In 2021, China sent shockwaves through the blockchain sector when it announced strict restrictions on Bitcoin mining and cryptocurrency trading.
The Chinese government implemented the ban in stages, and at the end of September 2021, they completely banned cryptocurrency trading. Just a few months later, the Bitcoin hash rate dropped significantly, and Chinese cryptocurrency exchanges left the country, leaving Bitcoin advocates concerned about the future of the industry following the decision. Beijing's decision.
As the world's second largest economy, China's decisions influence global cryptocurrency adoption. However, that doesn't mean all hope is lost for Bitcoin. Interestingly, China's cryptocurrency ban has become an example of how banning cryptocurrency activities can become troublesome.
History of China's cryptocurrency ban
Although China's 2021 cryptocurrency ban is considered a serious move, for those involved in the cryptocurrency industry, this is not too shocking.
Longtime investors have seen China "ban Bitcoin" many times. Therefore, looking at the history of China's Bitcoin restrictions is important to understand the reasons for the 2021 cryptocurrency mining ban.
2011: Interest in Bitcoin gradually increased
The father of Bitcoin, Satoshi Nakamoto published the white paper Bitcoin: A Peer-to-Peer Cryptocurrency System in 2008. Although Bitcoin became available in 2009, it was not until 2011 that Chinese citizens began to take notice. to cryptocurrency.
The main reason for increased Bitcoin adoption in China is the birth of the Bitcoin China cryptocurrency exchange, led by software engineer Bobby C. Lee (brother of Litecoin creator Charlie Lee). ) founded in 2011. During the early stages of the cryptocurrency market, Bitcoin China accounted for a large portion of the global Bitcoin trading volume.
2013: China bans cryptocurrencies for the first time
Bitcoin has become so popular in China that many businesses have started accepting it as a payment method. Notably, China's largest search engine Baidu announced it would welcome Bitcoin payments in 2013.
During this time, many Chinese people learned about Bitcoin's proof-of-work (PoW) algorithm, and the country's Bitcoin mining industry also began to thrive.
To meet the demand for cryptocurrency mining, Micree Zhan and Jihan Wu founded a hardware manufacturing company, ASIC Bitmain. ASIC, short for “application specific integrated circuit,” refers to computers specifically designed to solve algorithms on the Bitcoin blockchain. To date, Bitmain still plays an important role as a manufacturer of Bitcoin mining equipment in the world.
Although Bitcoin adoption is increasing, 2013 marked China's first attempt to suppress Bitcoin trading. The People's Bank of China (PBC) issued new rules regarding cryptocurrency trading at financial institutions, according to which Chinese banks are no longer allowed to hold or trade in these currencies. virtual currency like Bitcoin.
This first Bitcoin ban does not make it illegal for Chinese citizens to buy, store or send cryptocurrency. However, PBC has made it more difficult to access cryptocurrencies from exchanges like Bitcoin China. As a result, Bitcoin China suddenly announced that it would no longer accept deposits to the exchange in Yuan.
2017: China bans ICOs
During the 2017 bull market, Chinese officials increased sanctions on cryptocurrency trading. However, instead of focusing on bank transfers or Bitcoin mining, they have paid special attention to initial coin offerings (ICOs).
Since the emergence of smart contract blockchains like Ethereum (ETH) and increased speculation during the bull market in 2017, the number of ICO transactions has increased significantly. However, due to lack of regulation in the cryptocurrency sector, many of these ICOs later turned into scams.
To curb the demand for ICO fever, Chinese authorities banned all platforms providing ICO services. If violated, the platforms will have to return money to investors. China has also forced many centralized exchanges (CEX) to stop operating. During this time, Bitcoin China changed its name to BTCC and moved its headquarters to the UK.
2021: China bans cryptocurrency mining
China considered banning Bitcoin mining in 2019, but it was not until 2021 that it imposed severe restrictions on the sector.
As Bitcoin fluctuated around $55,000/BTC, China's State Council announced an official ban on mining activities. Soon after, the Bitcoin hash rate dropped by 50%, and the BTC price also plummeted to below $30,000 in the following months.
Along with the ban on Bitcoin mining, Chinese regulators also banned all cryptocurrency transactions. Currently, anyone working for a Chinese technology company involved in cryptocurrency could face jail time. It is also illegal for people to deposit cryptocurrency and for businesses and banks to accept digital assets such as Bitcoin and Ethereum.
What does China's cryptocurrency ban include?
China's cryptocurrency ban targets three aspects of the digital assets sector:
Bitcoin Mining: After China banned Bitcoin mining, it became illegal for Chinese people and businesses to mine cryptocurrency under the PoW mechanism.
Cryptocurrency Trading: Chinese investors are not allowed to buy, send or make transactions using cryptocurrencies such as Bitcoin or Ethereum. Additionally, there are many prohibitions against trading digital assets such as NFTs.
Jobs in the cryptocurrency sector: The Chinese government wants to discourage innovation in the cryptocurrency sector. If any tech company or startup engages in cryptocurrency trading, they can face severe penalties.
Although the use and sale of cryptocurrencies is illegal, there is no specific policy against holding digital assets such as Bitcoin, Dogecoin or Ethereum. Therefore, the Chinese people who held cryptocurrencies did not violate any existing laws.
In addition to rumors that China may be restricting access to decentralized digital assets before rolling out centrally controlled cryptocurrencies, Chinese officials have publicly stated mentioned several reasons for their cryptocurrency ban, including:
Risk of fraud and illegal financial activity: The Chinese government is concerned about the rise of fraudulent activities and illegal financial transactions involving cryptocurrencies, and they want to protect people from this potential risk.
Risk of money laundering and national security violations: The Chinese government is also concerned that cryptocurrencies could be used for money laundering and endanger national security.
Lack of oversight and control: Cryptocurrency markets are largely unregulated and unmonitored by governments, leading to the risk of instability and increasing the potential for illegal activities.
Potential to impact the economy: The government is concerned that engaging in cryptocurrency trading could affect the stability of the domestic economy and financial system.
Yuan depreciation: As the value of Bitcoin continues to soar, the Chinese yuan has been unable to outperform many competing currencies in the foreign exchange market. The Chinese government said it was concerned BTC could add competition to the national currency.
National environmental goals: After signing the Paris Agreement in 2015, China committed to reducing carbon emissions. According to the Chinese government, Bitcoin's high energy requirements do not fit with their plans for an environmentally friendly future.
CBDC Control and the Metaverse: While China is opposed to decentralized cryptocurrencies, it is not completely opposed to Web3. China is actively piloting CBDC nationwide. In addition, cities like Shanghai have also committed to investing billions of dollars to develop national digital space projects. China may want to eliminate competing coins like Bitcoin and Ethereum while rolling out these blockchain projects.
What consequences do bans have?
China's ban on Bitcoin mining has caused a significant drop in hash rate on the Bitcoin blockchain.
According to the Cambridge Bitcoin Electricity Consumption Index (CBECI), China contributed 70.9 exahashes per second (Eh/s) in May 2021, but this number dropped to zero in July 2021. Bitcoin's total hash rate dropped from over 150 Eh/s to 100 Eh/s during the same period.
Many Chinese Bitcoin miners have moved to countries that are friendlier to the cryptocurrency industry. Specifically in Kazakhstan, the percentage of Bitcoin's total hash rate increased after China's ban.
Notably, even in the following months, Bitcoin's total hash rate continued to increase. In January 2022, Bitcoin's hash rate reached nearly 200 Eh/s, significantly higher than before China's ban.
CBECI also found that mining activity in China reappeared on the Bitcoin network in September 2021. Apparently, many mining pools in China are still operating underground. In early 2022, China accounted for more than 20% of Bitcoin's hash rate, second only to the US.
Why is it difficult for cryptocurrency to be banned?
Although China has made efforts to limit the use of cryptocurrencies, research from the University of Cambridge shows that Bitcoin mining has not completely disappeared. Here are the reasons why controlling cryptocurrency becomes difficult:
Anonymity: Cryptocurrencies often allow users to keep personal information anonymous, which makes tracking and identifying owners difficult for government agencies.
Decentralization: Cryptocurrencies often operate on distributed networks, with no intermediary organization or agency controlling the entire system. This makes controlling and intervening in cryptocurrency operations complicated.
Global nature: Cryptocurrencies can be used and traded globally, not bound by national boundaries. Control will therefore require cooperation and coordination between countries. While China banned Bitcoin, countries like El Salvador and the United Arab Emirates have started accepting the cryptocurrency.
Popularity: Besides Bitcoin, there are hundreds of other cryptocurrencies that exist on the market. The emergence of more and more different cryptocurrencies makes monitoring and control more complicated.
Use decentralized exchanges: Users can trade cryptocurrencies on decentralized exchanges, where there is no regulatory intervention, making it difficult to control transactions towel.
China's cryptocurrency ban has had significant impacts on cryptocurrency mining and trading. Currently, 1.4 billion Chinese people are not allowed to access cryptocurrencies like Bitcoin. However, recent data on Bitcoin mining activity in China shows that there is still a strong interest in the cryptocurrency.
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