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

What has happened?

Since 2013, the Chinese government has taken steps to regulate cryptocurrencies, but nothing compared to what was implemented in 2017. (See 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. Extreme price volatility forced the central bank to take more extreme measures, including a ban on initial coin offerings (ICOs) and a crackdown on domestic cryptocurrency exchanges. Soon after, mining factories in China were forced to close due to excessive electricity consumption. Many exchanges and factories have moved abroad to avoid regulations, but remain accessible to Chinese investors. However, they still cannot escape the clutches of the Chinese dragon.

In the latest series of government-led efforts to monitor and ban cryptocurrency trading among Chinese investors, China expanded its “Eagle Eye” to monitor foreign cryptocurrency exchanges. Businesses and bank accounts suspected of transacting with foreign crypto exchanges and related activities are subject to measures ranging from limiting withdrawal limits to freezing accounts. There have even been ongoing rumors among the Chinese community about more extreme measures to be applied on foreign platforms that allow trading between Chinese investors.

“As to whether there will be further regulatory action, we will have to wait for orders from higher authorities.” Excerpts from an interview with the team leader of the China Public Information Network Security Supervision agency under the Ministry of Public Security, February 28

BECAUSE, WHY!?

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 or she could get lucky and get rich, or lose it all when the crypto bubble bursts. Now scale that to millions of Chinese citizens and we’re talking billions of Chinese yuan.

The market is full of scams and meaningless ICOs. (I’m sure you’ve heard of people sending coins to random addresses with the promise of doubling their investments and ICOs that just don’t make sense.) Many uninformed investors are in it for the money and could care less about the technology and innovation behind it. The value of many cryptocurrencies is derived from market speculation. During the cryptocurrency boom of 2017, participate in any ICO with a famous adviser on board, an up-and-coming team, or decent hype and you’re guaranteed at least 3x 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. Members of the Central Bank report that almost 90% of ICOs are fraudulent or involve illegal fundraising. In my opinion, the Chinese government wants to make sure that cryptocurrency remains ‘controllable’ and not too big to fail within the Chinese community. China is taking the right steps towards a safer and more regulated, yet aggressive and controversial world of cryptocurrency. In fact, it could be the best move the country has taken in decades.

Will China give an ultimatum and declare cryptocurrencies illegal? I highly doubt it, as it’s pretty useless to do so. Financial institutions are currently prohibited from holding crypto assets, while individuals can, but are prohibited from, engaging in any form of trading.

A state-run cryptocurrency exchange?

At the annual “Two Sessions” (so named 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, which is held the first week March, the leaders meet to discuss the latest issues and make the necessary amendments to the law.

Wang Pengjie, a member of the NPCC, dabbled in the prospects of a state-run digital asset trading platform and initiated 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 China Securities Regulatory Commission (CSRC), a regulated and efficient cryptocurrency exchange platform would serve as a formal way for companies to raise funds. (via ICO) and investors to hold their digital assets and achieve capital appreciation” Excerpts from Wang Pengjie’s presentation at the Two Sessions.

The March to a Blockchain Nation

Governments and central banks around the world have struggled to deal with the growing popularity of cryptocurrencies; but one thing is for sure, everyone has adopted blockchain.

Despite the crackdown on cryptocurrencies, blockchain has been gaining popularity and adoption on various levels. The Chinese government has been supporting blockchain initiatives and embracing the technology. In fact, the People’s Bank of China (PBoC) has been working on a digital currency and has conducted simulated transactions with some of the country’s commercial banks. It is not yet confirmed if the digital currency will be decentralized and offer cryptocurrency features such as anonymity and immutability. It wouldn’t be a surprise if it turns 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.

The 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 (cryptocurrency) products that take advantage of the huge opportunity for speculation that gives people the illusion of becoming rich overnight” Excerpts from an Interview with Zhou Xiaochuan on Friday, March 9.

In a media appearance on Friday, March 9, People’s Bank of China Governor Zhou Xiaochuan criticized cryptocurrency projects that took advantage of the cryptocurrency boom for profit and fueled market speculation. He also noted that the development of digital currency is ‘technologically inevitable’

Regionally, many Chinese cities are pushing blockchain initiatives to promote growth in their region. Hangzhou, known as the home of Alibaba, has declared blockchain technology to be one of the city’s top priorities in 2018. The Chengdu local city government has also been proposed to build an incubation center to foster blockchain technology. adoption of blockchain technology in the city’s financial services.

Local conglomerates like Tencent and Alibaba have also partnered 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 the fact that China is working towards becoming a blockchain nation. China has always been open-minded to emerging technologies like mobile payment and Artificial Intelligence. From now on, there is no doubt that China will be the first blockchain-enabled country. Will we see the Chinese government back down and let its citizens trade again? Probably when the market has matured and is less volatile, but definitely not in 2018.