Prepping for a Cryptocurrency World: China Edition

Over the past year, the cryptocurrency market took a series of heavy punches from the Chinese government. The market took the hits like a warrior, but the combos have taken its toll in many cryptocurrency investors. The market lackluster performance in 2018 pales in comparison to its stellar thousand-percent gains in 2017.

What has happened?

Since 2013, the Chinese government have taken measures to regulate cryptocurrency, but nothing compared to what was enforced in 2017. (Check out this article for a detailed analysis of the official notice issued by the Chinese government)

2017 was a banner year for the cryptocurrency market with all the attention and growth it has achieved. The extreme price volatility forced the Central bank to adopt more extreme measures, including the ban of initial coin offerings (ICOs) and clampdowns on domestic cryptocurrency exchanges. Soon after, mining factories in China were forced to close down, citing excessive electricity consumption. Many exchanges and factories have relocated overseas to avoid regulations but remained accessible to Chinese investors. Nonetheless, they still fail to escape the claws of the Chinese Dragon.

In the latest series of government-led efforts to monitor and ban cryptocurrency trading among Chinese investors, China extended its “Eagle Eye” to monitor foreign cryptocurrency exchanges. Companies and bank accounts suspected of carrying out transactions with foreign crypto-exchanges and related activities are subjected to measures from limiting withdrawal limits to freezing of accounts. There have even been ongoing rumors among the Chinese community of more extreme measures to be enforced 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 the higher authorities.” Excerpts from an interview with team leader of the China’s Public Information Network Security Supervision agency under the Ministry of Public Security, 28th February

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 could get lucky and strike it rich, or lose it all when the crypto-bubble burst. Now scale that 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 have heard news of people sending coins to random addresses with the promise of doubling their investments and ICOs that simply don’t make sense). Many unsavvy investors are in it for the 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 in 2017, participate in any ICO with either a famous advisor onboard, a promising team or a decent hype and you are guaranteed at least 3X your investments.

A lack of understanding of the firm and the technology behind it, combined with the proliferation of ICOs, is a recipe for disaster. Members of the Central bank reports that almost 90% of the ICOs are fraudulent or involves illegal fundraising. In my opinion, the Chinese government wants to ensure that cryptocurrency remains ‘controllable’ and not too big to fail within the Chinese community. China is taking the right steps towards a safer, more regulated cryptocurrency world, albeit aggressive and controversial. In fact, it might be the best move the country has taken in decades.

Will China issue an ultimatum and make cryptocurrency illegal? I highly doubt so since it is pretty pointless to do so. Currently, financial institutions are banned from holding any crypto assets while individuals are allowed to but are barred from carrying out any forms of trading.

A State-run Cryptocurrency Exchange?

At the annual “Two Sessions” (Named because two major parties- National People’s Congress (NPC) and the National Committee of the Chinese People’s Political Consultative Conference (CPCC) both take part in the forum）held on the first week of March, leaders congregate to discuss about the latest issues and make necessary law amendments.

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

“With the establishment of related regulations and the co-operation of the People’s Bank of China (PBoC) and China Securities Regulatory Commission(CSRC), a regulated and efficient cryptocurrency exchange platform would serve as a formal way for companies to raise funds (through ICOs) and investors to hold their digital assets and achieve capital appreciation” Excerpts of Wang Pengjie presentation at the Two Sessions.

The March towards a Blockchain Nation

Governments and central banks worldwide have struggled to grapple with the increasing popularity of cryptocurrencies; but one thing is sure, all have embraced blockchain.

Despite the cryptocurrency crackdown, blockchain has been gaining popularity and adoption in various levels. The Chinese government have been supporting blockchain initiatives and embracing the technology. In fact, the People’s Bank of China (PBoC) have been working on a digital currency and have conducted mock transactions with some of the country’s commercial banks. It is still unconfirmed if the digital currency will be decentralized and offer features of cryptocurrency like anonymity and immutability. It wouldn’t come as a surprise if it turns out to be just a digital Chinese Yuan given that anonymity is the last thing that China wants in their country. However, created as a close substitute of the Chinese Yuan, the digital currency will be subjected to existing monetary policies and laws.

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

“Lots of cryptocurrencies have seen explosive growth which can bring significant negative impact on consumers and retail investors. We don’t like (cryptocurrency) products that make use of the huge opportunity for speculation that gives people the illusion of getting rich overnight” Excerpts from Zhou Xiaochuan interview on Friday, 9th March.

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

On a regional level, many Chinese cities have are driving blockchain initiatives to promote growth in their region. Hangzhou, renown for being the headquarters of Alibaba, have stated blockchain technology to be one of the city’s top priorities in 2018. The local government in Chengdu city have also been proposed the building of an incubation center to foster the adoption of blockchain technology in the city’s financial services.

Local conglomerates such Tencent and Alibaba have also formed partnership with blockchain firms or initiated projects on their own. Blockchain firms such as VeChain have also secured multiple partnerships with Chinese firms to improve supply chain transparency in China.

All clues point to the fact that China is working towards a blockchain nation. China has always had a open mentality to emergent technologies such as mobile payment and Artificial Intelligence. Henceforth, it is without a doubt that China will be the first blockchain-enabled country. Will we see the Chinese government backing down and let its citizens trade again? Probably, when the market has matured and is less volatile but definitely not in 2018.