Cryptocurrency in China

Introduction

Prior to 2017, China was the largest cryptocurrency market in the world, with 80% of Bitcoin transactions, the most popular digital currency, taking place in yuan 1. Despite restrictions on cryptocurrencies in China and the current bear market, the country’s blockchain industry continues to have the most active blockchain projects worldwide. With “blockchain” in their name, almost 5,000 companies have been formally registered, up from 500 in 2017. The Central Bank of China announced in July 2018 that its prohibition on domestic cryptocurrencies had been quite successful, with barely 1% of crypto-trade activity involving Yuan.

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The domestic cryptocurrency market and initial coin offerings have been outlawed, but China’s blockchain sector is nonetheless thriving. Companies like Binance, Huobi, and OKcoin are excellent examples of China’s dominance in the blockchain sector. The three are the biggest sites for bitcoin trade. Along with these businesses, Bitmain Technologies, a Chinese company, produces 75% of the mining rigs used to create new cryptocurrency units, making it the world’s largest manufacturer of these machines.

When the statement was made, bitcoin volume increased, according to data from cryptocurrency market Bitstamp, but shortly the volume dropped and the prices rose again. Wes Fulford, CEO of financial consultancy Viridi Funds, claimed that some cryptocurrencies, like bitcoin, demonstrated endurance in contrast to others, like ether. Dogecoin, Solana, and Ripple are examples of altcoins that decreased. After the statement, certain mining companies with US listings plummeted. While San Francisco-based cryptocurrency exchange Coinbase Global (COIN.O) declined more than one percent, Riot Blockchain (RIOT.O), Bit Digital (BTBT.O), and Marathon Digital (MARA.O) all had declines of 2.5 to 5 percent.

In addition to the banking system not accepting cryptocurrencies or offering related services, China does not recognise cryptocurrencies as legal tender. In an effort to enhance investor protection and reduce financial risk, the government has implemented legislation since 2013 that ban the trading of cryptocurrencies and any connected activity. Events involving cryptocurrencies or initial coin offerings (ICO) have been discouraged, and domestic cryptocurrency platforms and ICOs have been outlawed.

The 2013 circular on Bitcoin is one of the official opinions on how the Chinese government views cryptocurrencies. China has not yet passed any legislation governing cryptocurrencies. According to the document, Bitcoin should only be regarded as a virtual good rather than legal tender because it is not issued by a monetary authority and lacks the usual features of fiat currency. The paper further states that trading in this commodity by citizens is done at their own risk. The 2013 government notice further prohibited any financial or payment institutions from engaging in Bitcoin trading and restricted any insurance services from cooperating with Bitcoin-related firms.

Ten government agencies, including the People’s Bank of China (PBOC), collectively released a notice on September 24, 2021, to make it clear that cryptocurrencies are not considered legal tender. Furthermore, all bitcoin exchanges operating offshore and offering services to Chinese nationals are prohibited in China. According to the authorities, any businesses that provide services to offshore cryptocurrency exchanges with workers resident in China would be looked into and penalised.

In 2017, China closed down its domestic cryptocurrency exchanges at a time when 90% of all bitcoin trade worldwide took place on their speculative market. The PBOC announced in June 2019 that it would be blocking access to all domestic and international cryptocurrency exchanges as well as websites for initial coin offerings, even though cryptocurrency trades continued through foreign online exchanges. This effectively outlawed the trading of cryptocurrencies in China.

China forbade institutions and businesses from offering cryptocurrency-related services in May of that year and issued a warning to investors against speculative cryptocurrency trading. Three industry organizations—the China Banking Association and the Payment, the Clearing Association of China, and the National Internet Finance Association of China—released a statement stating unequivocally that it is not permitted to provide services like registration, clearing, settlement, and trading. Government representatives made an effort to put more pressure on the sector by cautioning consumers that they won’t be protected if they trade in bitcoin and other virtual currencies. The government banned cryptocurrency mining in June of that year and ordered banks and payment providers to stop facilitating transactions.

Exchanges of legal tender and virtual money, the purchase or sale of virtual goods (including those to residents of China abroad), and the provision of information (including technical assistance and pricing services) for virtual money are now prohibited. They run the risk of being looked into and prosecuted. The current restriction aims to better detect and probe cryptocurrency trading behaviour by combining offline and online inquiry.

Financial institutions are prohibited from offering services for cryptocurrencies, such as account opening, money transfers, and other actions that make using cryptocurrencies easier. The use of cryptocurrency as a form of payment is also prohibited by websites and online businesses. Additionally, cryptocurrency advertisements are not allowed, and key words associated with them are tracked.

In essence, China’s prohibition echoes world fears about cryptocurrencies. Governments in the US and Asia are worried that the use of digital currencies would increase risk, encourage criminal activity, hurt investors, and undermine governmental control over monetary systems. The Chinese authorities has claimed that the rise in gambling, fraud, money laundering, pyramid schemes, and other illicit activities has been facilitated by the trade of virtual currency. Therefore, a ban on cryptocurrencies is required to uphold social harmony and national security.

The “blockchain,” a shared record used by numerous computers to verify transactions, is the foundation of cryptocurrency technology. New “coins” are given to those who engage in this crypto-mining activity. China has always been one of the major mining hubs due to its affordable computer hardware and low-cost electricity. Gamers have previously accused the bitcoin sector of being to fault for the global lack of potent graphics cards due to mining’s enormous popularity.

Although crypto-minding operations use a lot of energy and produce a lot of carbon emissions, they only make a small contribution to the country’s GDP and have a small influence on how quickly industries develop and how quickly science and technology advances. Additionally, the dangers associated with the creation and use of virtual currency are coming to light more and more.

In addition to the earlier crackdown, the recent NDRC circular emphasised that investment in new cryptocurrency mining projects must be prohibited; local governments should speed up efforts to phase out existing project because it is believed that the blind and disorderly development of virtual currency has a negative impact on the promotion of high-quality economic and social development, energy conservation, and emission reduction, which may endanger the goals of carbon neutrality.

Conclusion

Chinese officials have always been concerned about capital flight despite the country’s stringent capital controls. There is some debate over the effectiveness of these capital controls because, according to some analysts, capital flight increased significantly between 2009 and 2018. The PBOC also forbade the establishment of cryptocurrency exchanges within China in 2017. (The 2017 prohibition did not go as far as to outlaw cryptocurrency ownership or mining, which the 2021 ban ultimately does). Despite not using capital flight as a justification for its cryptocurrency limitations in 2017, Chinese authorities did impose more limits on Chinese enterprises’ abroad ventures. In some ways, the limits placed on Chinese cryptocurrency exchanges in 2017 might be considered as a sign of the subsequent tightening of Chinese corporations’ outward investment that year.

Author: Tanya Saraswat, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or   IP & Legal Filing.

References

• Francis Shin, What’s behind China’s cryptocurrency ban? World Economic Forum (2022), https://www.weforum.org/agenda/2022/01/what-s-behind-china-s-cryptocurrency-ban/ (last visited Jan 13, 2023).
• Sofia Brooke, China makes cryptocurrency transactions illegal: An Explainer China Briefing News (2021), https://www.china-briefing.com/news/china-makes-cryptocurrency-transactions-illegal-an-explainer/ (last visited Jan 13, 2023).