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 was successful as a warrior, but combos have taken their toll on many cryptocurrency investors. The poor market performance in 2018 is evident compared to the 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 applied in 2017. (See this article for a detailed analysis of the official notice issued by the Chinese government).

2017 was a milestone 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, including a ban on the initial supply of currencies (ICOs) and a reduction in domestic cryptocurrency exchanges. Shortly afterwards, China’s mining factories were forced to close, citing excessive electricity consumption. Many stock exchanges and factories have moved abroad to avoid regulations, but they have been 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 widened its “eagle eye” to control foreign currency exchanges. Companies and bank accounts suspected of making transactions with foreign cryptocurrencies and related activities are subject to measures, from limiting withdrawal limits to freezing accounts. There have even been ongoing rumors among the Chinese community about more extreme measures to be applied to foreign platforms that allow trading 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 Chinese security oversight agency of the Ministry of Public Security’s public information network on February 28

WHY? BECAUSE ??

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 could get lucky and make it rich, or lose it all when the crypto-bubble burst. 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 meaningless ICOs. (I’m sure you’ve heard news about people sending coins to random addresses with the promise of doubling their investments and ICOs that just don’t make sense). Many underdeveloped investors participate for their 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 3 times your investments.

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 nearly 90% of ICOs are fraudulent or involve illegal fundraising. In my opinion, the Chinese government wants to make sure that the cryptocurrency remains “controllable” and not too big to fail in the Chinese community. China is taking the right steps towards a more secure and regulated, albeit aggressive and controversial, world of cryptocurrencies. In fact, it could be the best move the country has made in decades.

Will China issue an ultimatum and make cryptocurrency illegal? I doubt it very much, as it is quite useless to do so. Currently, financial institutions are prohibited from holding any cryptographic assets, while individuals are allowed, but are prohibited from conducting any kind of trading.

A state-run cryptocurrency exchange?

In the annual “two sessions” (called because two major parties, the National People’s Congress (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 gather to discuss the latest issues and make the necessary changes to the law.

Wang Pengjie, a member of the NPCC, delved into the prospects of a state-owned digital asset trading platform, as well as starting 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 formally serve for companies to raise funds (through ICOs) and investors to maintain their digital assets and get a capital valuation “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 combat the growing popularity of cryptocurrencies; but one thing is for sure: everyone has adopted blockchain.

Despite the repression of cryptocurrencies, the blockchain has been gaining popularity and adoption at various levels. The Chinese government has supported blockchain initiatives and adopted the technology. In fact, the People’s Bank of China (PBoC) has been working in a digital currency and has conducted counterfeit transactions with some of the country’s commercial banks. It is not yet confirmed whether digital currency will be decentralized and offer cryptocurrency features such as anonymity and immutability. It wouldn’t be a surprise if it turned 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 substitute for the Chinese yuan, the digital currency will be subject to existing monetary policies and laws.

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 products (cryptocurrency) 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 crypto-boom to collect and fuel market speculation. He also noted that the development of digital currency is “technologically inevitable.”

At the regional level, many Chinese cities have launched 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. The local government of Chengdu City has also proposed building an incubation center for encourage the adoption of blockchain technology in the city’s financial services.

Local conglomerates such as Tencent and Alibaba have also formed alliances 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 China working towards a blockchain nation. China has always been open-minded to emerging technologies such as mobile payment and artificial intelligence. From now on, China will undoubtedly be the first country with a 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.