China Clamps Down on Cryptocurrencies, Invests in Blockchain Tech
By Dafydd Williams, Senior Director, Advisory Services
A year after banning initial coin offerings and closing digital coin exchanges, China is clamping down further on cryptocurrencies, trying to curb capital flows and possible money laundering by making it more difficult for investors to obtain information and engage in trading. Nevertheless, the government itself remains an active investor in blockchain, the technology behind digital currencies that President Xi Jinping has labeled a "breakthrough" technology.
Burgeoning private wealth and increased government restrictions on international capital flows have made China a natural hotspot for cryptocurrency investing, which allows individuals to open accounts online and transact anonymously. Before last year’s ban, more than 80 percent of trading in bitcoin, the earliest and most popular cryptocurrency, was conducted in yuan.
China’s recent clampdown comes at a time when investors and regulators around the world are exploring ways to integrate cryptocurrencies into the traditional economy. In Singapore, for example, one cryptocurrency business set up a coffee shop that accepts its own currency (and bitcoin), even as the Monetary Authority of Singapore “urged investors to exercise ‘extreme caution’ toward the cryptocurrency market, which many feel is in a bubble.” And one company in Australia is partly funding an AU$300 million island resort by offering cryptocurrency tokens, a move “that appeared to have the backing of Australian regulators.”
As for Chinese investors, many have since switched to foreign accounts or found other ways to get around the country’s ban, though they have to pay higher fees for these transactions. The government recently said that it will now block access to 124 websites run by offshore exchanges that have provided services to Chinese investors. Other recent measures include banning cryptocurrency speeches and events and blocking WeChat social media accounts and online discussion forums that provide information about trading.
It’s not just investors the government has to contend with in its efforts to fight cryptocurrency. China’s cheap electricity rates have encouraged armies of citizens to “mine” bitcoin, or create the computer-generated algorithms used to facilitate transactions. Around the time of last year’s ban, China had some of the largest bitcoin mines in the world. Though authorities ordered a shut-down of mining in January, activity continues. Things could change, however, if the government follows through on threats to curb electricity use. In light of the repressive atmosphere, some Chinese miners are considering moving operations to Canada.
Embracing Blockchain’s Potential
With its tight restrictions on cryptocurrencies, China is attempting to gain control of money flows and profits in its economy. But the government is also dedicated to making the country a technology leader, and it sees blockchain as an important part of that process. In a May speech, Xi said, “A new generation of technology represented by artificial intelligence, quantum information, mobile communications, internet of things and blockchain is accelerating breakthrough applications.”
Blockchain creates a secure, unalterable record of transactions between two or more parties in a transaction or along a supply chain, eliminating the need for an outside party such as a bank. Most people are familiar with the technology through digital currencies like bitcoin and Ethereum, which skyrocketed in value last year and have slumped this year in response to concerns about regulation and fraud.
But blockchain has enormous potential beyond its appeal as a speculative investment. It could someday be used as a secure, officially-sanctioned method of payment. Western banks are looking into it. It could also provide much-needed transparency in complex and obscured markets such as insurance, or facilitate a peer-to-peer sharing economy among strangers with a level of security that is lacking today.
It’s not known which aspects of blockchain China is interested in developing, and perhaps the government doesn’t have clear objectives yet. But it has invested in BlockVC, which has offices in Beijing and is funding 40 or 50 blockchain projects around the world. Banks and fintech companies in China are also investing. Local governments, including Shanghai and Nanjing, have sunk over $3.5 billion into the sector since 2016.
Other Governments Wary
Though China’s restrictions on cryptocurrency are more draconian than they are in most other places, many countries have also expressed concerns about rampant speculation, fraud and criminal abuse:
- In the US, the SEC recently nixed proposals for a bitcoin exchange traded fund, and one trading platform is now requiring investors to supply personal information. The SEC has also warned investors of risks and has halted several initial coin offerings.
- In Europe, EU finance ministers were concerned enough to hold a recent meeting about cryptocurrencies, raising fear among investors, but they decided not to rush things and to wait for further analysis before taking any steps towards regulation.
- After blocking access to exchanges and fining investors, Russia reversed course this year and decided to legalize trading.
- In South Korea, where crypto investing occurs on a massive scale, the president threatened to outlaw it completely, causing a massive drop in cryptocurrency values; however, the country failed to follow through with its threat. But it did pass a law requiring exchanges to list investors’ real names.
- Other countries, including Bangladesh, Bolivia, Ecuador, Kyrgyzstan, Morocco and Nepal, have banned trading of bitcoin and other cryptocurrencies.
Blockchain is an emerging technology that thus far has been expressed in cryptocurrency investments and the wild price swings, incidents of fraud and transaction hiccups that accompany them. Someday, blockchain could do much more. In the meantime, countries must struggle to find a balance between encouraging innovation and preventing abuse.