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Bitcoins in China: Trends and Challenges; By Roshini Rajshri

Image Courtesy: Altcoin Today/ NewsBTC

Article No. 055/2018

Introduction

Cryptocurrencies are digital currencies which uses cryptography to secure and verify transactions using a computer line which holds its monetary value.   Bitcoin is a type of cryptocurrency which uses encryption technology to regulate the generation of currency and to verify the transfer of funds. It is decentralized and works without a central bank or single administrator.

Many attempts were made since the 1990s for the creation of cryptocurrency but due to the failure of digital cash production the growth had curtailed.  (The digital cash production had failed because the transaction is facilitated with help of a trusted third party and other actors which in turn led to money laundering).

Bitcoin had begun gaining significance due to the blockchain technology which uses a public ledger for maintaining details regarding all the transactions that takes places within a network. Every transaction is stored in the form of a file containing public keys for both the sender and the recipient (i.e. a wallet address) and the amount that has been transferred. Most importantly, the details that are stored in the ledger can be viewed but cannot be retrieved or altered.

Moreover, the blockchain technology cannot be hacked. If a computer’s blockchain updates are hacked it will be rejected by the system. Changes can only be made when innumerable sites agree for the same change. The only way in which systems can be hacked is when all possible system locations in the world, when located (whereas billions and millions of computers) could be hacked. It is believed that it is theoretically possible, but in reality, it would be hard to hack the blockchain system which attracts the users for further accumulation of bitcoins.

Anyone can access the internet and suitable hardware can participate in mining. Within the network, only miners can solve the cryptographic puzzle, in order to obtain the details regarding the transaction. Once the transaction is confirmed, it is irreversible.

Bitcoins are stewarded by miners, massive network of people who contribute from their personal computer. They also maintain a record containing the details of bitcoin users. They are paid for auditing work by earning new bitcoins. And in case the bitcoins were lost by owner of bitcoin then the money invested is also credited to miners.

Bitcoin mining will be stopped when it reaches a maximum of 21 billion coins. Few countries permit bitcoin mining but prohibit its possession and usage. In some countries, it is not even recognized as currency, while it can be considered as an asset or property.

The China factor    

About 80% of bitcoin mining is done in China. The reason for higher production is that they use their surplus hydroelectricity in bitcoin mining. The mining process is mostly done in areas that are sparsely populated so that the electricity can be utilized at most for the production alone. In China, bitcoin users are not charged for trading via bitcoin exchanges. Though the Chinese government has not recognized bitcoin as a currency, this cryptocurrency has seen tremendous growth in the Chinese market.

The timeline of bitcoins in China shows that, prior to 2013, People’s Bank of China (PBOC) and other financial regulators issued a joint notice stating the risks that are associated with the bitcoin usage. It was not recognized as a currency rather it was only recognized as “a commodity which is traded online”[1]. The Government permitted the people to buy bitcoins at their own risks. While in 2014, Bitcoin was considered similar to a rare stamp, so that the collectors can purchase them as an item for their collection which also holds a value.

In 2016, the Chinese government decided to issue a sovereign digital currency with an intent to reduce the risk of money laundering and to curtail the cost of circulatory bank notes. By 2017, the Chinese government investigated bitcoin exchanges in China and found out the risks associated with it. There are some practical risks. For example, if an owner wants to purchase some goods from shop 1 using bitcoins but does want to wait for transaction time/ buffering, he quits his purchase and moves to another shop where he again uses the same bitcoin to carry out the payment. In the meantime, he had obtained the good from the shop 2 but the payment was already made to shop 1. So, the shop 2 owner has lost his goods as well as the money due to the haste of the user.

In Mid 2017- Initial Coin Offering (ICO) was launched- a cryptocurrency venture through which funds are raised. Due to its potential vulnerability to scams and terrorist financing, ICO was banned in China which led to the fall of bitcoins by 6%. As ICO, a cryptocurrency venture lacking transparency and a decentralized process could lead to many fraudulent activities, the Chinese government and PBOC sensed the high chances of risks associated with bitcoins. Hence, the bitcoin market faced a fall in prices. The prices dropped to as much as 6%, which also reflected in its peers Ripple, Ethereum and Litecoin falling more than 4% in value.

Bitcoin is an innovation and it is perceived as an advancement in technology which China cannot deny. Saying “no” to bitcoin is eventually not a solution to the cryptocurrency issue. Shutting down of ICO’s and cryptocurrency ventures is not the possible solution.

There must be a more fundamental approach which does not adversely affect the financial systems. Beijing has to tighten the regulations, it has to regulate the process of cryptocurrencies. There must be proper monitoring of transactions which to an extent can reduce the level of risks.

China, which has a control over its banking system and can also allocate funds according to political agenda, can resolve the issue of cryptocurrencies without imposing a ban on it. Banning of bitcoin trade will not stop the bitcoin escalation. Beijing has second thoughts on bitcoin banning, there are chances of lifting the ban on bitcoin in near future.

The Chinese ban on bitcoin exchanges instigates the following questions?

What are the problems that are associated with the bitcoin functioning?

Bitcoins are associated with security risks. It can be used for illegal purposes (International black market). The problems associated include:

STEALING PRIVATE KEYS:  The private keys which are stored in bitcoin exchanges or personal cloud exchanges are used by hackers to steal money from the bitcoin coin user’s fund.[2]

Will a ban on bitcoin affects China’s economy?

China’s bitcoin banning and its effect on the Chinese market can be interpreted on

a long-term basis. At present, bitcoins can be obtained by users at their own risk.

Bitcoin ban may or may not have an effect on its economy it can be pertained on a long term analysis, there can be changes which can occur in their markets,  whether it may have a positive effect or vice-versa.

What are the regulations that can be suggested for implementing bitcoin?

Bitcoins are pertained to risks due to lack of awareness among users. Some users store their private wallet details in the same virtual wallet as bitcoin funds, thereby helping hackers to steal their funds.

Bitcoins must be subjected to certain regulations to monitor its functioning and implement measures that reduce the risks.

As bitcoin is decentralized it cannot be held responsible under the government. But the government must assure a security, which enlarges its consumption.

In China, bitcoin consumption and mining occur at relatively high quantities. So it is rather a need for its government to formulate any policies for regulating its mechanism which enables efficient functioning.

Bitcoin has attracted millions of users for consuming it because of its inherent characteristics like freedom in payment, rapid transactions, protection from identity theft. But at the same time, it has certain drawbacks. Bitcoins are not regulated by the government and does not hold a legal status which makes it uncertain for users for consumption as it lacks transparency.

Bitcoin is perceived as a threat because it could be mostly used for illegal business by criminals as it is difficult to trace the information. As a nation, it has to prevent money laundering, which forces nations to curb its production by imposing a ban on it.

China’s ban on bitcoin exchanges can be seen as a way to prevent further malpractices, but China as a developed nation can handle the issue of cryptocurrency through a fundamental approach by regulating its mechanism. The question of whether China’s ban on bitcoin exchanges may or may not be lifted depends on the Chinese perspective on bitcoins.

Reference

[1]  Sidney leg , South China morning post https://www.scmp.com/news/china/economy/article/2132119/beijing-bans-bitcoin-when-did-it-all-go-wrong-cryptocurrencies

[2]  Nathan Reiff, Investopedia https://www.investopedia.com/news/how-might-chinas-ban-affect-bitcoin/

(Roshini is a research intern, C3S. She is currently pursuing her M.A in Defence and Strategic Studies at the University of Madras. She has attended various national seminars hosted by the Department of Defence and Strategic Studies. Her areas of interest include international relations, demographic politics, and conflicts in South and Southeast Asia. She has carried out the research under the guidance of the members of C3S. The views expressed in this article, however, are of the author.)

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