As of this writing in 2022, the Chinese government has banned its citizens from trading or transacting in cryptocurrency. That includes Bitcoin, Ethereum, and Tether, a stable coin. For a brief time, it seemed like Bitcoin could have gone mainstream in China. Recent government actions have turned that around. In this article, we look back at the world’s first cryptocurrency in the People’s Republic of China. China has long disapproved of virtual currencies.
In 2007, Tencent launched QQ-coin for its users to exchange amongst themselves. In 2009, the Chinese Government warned people against using it as an actual currency. The first Bitcoin was mined in 2009. At the time when founder Satoshi Nakamoto left the project in 2010, the Bitcoin price was something less than 10 cents. Nice. The project picked up steam. Someone bought a pizza with Bitcoins.
So on. In June 2011, a Chinese named Linke Yang founded China’s first Bitcoin exchange: BTC China. It was not until 2013 that Bitcoin first gained some real traction in China. In May 2013, the state television network CCTV aired a half-hour documentary on Bitcoin. The documentary first introduced the Middle Kingdom to the wonders of Bitcoin, and downloads of the Bitcoin desktop client surged.
By September 2013, Chinese nodes accounted for 11.3% of the global total – second-most in the world. Then, the FBI’s seizure of the online black market Silk Road in October 2013 brought a great deal of publicity to Bitcoin. The price started to rise, with Chinese users behind the increase. In October 2013, the Baidu Accelerator Service – a subsidiary of the Chinese Internet search giant – announced that they will accept payment for services in Bitcoin.
That same month, BTC China moved ahead of long-time leader Mt. Gox, pushing the Bitcoin price above $200. A month later in November 2013, the price of Bitcoin exceeded $1000 for the first time. That month, BTC China raised $5 million from Lightspeed Ventures. Bobby Lee, then CEO, commented: > “China has been a nation of savers. Even though Bitcoin is new to the scene, we think it is a viable digital asset, so people have realized that and maybe invest in it as any other asset class: stocks, bonds, gold, commodities, real estate, etc,” Note that from the very beginning, Lee didn’t want to call bitcoin a currency. He might have been aware of the repercussions of doing so.
In December 2013, The People’s Bank of China – in conjunction with other government bodies including the Ministry of Industry and Information Technology – issued the Notice on Preventing Bitcoin Risks. The Notice clarified that in China’s view, Bitcoin is not a currency. It does not have currency properties including being legal tender. And thus, it should be treated as a virtual commodity. This Notice thus banned Chinese financial institutions from handling Bitcoin transactions.
Financial institutions cannot conduct business in Bitcoin. They cannot price Bitcoin, nor can they buy or sell it to others. Bitcoin trading websites thus now needed to register with the Chinese government. For anti-money laundering purposes, users must register using their real names and identities. The Hong Kong Monetary Authority followed a day later, warning investors that Bitcoin was a highly speculative commodity. Hong Kongers should be careful when investing in it and take precautions.
This notice hit the Bitcoin price pretty hard at the time. The price of Bitcoin in China fell by 35%. Foreign markets were also hit hard at the time, with prices falling from a high of $1,200 in late November to some $550 in the weeks after the PBOC announcement. A number of Taobao merchants stopped accepting Bitcoin as payment for their goods. In one survey in December 2013, 14 out of 56 merchants stopped accepting Bitcoin entirely.
The Central Bank continued the crackdown by telling third-party payment firms to stop dealing with Bitcoin. And a month later in January 2014, Alibaba said that it would ban trades of Bitcoin and all other virtual currencies. Chinese Bitcoin exchanges were cut off from having customers deposit their RMB. But, the law still allowed such exchanges to exist.
Recovery and Concerns in 2015-2016
And after a few years, crypto trading volumes in China recovered. The Chinese government however continued to have several concerns about Bitcoin and crypto in general.
The immediate one in 2015 would be related to evading capital controls. In the years leading up to 2015, China gradually loosened its currency controls on the RMB. But that year saw a major stock market bubble pop, with A-shares on the Shanghai Stock Exchange falling over 30%. The Chinese government directly intervened in the market, purchasing shares. They ordered major shareholders to hold their shares for at least six months, banned short selling, installed circuit breakers, and reimposed capital controls.
At the time, Chinese individuals cannot make more than $50,000 USD a year in foreign currency purchases. But bitcoin is not a currency and can be quickly transmitted around the world, opening the door for Chinese citizens to get their capital offshore. In times of volatility, the Chinese RMB premium on Bitcoin starts to raise – evidence of capital leaving the country. As high as a third of Chinese Bitcoin purchases are quickly resold on a non-Chinese exchange, and these “capital flight” trades peaked during the 2015 Shanghai stock crash.
This is of obvious concern to Chinese officials. Furthermore, the Chinese government had your standard concerns about money laundering and criminal activity. For instance, in 2015, Hong Kong tycoon Wong Kwan was kidnapped and the kidnappers demanded Bitcoin. Anyway, despite those concerns, the Chinese government did not impose any additional regulations over the next three years. By late 2016, China’s two largest Bitcoin exchanges – BTC China and OKCoin – represented over 95% of the worldwide trading volume.
Chinese RMB activity did not go away even when the People’s Bank of China made inspection trips to these leading exchanges in early 2017 – forcing them to end some of their margin trading services and temporarily suspending withdrawals.
2017 and the rise of Chinese ICOs
The year 2017 saw a massive jump in the Bitcoin price. I personally remember everyone in Taiwan talking about buying Bitcoin for the first time. Around this time, Initial Coin Offerings started to pick up steam.
Roughly speaking, these are the crypto community’s equivalent of IPOs. A company offers new crypto to the public, oftentimes working with influencers to promote it. ICOs have their uses. But there are also a lot of scams. For instance, the “Pump and Dump” scheme, where someone talks up an ICO and dumps all the coins as soon as it hits the market.
Social media companies like Line, Tencent, and LinkedIn banned ICO adverts way before the government did. By July 2017, ICOs were really catching on in China. There were 43 ICO platforms, with 105,000 investors putting in some $400 million. The top three platforms – ICOAGE, ICOINFO, and ICO365 – took some 55% market share.
In the midst of a market craze, Chinese ICOs were coming out for things like gold mining, dating platforms, and more. In July 2017, the National Internet Financial Security Technical Expert Committee released the “Report on the Development of Domestic ICOs in the First Half of 2017”. It recognized that ICOs bypassed the traditional venture capital market and with over 200 participants in each event, created the possibility for “mass financial incidents”. “Mass financial incidents” is not a phrase that China likes.
China telegraphs its work with policy memos. On August 24th, 2017, the State Council’s Legislative Affairs Office posted its Regulations on Disposal of Illegal Fundraising as a draft for comment. Article 15, Paragraph 2 stated: > If the act of raising funds in the name of issuing virtual currency violates the state license and relevant laws and regulations, the relevant state departments will initiate an administrative investigation;
On September 4th, 2017, the Chinese government followed through on the signs and banned all ICOs for disrupting financial order. ICOs are now classified as illegal fund-raising and all activities in the industry should be stopped. Without a regulatory agency or government review of an individual ICO’s risks, the Chinese government believed that ICOs would encourage criminal activity and investment in unworthy projects.
Two of the three ICO platforms suspended their services. Bitcoin China, one of the dominant exchanges at the time, delisted a number of ICO coins. The Chinese price of Bitcoin fell 16% from 32,214 RMB to 27,115 RMB. People, of course, felt that this Chinese regulation had only to do with protecting its citizens. For instance, South Korea would do the same that month. China still supported blockchain technology per se.
One quote from the time went: > Just because 90% of ICO projects are unreliable, it cannot be concluded that Bitcoin and blockchain technology is unreliable. In fact, both crypto tokens and the technology itself are neutral. This might be true in the case of Blockchain technology, but in other aspects of the crypto industry, it isn’t. And the Chinese government soon moved against that too.
Bitcoin needs miners to help add new bitcoins into the system and confirm transactions. Chinese companies quickly dominated the Bitcoin mining space – developing specific ASICs to compute the SH256 algorithm. One of the biggest ASIC companies is Bitmain. Founded in 2013, their first product was the BM138, made on a 55nm TSMC process. 55nm was a relatively mature node, but the vendor’s products rapidly ascended the node ladder towards the latest, bleeding-edge nodes.
These devices, 100x faster than traditional computers, helped make China the world’s Bitcoin mining center. China hosts the majority of the mining computation power in the Bitcoin global network. Additionally, China has some of the cheapest energy prices in the world. Lower electricity costs from cheap coal, nearby wind farms, and energy subsidies make Bitcoin mining much more profitable. China’s Bitcoin mining cities tend to be inland, with the largest being in the province of Inner Mongolia.
However, Bitcoin mining has negative spillover effects in the local community as it tends to crowd out other business uses of that electricity. The local business sector sees declines in both wages and capital investment. And of course, recently China has had some issues maintaining stable electricity in light of coal shortages and tighter environmental regulations. Who knows what sort of role Bitcoin mining has on this. But in the views of the Chinese government, shutting these down won’t hurt.
On May 21st, 2021, China Vice Premier Liu He presided over a meeting of the Financial Stability and Development Committee of the State Council. The document reviewing the meeting mentioned the need to support the “real” economy, and control financial risks. Part of that would be to control the financial activities of various Fin-Tech platform companies. Another would be to crack down on Bitcoin mining and trading behaviors.
Four days later, certain cities in Inner Mongolia announced measures to phase out Bitcoin mining. Xinjiang and other provinces followed suit, with measures starting on June 1st, 2021. Four of the top five mining pools are located in China, accounting for something like 50-80% of global mining power. In June, that hash power declined by 60%. Hash power has since recovered, as the Bitcoin mining companies adapt – which includes leaving the country to go elsewhere in the world.
Per Bloomberg, one mining company is moving its machines from place to place to stay under the radar. But the Chinese removal of mining companies would be a phased rollout, taking place over several months. And I don’t think it is going to slip. A recent Newspaper article said: > Virtual currency “mining” is an outdated process, with large energy consumption and carbon emissions. In addition, the risks derived from the production and transaction links are prominent, and its blind and disorderly development will have an adverse impact on high-quality economic and social development.
So these are orders coming from the top. I reckon they’ll clean up the stragglers in time. It is of note that Kazakhstan, one of the more popular destinations for these Chinese mining companies, recently had to hike fuel prices for its people – resulting in unrest. China’s ban on cryptocurrencies continues to spare Blockchain technology, which underlies crypto.
NFTs and the Digital RMB
Chinese companies have released some interesting products in the field recently. For instance, Tencent Cloud, a cloud computing service like AWS, recently released some blockchain products. Xinhua, the state news agency, used Tencent’s service to issue some NFTs in December 2021. But I don’t know if it’s the start of a trend.
Tencent-powered NFTs might be fun to collect, but will NFTs be as popular in China if you can’t really trade (I.e. flip) them? And of course, I have to mention the Digital RMB, a digital fiat currency being developed by the People’s Bank of China. In development since 2014, the digital Yuan looks to serve a domestic Chinese population that is increasingly moving away from physical cash. China’s never said that E-RMB is a decentralized blockchain like Bitcoin.
It is issued and managed by the central bank and is legal tender. I see it as a substitute for cash payments, coexisting with physical RMB. It probably attempts to co-opt Bitcoin’s role as a “virtual currency”, but I reckon that BTC has left that role behind a long time ago. The outcome of the September 2021 cryptocurrency transaction ban is yet to be seen. The government’s prior attempt to ban Bitcoin caused investors to start using Tether as a proxy.
Tether is now banned, but I reckon they can find something new. So it feels likely that Bitcoin trading will survive in some form in China. It’s not illegal to hold it. But it and crypto, in general, will never go mainstream like they almost did in 2013 and 2017. There’s now no easy on-ramp for the Chinese capital to enter and exit the system.
No legal centralized platform to manage and grow a user experience. Exchanges like Binance and BTC China have left China many years ago. The government’s crackdown has essentially relegated it to the backwaters of the Chinese internet, and that is what I mean when I talk about the fall of Bitcoin in China.