenticity and value. He or she could get lucky and get rich, or lose it all when the crypto-bubble bursts. We are now scaling this to millions of Chinese citizens and we are talking about billions of Chinese yuan.

The market is full of scams and useless 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 inexperienced investors are there for money and would care less about the technology and innovation behind it. The value of many cryptocurrencies is derived from market speculation. During the crypto-boom of 2017, participate in any ICO with a famous advisor on board, a promising team or a decent hype and you are guaranteed at least three times your investment.

The lack of understanding of the company 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 the cryptocurrency remains “controllable” and not too big to fail within the Chinese community. China is taking the right steps toward a more secure and regulated, albeit aggressive and controversial, world of cryptocurrency. In fact, it could be the best move the country has taken in decades.

Will China issue an ultimatum and make the cryptocurrency illegal? I doubt it very much because it is quite useless to do so. Currently, financial institutions are prohibited from having cryptographic assets, while individuals have permission, but cannot conduct any form of trading.

A state-run cryptocurrency exchange?

In the annual “Two Sessions” (called because two major parties: the National People’s Assembly (NPC) and the National Committee of the Chinese People’s Political Consultative Conference (CPCC) participate in the forum ‰‰ held in the first week of March, the leaders meet to discuss the latest issues and make the necessary legal amendments.

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

“With the establishment of related regulations and the cooperation of the People’s Bank of China (PBoC) and the Securities Regulatory Commission of China (CSRC), a regulated and efficient cryptocurrency exchange platform would serve as a formal way for companies raise funds (through ICO) and investors to maintain their digital assets and achieve capital appreciation “Excerpts from Wang Pengjie’s presentation at the two sessions.

The march towards 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, they have all adopted blockchain.

Despite the repression of cryptocurrency, the blockchain has been gaining popularity and adoption at various levels. The Chinese government has been supporting blockchain initiatives and adopting the technology. In fact, the People’s Bank of China (PBoC) has been working on a digital currency and has conducted simulated transactions with some of the country’s commercial banks. It has not yet been confirmed whether digital currency will be decentralized and offer cryptocurrency features such as anonymity and immutability. It wouldn’t be a surprise if it turns out to be just a digital Chinese Yuan, as anonymity is the last thing China wants in its country. However, created as a close substitute for the Chinese yuan, digital currency will be subject to existing monetary policies and laws.

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

“Many cryptocurrencies have experienced explosive growth that can have a significant negative impact on consumers and retail investors. We don’t like (cryptocurrency) products that take advantage of the huge opportunity for speculation that gives people the illusion of ‘get rich overnight’. Interview with Zhou Xiaochuan on Friday, March 9th.

In a media appearance on Friday, March 9, the governor of the People’s Bank of China, Zhou Xiaochuan, criticized cryptocurrency projects that took advantage of the cryptocurrency boom to profit and fuel market speculation. He also noted that the development of digital currency is “technologically inevitable.”

At the regional level, many Chinese cities are pushing blockchain initiatives to promote growth in their region. Hangzhou, known for being the headquarters of Alibaba, has stated that blockchain technology is one of the city’s top priorities in 2018. It has also been proposed to the local government of Chengdu City to build a blockchain center. incubation to encourage the adoption of blockchain technology in the city’s financial services.

Local conglomerates such as Tencent and Alibaba have also partnered with blockchain companies or started projects on their own. Blockchain companies like VeChain have also secured multiple partnerships with Chinese companies to improve supply chain transparency in China.

All clues point to the fact that China is working towards a blockchain nation. China has always been open-minded to emerging technologies such as mobile payment and artificial intelligence. From now on, it is without a doubt that China will be the first country to enable blockchain. Will we see the Chinese government step back and let its citizens trade again? Probably when the market has matured and is less volatile, but definitely not in 2018.