As of 2023, China is among the leaders in blockchain industry development, even though the Chinese authorities imposed a complete ban on digital asset transactions in 2021. Moreover, China’s government approved the creation of the National Blockchain Technology Innovation Center headquartered in Beijing. The country has great plans for Metaverse development, leads in CBDC adoption, and is developing many other promising DLT projects.
The CP Media team examined in detail the Chinese government’s policy on the crypto sector, the current situation with blockchain projects in the country, and the PRC’s future plans for the industry’s development.
How the Chinese Government Regulates the Crypto Market
The Chinese government’s position on the crypto industry has always been quite tough and harsh. Since 2013, representatives of the National Bank of China have repeatedly commented on crypto transactions, giving recommendations and setting different bans. The regulator’s overall position boiled down to the fact that digital assets are payment instruments issued by credit or monetary institutions. Citizens were strongly advised not to use crypto for banking and market settlement transactions, as it had no legal status.
A brief chronology of the PRC government’s main actions regarding the cryptocurrency market from 2013 to 2021:
- In December 2013, the People’s Bank of China published a recommendation on Bitcoin transactions. Merchants were urged not to accept payments in BTC. On top of that, the regulator banned banks and financial institutions from converting Bitcoin into CNY. These decisions collapsed the then main cryptocurrency exchange rate from $1,200 to $500.
- In early September 2017, the People’s Bank of China reported that over 90% of ICOs could be a potential tool for illegal financing and financial fraud. After that, the regulator banned all ICO operations and exchange trading in crypto-assets.
- In 2021, there was an official ban on mining digital assets in Yunnan, Inner Mongolia, Xinjiang, and Sichuan provinces. Experts said that one of the main reasons for this decision was China’s preparation for the digital yuan adoption, which was conceived as the main competitor to Bitcoin and other cryptocurrencies. In addition, any operations with crypto in the PRC were considered illegal financial activities with subsequent criminal liability.
Given the increasing scrutiny of the cryptocurrency market by Chinese authorities and the lack of opportunities for blockchain companies for legal work, some major Chinese crypto exchanges, such as OKX (OKEx at the time) and Huobi, had to move their offices to offshore locations. Overall, Chinese blockchain companies gained significant traction in the gray market. Offshore online venues allowed Chinese users to convert CNY into USDT and then purchase cryptocurrencies for USDT.
Prior to the official ban on mining in some Chinese provinces, Sichuan was considered one of the global mining hubs. As of September 2020, China accounted for 67% of all Bitcoin mining operations. The Chinese government’s hardline stance on miners led to their flight from BIT Mining alone sent 320 miners to Kazakhstan and stopped selling related equipment due to the general price drop.
The Creation and Testing of the Digital Yuan
According to several cryptocurrency experts, tight restrictions on mining and other crypto operations in China are directly related to the testing of the digital yuan (e-CNY). The central bank digital currency (CBDC) has been under development since 2019. In 2022, the e-CNY testing process began in a number of cities, followed by plans to fully integrate crypto into the Chinese economy. Additionally, the e-CNY developers announced the introduction of the national digital currency as a means of payment on the Alibaba online marketplace.
In December 2022, Hangzhou unveiled a mobile app of the same name for using the e-CNY. The process of testing the national cryptocurrency continued successfully in China throughout 2022. For example, the Tianjin branch of China Construction Bank offered its customers 50% off the price of going to the cinema, visiting food outlets, or making purchases with the e-CNY.
The People’s Bank of China reported that at the end of 2022, almost $2 billion of e-CNY were in circulation. The regulator said that it would work to strengthen the interaction of traditional payment instruments with the digital yuan system for user convenience.
In late January 2023, companies such as Taobao, JD.COM, and Meituan began supporting the digital yuan. As a result, the Meituan app recorded over 39 million e-CNY transactions. In early March, WeChat, used by 48% of all Chinese citizens, announced digital yuan payments.
The Current Status of China’s Crypto Market and Future Plans
In addition to the ongoing testing of the digital yuan in several Chinese provinces, China’s government is also investing in the development of other blockchain projects. For example, the Blockchain-based Service Network (BSN) project, supported by the local government, presented a plan for developing the domestic NFT market. The project is called Distributed Digital Certificate (DDC). Five blockchain-based networks have already been launched as analogs of existing blockchains. For example, Wuhan China — Ethereum, Tai’an Chain — FISCO BCOS, and several others. China’s blockchain analogs will be managed directly via the BSN, and the government-regulated China Digital Asset Trading Platform should start operating in 2023.
In August 2022, Beijing presented a strategy for the development of Metaverse technologies and a development plan for the VR industry. Implementation of these plans is expected to take place between 2022 and 2025. The government intends to make Beijing a model of a digital economy and has already instructed the municipalities to develop infrastructure that can be used in tourism, education, etc. According to the government, the integration of local services and promising startups will form a unified digital platform that can be used by every citizen of the country.
Despite the Chinese government’s tough stance on mining and crypto transactions, China actively supports the development of blockchain technology and is working to integrate it into the country’s economy, administrative organizations, and other areas of citizen life. CNBC experts estimate that Chinese crypto traders, in spite of government sanctions, still occupy a large part of the cryptocurrency market and exert great influence on it, while authorities in mainland China encourage the formation of the Asian cryptocurrency hub in Hong Kong.
