China, or from market leader to ban. How did Beijing waste its potential in the cryptocurrency market?

Bitcoin is intended to be an independent digital currency. Hence, it may not be liked in the Middle Kingdom. In this article, let’s take a look at how China’s approach to BTC has changed over the years.

Beginnings: enthusiasm and development of the sector

When Bitcoin was created, the Chinese quickly noticed the potential of its technology. Anyone who remembers those times knows that between 2011 and 2013, blockchain gained popularity in Chinese technology circles, especially among developers and investors. Even the first cryptocurrency exchanges began to emerge, such as BTC China (BTCC). Investing in BTC was possible and the market was developing.

In 2013, China became the world’s largest bitcoin market, accounting for the majority of global cryptocurrency trade. The popularity of cryptocurrencies was driven by, among others, by the fact that they constituted an alternative way of investing in the face of restrictions on the transfer of capital abroad.

First restrictions: warnings and prohibitions

However, as bitcoin became more popular, the Chinese government began to look more closely at this phenomenon. In December 2013, the People’s Bank of China (PBoC) issued its first warning, banning financial institutions from handling cryptocurrency transactions. Bitcoin could still be used by private individuals, but the government signaled that it was not welcome for public institutions to use it. At that time, the market was still developing strongly.

In 2017, Chinese exchanges such as Huobi and OKCoin became dominant players in the blockchain world.

Turning point: ban on ICOs and cryptocurrency exchanges

However, 2017 turned out to be a breakthrough – in the negative sense of the word. It was a period of great popularity of Initial Coin Offerings (ICO). The Chinese government unexpectedly banned this form of financing for companies and startups, considering it illegal. ICOs, which allowed for raising capital by issuing new cryptocurrencies, were considered particularly risky for retail investors. Officially, it was about protecting investors.

A few months later, China went a step further by banning cryptocurrency exchanges. This decision forced the largest Chinese platforms such as BTCC, Huobi and OKCoin to move their operations abroad.

Attack on the mines

Despite restrictions on cryptocurrency trading, China was still the global center for bitcoin mining. This was the result of access to cheap electricity and large resources of computer equipment produced in the region. Until 2020, Chinese miners were responsible for a large (often even the largest) part of the global hash rate of the Bitcoin network.

And again, the authorities didn’t like it. In 2021, Beijing tightened its policy towards cryptocurrencies: in May, the authorities announced a mining ban, justifying their decision with the need to protect the environment. Mines began to migrate to neighboring countries or even to the USA.

In September 2021, the People’s Bank of China finally announced that all transactions involving blockchain currencies are illegal. This was the most decisive step ever taken by the Chinese authorities against bitcoin and other cryptocurrencies!

Since then, cryptocurrencies have remained banned in China. More specifically, they cannot be used in transactions. As for ownership itself, the matter is more complicated. After all, the anonymity they provide makes a ban on their possession a dead rule. In addition, the recent judgment of the Supreme Court may prove crucial for the future of the market.

Collecting so-called ‘virtual currencies’ such as Bitcoin and Ether from investors through the illegal issuance and circulation of tokens (…) is essentially an act of illegal public financing without authorization. Therefore, no organization or individual may engage in illegal token issuance and financing activities

– we read in the document.

However, it further added that cryptocurrency has value as a commodity.

The ruling was interpreted differently by the bitcoin community. It certainly does not mean that BTC is fully legal in China, but it has the status of a commodity, so similar to that in the USA. This is a bridgehead to improve the legal situation of investors.

Why was the ban introduced?

But why did China decide to ban bitcoin in the first place?

In practice, it could have been about capital control. Cryptocurrencies were a way to bypass restrictions related to capital outflow abroad, which could weaken the stability of the Chinese yuan. In addition, the government was probably afraid of the development of speculation and a bubble on the cryptocurrency market, which could threaten the country’s financial stability. In the culture of the Middle Kingdom, the government (formerly the emperor) plays the role of a “father”, a protector, hence such “care” could be understood.

But it could have been something else. At that time, China was already promoting its CBDC – the digital yuan. Bitcoin and other cryptocurrencies were therefore perceived as competition for this project.

The impact of Beijing’s decisions on the world

The bans introduced by China have had a huge impact on the global cryptocurrency market. In the short term, they caused price declines and capital outflow, but in the long term, the market managed to recover. Many miners and exchanges have moved their operations to friendlier jurisdictions, contributing to the decentralization of mining and trading.

In fact, it can be said that Beijing has lost more from its politicians than it has gained. It lost its chance to become a center for blockchain and cryptocurrency technologies. Now the USA will fight for this position.

Perhaps the worst thing for the Chinese government is that it has embarrassed itself. He did not manage to destroy the bitcoin or mining market – a large part of the network’s hash rate is still generated in the region.

Other countries in Asia and cryptocurrencies

The policies of other Asian countries contrast with Beijing’s actions. For example, Singapore is considered one of the most cryptocurrency-friendly countries in the world. Singapore’s financial regulator has introduced clear regulations regarding cryptocurrencies and blockchain technology. There is also no capital gains tax in the country, which makes cryptocurrencies particularly attractive to investors.

Japan is one of the first countries in the world to formally recognize bitcoin as legal tender. Already in 2017, an act was introduced regulating the functioning of cryptocurrency exchanges and protecting the interests of investors.

In turn, South Korea has been at the forefront when it comes to cryptocurrency adoption for years. The country has one of the most active cryptocurrency communities. There are exchanges such as Upbit and Bithumb, some of the largest in the world. Investors also do not have to pay tax on profits there.

Summary

China’s relationship with Bitcoin is a story full of twists and turns – from initial enthusiasm and market dominance to a complete ban on cryptocurrency-related activities. The country played a key role in shaping the global cryptocurrency market, but at the same time it showed how state regulations can adversely affect the development of new technology.

Although China has closed its doors to Bitcoin, it is possible that the next changing of the guard in the country’s history at the head of the ruling elite will lead to a change in this policy.

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