The Curious Case of Blockchain and Cryptocurrency Adoption in China

Blockchain technologies and cryptocurrencies have long been a baffling mixture of contention and positivity in China. Over the course of almost 8 years, the nation has gone from banning cryptocurrency activities altogether, to building the largest Bitcoin mining regions in the world. With the nation soon to introduce a central bank digital currency (CBDC) and a world-leading number of blockchain patent applications, China is indeed the most fascinating nations to watch.

The Curious Case of Crypto in China

In the curious case of cryptocurrency, China is perhaps the biggest outlier for regulatory and legislation flip-flopping. Though perhaps the crypto-skeptical pro-blockchain nation may be prudently testing the waters of this new tech in a fashion unlike any other. Crypto bans, a national central bank digital currency (CBDC), blockchain-based government portals, and huge investment into DeFi make China one of the most curious sagas in the brief history of blockchain.

In 2017, cryptocurrencies were in vogue, the markets were red hot with innovations and scams with thanks to the largely unregulated and new novel fundraising method used by crypto-related companies known as initial coin offerings (ICOs). At this point in time, the value of Bitcoin reached its highest point, breaking past $20,000, and with it, many other cryptocurrencies rose to fame.

Since then, many have died off, many have survived, and very few were deemed legal by China’s authorities. In 2017 China banned ICOs entirely, resulting in a nervous quake for the cryptocurrency market. But the rally against cryptocurrencies began in March 2013, when the People’s Bank of China (PBoC) declared that cryptocurrencies were no longer recognized by the state as legal tender or a viable retail option. Even cryptocurrency mining farms were hit, with over a hundred companies being forced to shutter their doors. It seemed as though cryptocurrency and blockchain technology was doomed in one of the world’s largest economies.

Prior to this, in the Winter of 2013, the PBoC officially prohibited banks and payment companies from engaging with them altogether. Later in December of that year, the government officially deemed bitcoin a “virtual commodity”, giving it some regulatory classification, and this is essentially where the story of endless policy amendments began.

Throughout 2018-19, the narrative in china was “blockchain not crypto”, despite continued investment into crypto-infrastructure building companies. In June of 2019, the PBoC released a statement, declaring that it would ban all access to domestic and foreign cryptocurrency exchanges”.

However, cryptocurrency trading has resumed in China with many switching to foreign exchanges such as those based in Hong Kong, Japan, and South Korea, regardless of the ban. Though as you may have already come to realize, matters aren't quite as they seemed.

The Switch

In July of 2019, this all changed. In a landmark ruling that came soon after PBoC’s ‘ban’, transformed sentiments almost overnight. Chinese courts finalized that Bitcoin is a “virtual property”, noting it had value, could be disposed and had scarcity – the hallmarks of inherent utility, which are vital attributes to any property, especially digital currencies.

In November of 2019, things began to change quite radically. In an edition of China’s Industrial Structure Adjustment Catalog, cryptocurrency mining will no longer be subject to a state crackdown. Since then, China has become the biggest manufacturer. Furthermore, China is home to the biggest cryptocurrency mining industry in the world, further obscuring its stance on the technology. In 2019, Bitcoin mining raked in $5.4 billion and according to data, China mines more Bitcoin than anywhere in the world, and also is home to some of the biggest producers of mining hardware manufacturers and mining pools like BitMain and Canaan Creative.

Patent Pending

As per data from LedgerInsights.com (2019), out of the top ten companies in the world with blockchain patent applications, Chinese firms hold seven of those positions. All top three companies are in China, Alibaba/Alipay presently hold 1505 patents, Tencent with 724, Ping An Group holding 561 and four others with a total of 975 between them, bringing China’s total patents up to 3,765 – which is likely to have increased since then.

It must be noted that blockchain patents aren’t all that straightforward, and some reports may include patent applications relating to cryptography, which can include blockchain or other security-related applications.

As Ethereum co-founder/creator Vitalik Buterin Tweeted: “If you're bragging about how many "blockchain patents" your country/company/organization has, you don't understand blockchains.”

Blockchain Adoption

In a recently published whitepaper from the Industrial and Commercial Bank of China (ICBC), the paper noted that over 70 Chinese financial services companies, which included all state-managed banking institutions and China’s largest technology firms, are all using blockchain-enabled financial applications in one form or another.

One example is the ICBC’s international trade settlement platform for China and Europe; built on blockchain, the platform can verify and sync shipping/supplier data which is shared by firms, banks, government entities, etc.

Alibaba also recently partnered with the government of a Chinese province to stamp out food fraud and boost consumer trust. The project brings together both blockchain and an Internet of Things (IoT) tracking system for total transparency.

The above examples are becoming quite typical stories in the adoption of blockchain technologies, but there may perhaps be a cherry on the cake, especially considering China’s odd relationship with the technology overall.

Reportedly, an alliance of Chinese government groups, banks, and major tech companies are banding together to launch what is titled the “Blockchain-based Service Network” (BSN). It is intended to act as an operating system, where users can quite simply access blockchain programs or build their own, something akin a sandbox. Though most importantly, it is a historical moment as this will be the first major blockchain network owned and maintained by a central government.

Most excitingly of all, there are rumors that the network will integrate two of the most popular blockchain networks for decentralized finance (DeFi) protocols and decentralized applications (dApps), Ethereum, and EOS, respectively.

What this could mean for the development of blockchain/cryptocurrency/DeFi in China is almost impossible to tell, though as inconsistent they have been, there is no doubt in their mind that one, if not all of these technologies will have a future there. Though what form and shape that will take is anyone's guess.

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