China crypto ban history: A complete overview
While China's 2021 crypto ban was the most severe in the nation's history, it wasn't a shock to those involved in the crypto industry. Many long-time crypto traders have lost count of how many times China "banned Bitcoin." Reviewing the history of China's Bitcoin restrictions is essential to understanding where 2021's crypto mining ban came from.
2011: Interest in Bitcoin ramps up
Bitcoin’s inventor Satoshi Nakamoto published the Bitcoin: A Peer-to-Peer Electronic Cash System whitepaper in 2008. Although Bitcoin was available in 2009, it wasn't till 2011 that more Chinese citizens started to pay attention to crypto.
The primary reason Bitcoin adoption increased is due to the centralized exchange Bitcoin China. Software engineer Bobby C. Lee (brother of Litecoin's Charlie Lee) set up this domestic Bitcoin exchange in 2011. In the early history of crypto, Bitcoin China was responsible for a large share of the global Bitcoin trading activity.
2013: BTC adoption grows, and China bans crypto for the first time
Bitcoin became so widespread in China that many businesses began accepting it as payment. Notably, the country's largest search engine Baidu announced it welcomed BTC payments in 2013.
During this time, many Chinese also learned about Bitcoin's proof-of-work (PoW) algorithm, and the country's BTC mining industry started to bloom. To meet the demand for crypto mining, entrepreneurs Micree Zhan and Jihan Wu created the ASIC manufacturing company Bitmain. ASIC, short for "application-specific integrated circuit," refers to computers specially designed to solve algorithms on the Bitcoin blockchain. To this day, Bitmain is a significant manufacturer of Bitcoin mining equipment.
Although BTC adoption was growing, 2013 marked China's first attempt to put the brakes on Bitcoin trading. The People's Bank of China (PBC) issued new rules regarding crypto transactions at financial institutions, according to which Chinese banks could no longer hold or transact in virtual currencies like BTC.
This first BTC ban didn't make it illegal for Chinese citizens to buy, store, or send crypto. However, the PBC made accessing crypto from exchanges like Bitcoin China more challenging. Indeed, Bitcoin China abruptly announced it would no longer accept yuan deposits following the PBC's new rules.
2017: China outlaws crypto ICOs
During the 2017 crypto bull market, Chinese officials put increased sanctions on crypto trading. However, instead of focusing on bank transfers or BTC mining, officials were most concerned with the ICOs, or "initial coin offerings," which are digital tokens meant to represent an ownership stake in a new crypto project.
Following the release of smart contract blockchains like Ethereum (ETH) and the increased speculation during the 2017 bull market, ICO trading increased dramatically. However, due to the lack of regulation in crypto, many of these ICOs turned out to be scams.
To curb demand for the ICO craze, China banned all platforms offering ICOs. If an exchange sold ICOs, they had to return the money to investors. China also forced many centralized crypto exchanges (CEXs) to cease operations. During this time, Bitcoin China changed its name to BTCC and relocated its headquarters to the U.K.
2021: China bans crypto mining
China considered banning Bitcoin mining in 2019, but it wasn't until 2021 that officials imposed severe restrictions on this sector. As Bitcoin was hovering around $55,000 per coin, China's State Council announced a formal ban on crypto mining. Shortly after, the hash rate on Bitcoin's network dropped 50%, with BTC’s price plunging to about $30,000 in the ensuing months.
Along with the Bitcoin mining ban, China's regulatory bodies outlawed all crypto trading and transactions. Presently, anyone who works for a Chinese tech firm associated with crypto can face jail time. It's also illegal for residents to send crypto and for businesses and banks to accept coins like Bitcoin and Ethereum.
What does China's crypto ban include?
China's crypto ban targets the following three areas of dealing with digital assets:
- Bitcoin mining: After China banned Bitcoin mining, it became illegal for Chinese residents and businesses to mine PoW cryptocurrencies.
- Crypto trading and transactions: Chinese investors aren't permitted to buy, send, or transact in digital currencies like Bitcoin or Ethereum. There are also many policies against trading digital collectibles like NFTs (non-fungible tokens).
- Employment in the crypto sector: The Chinese government wants to discourage innovation in its crypto sector. If any tech companies or entrepreneurs deal with cryptocurrencies, they could face significant penalties.
Although it's illegal to use and buy crypto, there are no specific policies against holding digital assets like Bitcoin, Dogecoin, or Ethereum. Therefore, Chinese residents who already have crypto in a wallet aren’t violating any current laws.
Why does China outlaw crypto?
In addition to the speculation that China may be restricting access to decentralized digital assets before rolling out its own centrally controlled cryptos. Chinese officials have publicly noted several reasons for their crypto bans, including:
- Consumer protection: The Chinese government often focuses on cryptocurrency's association with scams and money laundering when introducing crypto restrictions. The government also warns citizens to avoid crypto due to its connection with these illegal activities.
- No legal backing: Since 2013, the Chinese government has criticized the unclear legal status of digital currencies like Bitcoin. Since no sovereign nation issues Bitcoin, the PBC doesn't recognize BTC as a valid currency.
- Capital flight: Since cryptocurrencies are nationless, many countries are worried money will leave their local economies. China’s government signaled it was concerned digital currencies would make it more difficult to contain the flow of capital.
- Yuan devaluation: As Bitcoin's value continued to rise, the Chinese yuan failed to outpace many competing currencies in the forex market. The Chinese government suggested it was concerned BTC could have added increased competition to the national currency.
- Environmental concerns: After signing the 2015 Paris Agreement, China has pledged to reduce its carbon footprint. According to the Chinese government, Bitcoin's high energy requirements contradict the nation's plan for an eco-friendly future.
- Control over CBDCs and metaverse projects: While China opposes decentralized cryptocurrencies, it's not completely against Web3. Indeed, China is actively working on an official CBDC (central bank digital currency) known as the "digital yuan." Cities like Shanghai have also pledged billions to develop national metaverse projects. China may want to remove competing coins like Bitcoin and Ethereum while it rolls out these blockchain projects.
Did the ban have any aftereffects?
China's Bitcoin mining ban caused a significant decrease in the hash power 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 that dropped to zero in July 2021. Bitcoin's total hash rate dropped from more than 150 Eh/s to 100 Eh/s during the same period.
Many of China's Bitcoin miners fled to nations that were more friendly to the crypto industry, like Kazakhstan's percentage of Bitcoin's total hash rate increased following the China mining ban.
Even in the following months, Bitcoin's total hash rate continued to increase. In January 2022, the Bitcoin hash rate was near 200 Eh/s, significantly higher than before China's Bitcoin ban.
The CBECI also noticed that mining activity in China appeared on Bitcoin's network in September 2021. Apparently, many Chinese mining pools are still operating underground. In early 2022, China accounted for more than 20% of Bitcoin's hash rate, which is second only to the U.S.
Why is crypto difficult to ban?
Despite China's efforts to curb crypto adoption, research from Cambridge University shows Bitcoin mining hasn't gone away entirely. Here’s why it's challenging to police cryptocurrencies:
- Cryptocurrencies are decentralized communities: Decentralization has always been key to the design of cryptos like Bitcoin and Ethereum. Since there are no central authorities to target behind many crypto projects, it's harder for governments to shut down a digital asset.
- Always available on the internet: As long as people have access to the internet, they can run a node or access digital assets in a self-custodial wallet.
- An effective crypto ban needs to be global: Since crypto is borderless, one nation's crypto ban can't outlaw these currencies. Some countries like El Salvador and the United Arab Emirates have begun embracing crypto, so it's unlikely a global crypto ban will go into effect.
Wrapping up
China's crypto ban has had significant implications on crypto mining and trading. It's now illegal for China's 1.4 billion residents to access digital currencies like Bitcoin. However, recent data on BTC mining in China suggests there's still a strong interest in crypto.
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