China is big in many senses of the word. It is the world’s most populous country and a major global economy. The same applies to the context of the crypto industry: China is one of the largest players in the market. It is no wonder that news from China often attract a lot of attention and sometimes even shake the market up. Why is that? ChangeHero tried looking into this question.
On October 24th, President Xi Jinping underscored the importance of developing financial technologies and blockchain — which was followed by a further crackdown on crypto businesses. On a first glance, it might look like a paradox but in the context of the history of blockchain and cryptocurrencies in China, this makes complete sense.
During the last few years, China has had quite a complicated relationship with the nascent crypto industry. The country is the top blockchain adopter in the entire world, a massive amount of cryptocurrency is being mined, stored and circulated within its borders. At the same time, officially they want nothing to do with cryptocurrency which they themselves have made synonymous with “scam” after failing to provide regulation.
Residents and experts alike assure that, while not as massive as before, the trading and usage of cryptocurrency in China is still at large. It is not like using cryptocurrency is unlawful — there is no explicit prohibition on holding coins and tokens or trading currencies. Mining is not illegal, quite the opposite — it is widespread in a few provinces, especially where electricity is subsidized. It is a real, tangible industry with its own practices.
Some exchanges, like Huobi and OKCoin, complied with the official stance and switched to trading currencies on an “over-the-counter” basis. Huobi also thrived thanks to expanding abroad. The new regulations gave an advantage to overseas platforms who targeted Chinese traders — and that is how Binance became one of the largest exchanges in a span of time so short traditional exchanges could only dream about. However, smaller Chinese-based exchanges, like Biss, made headlines for another reason: police investigations.
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The crypto boom of 2017 has started an ICO craze in China. Needless to say, fraudsters have seized the opportunity and lots of investors lost their savings permanently. With no legal framework for this new sort of finance, Chinese authorities could not possibly prevent further financial losses or provide victims with returns, and so the crackdown began. State media has adopted a rhetoric, according to which cryptocurrencies are a risky investition at best and an outright scam at worst, and uses it to this day.
Content about cryptocurrencies and blockchain in one post on Weibo (a social media platform massively used in China) is restricted by the service’s guidelines, and existing posts that mentioned both have been taken down. This is also the part of official efforts to support a positive image for the latter and condemn the former. However, with the fact that China still has a large presence on the crypto market, it is obvious that some of its citizens do not restrict their sources of information to the channels that are controlled by the state.
The Chinese policy of separation of blockchain from cryptocurrencies does not affect China only. Official statements from Chinese authorities have caused many a shakeup on the exchanges: September 2017 Announcement caused BTC to drop significantly and its price gained traction after President Xi called for the adoption of blockchain.
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Some experts claim that separating blockchain technology from its cryptocurrency origins may have actually paved the way for wider adoption of the former in China. In the first half of 2019, a cryptography law was adopted there, which should become the framework for government-backed blockchain applications and — most importantly — the centralized national digital currency.
Since cryptocurrencies do not have “real” value according to the Chinese law, the state has proposed to create their own currency based on blockchain but also provide legal tender for it. In addition to that, this currency will be pegged one-to-one to RMB, just like a stablecoin. CBDC — central bank digital currency — is to be tested in a few select regions by the end of the year and employed more widely in 2020.
Unfortunately for China, their digital currency remaining centralized means that it is compromisable, so the world has yet to see what wonders of cybersecurity the state will have to invent to deter hacking and fraud.
So why should we care about digital yuan?
For the same reasons, you would care about digitalization or any currency. Don’t worry, China is unlikely to try and invade the crypto industry — their goals are different.
Provision of algorithms of CBDC by an authority — in this case, People’s Bank of China — would mean that the state will have easier access to transactions in the network, which facilitates monitoring, but also the expansion of services and lower operational costs. This might set a precedent for other countries. Digital RMB will be more accessible abroad, which is not unimportant to those who wish to partner with Chinese enterprises.
At the same time, the West is watching China with cautious curiosity. Some USA officials and experts are concerned that digital yuan might dethrone the dollar in the global financial system by eliminating the leverage provided by USD and sanctions. The centralized nature of CBDC raises concerns over civil rights with some experts since anonymity and control over one’s finances are not guaranteed at all.
Nonetheless, a few influencers on Twitter have expressed their hopes in the light of President Xi’s endorsement of blockchain. Misha Lederman and Gabor Gurbacs openly praised Chinese policy of technology advancement and noted that the States should follow suit. Lederman also pointed at the largest companies who would see great benefits in this political situation — Tron Network, Binance, the VeChain platform and blockchain project NEO.
With all this in mind, can we really say that China welcomes blockchain? Their vision is obviously different from the original idea of this technology, which is decentralization. Nevertheless, China is not going to miss out on the advantages of digital currency and they are going to do it in their own way. Only time will tell if their initiative becomes a success and gains traction or not. Who knows if the Chinese vision of blockchain influences the technology worldwide? Luckily, we will not have to wait for too long because it all will start really soon.