General situation in China
Since the early days of Bitcoin, China has been one of the earliest countries to embrace cryptocurrencies. In 2011, BTC China was the first crypto exchange to be launched in the country, setting the necessary infrastructure for the growth of cryptocurrencies. This was followed by Baidu, China’s leading search engine, accepting Bitcoin as payment for its website security services in 2013. China’s cheap energy enabled large-scale crypto mining operations with Bitmain, a cryptocurrency mining equipment manufacturer, setting up shop in 2014 and becoming the leading manufacturer of application-specific integrated circuit (ASIC) mining equipment.
In recent years, China has introduced increasingly restrictive cryptocurrency laws, making it illegal for companies to provide cryptocurrency-related services and operate cryptocurrency exchanges in the country. These new regulations go even further and essentially amount to a blanket ban on most activities that enable the cryptocurrency ecosystem to function. Now, even cryptocurrency exchanges outside the country will not be able to serve Chinese citizens. In addition, China has cut power to cryptocurrency mining operations, which consume large amounts of electricity to solve complex mathematical puzzles for which they are rewarded with units of digital currency.
China’s strict regulations: a brief history of crypto bans
The Chinese government had long been wary of the unregulated and decentralized nature of cryptocurrencies, especially in light of the country’s capital flight between 2009 and 2018. With this in mind, Chinese authorities have imposed several bans on cryptos, starting with a June 2009 ban on virtual currencies, followed by a September 2013 ban on Chinese banks handling Bitcoin transactions.
In January 2014, China’s e-commerce giant Alibaba also banned Bitcoin transactions, with more fake reports about a crypto ban in China causing a significant plunge in BTC prices. In September 2017, Chinese authorities officially banned crypto exchanges from offering services to persons within the country and initial coin offerings (ICOs). This ban meant that Chinese citizens and residents could not be able to fund or engage in ICOs. As a result, China-based crypto exchanges such as FXBTC closed shop, while others migrated their operations to other countries.
April 2019 saw China’s National Development and Reform Commission (NDRC) release a statement terming Bitcoin mining as a major source of environmental pollution. While NDRC eventually retracted its statement, 2020 was a tough year for crypto in China, with the country tightening its hostile crypto regulations. This culminated in March 2020 with China largely behind the infamous ‘crypto bloodbath’ that saw the price of nearly all major tokens nosedive. The Chinese government has continued its crackdown on crypto trading and mining in 2021, considered the toughest era of cryptocurrencies in China. In May 2021, The National Internet Finance Association of China, the China Banking Association, and the China Payment and Clearing Association issued a joint statement warning Chinese citizens against investing in cryptos. Then in June 2021, China’s State Council called for a strict crackdown on crypto mining in all jurisdictions, before finally, in September 2021, PBoC declared all crypto transactions in China illegal. Overall, Chinese authorities have imposed a record 19 bans on cryptos in the last 13 years in an effort to control the country’s economy. These bans have caused crypto miners and exchanges to move to crypto-friendly countries or shut down permanently. However, the latest crypto ban has opened the door for an official digital currency backed by the Chinese government.
What about eCNY?
In September 2021, cryptocurrencies were banned outright. However, the country is working on the development of the digital yuan (e-CNY).
The Chinese government’s move to reintegrate cryptocurrencies through this mode also has to do with the desire to exert more control over the country’s economic activity and to create its own digital currency that will be backed by the government.
The Situation in Hong Kong
Hong Kong has historically had an open and supportive attitude towards cryptocurrencies and has become a hub for crypto companies and exchanges. Recently, the Securities and Futures Commission (SFC) of Hong Kong released a statement indicating that some virtual asset activities may be considered securities, and that the SFC may regulate such activities.
The SFC will allow retail trading of a select group of cryptocurrencies to bring regulatory clarity to the crypto market, and the Virtual Asset Trading Platforms (VATP) could be regulated by offering on their platform at least one token qualified as a security. Additionally, the Hong Kong Monetary Authority (HKMA) is considering expanding regulations for payment-related stablecoins and asset-linked stablecoins, proposing a risk-based approach for regulatory requirements. Foreign companies must incorporate a company under Hong Kong law and apply for a license from the HKMA in order to carry out these activities in Hong Kong.
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