June 23, 2022

China Bans Bitcoin: Five Questions that We Still Have

There have been a lot of rumors going around about why China decided to ban Bitcoin. It is important that we separate the facts from the myths, so that we can get a better understanding of what happened. In this blog post, you will learn about five questions that are still unanswered and how they relate to China’s decision on Bitcoin.

So why did China make this decision? The main story everyone knows is that the People’s Bank of China (PBOC) wanted to stop all Bitcoin exchanges from offering zero fee trading. They believed this to be unfair towards Chinese consumers, who are losing money every time they trade Bitcoins into RMB. It was already known that PBOC thought zero fee trading was unfair, but the way they went about it showed a lot of ignorance. PBOC didn’t consult exchanges prior to imposing such rules and exchanges were not given enough time to prepare. This led to many Chinese Bitcoiners losing all their coins on Chinese Bitcoin exchanges, which is why we saw an exodus into other cryptocurrencies that will be explained below.

Another reason why China banned cryptocurrency exchanges is because it wanted to stop capital outflows from the country. The PBOC along with many other financial institutions in China feel threatened by Bitcoin’s ability to help Chinese citizens move their RMB abroad. Some misguided economists also believe that moving funds offshore will increase the value of the RMB and strengthen it. The PBOC is fighting this trend by imposing more capital controls, which can be seen in the recent announcements of stricter rules about online payment providers and game publishers.

If you buy into both of these theories (that zero fee trading was unfair for consumers + that Bitcoin was used to move money offshore), then it should follow that China should disallow the usage of Bitcoin as a currency. This is why we saw PBOC taking an aggressive stance on ICOs and not allowing any Chinese company to accept cryptocurrency. The main reasoning behind this decision was to stifle capital outflows through cryptocurrencies, but also to stop RMB from flowing into other cryptocurrencies (which defeats the purpose of stopping cryptocurrency exchanges).

The other competing viewpoint is that China wanted to help its companies compete with their international counterparts by removing a lot of the transaction fees involved in overseas payments. This can be seen as a logical solution to China’s economic problems, where it needs to trade more with the rest of the world and not just focus on making goods for Chinese citizens. In this case, it would make sense to allow cryptocurrency exchanges and even invest in them to support development. This is the reason why we saw Chinese VCs investing in Indian exchanges and companies like Bitmain moving their operations from China to other countries. The reality of the situation is that nobody really knows the truth. It all depends on which media outlet you are watching, since there are many vested interests involved.

Another myth is that China banned Bitcoin for being a Ponzi scheme or a bubble. These claims are not supported by any facts of actual Chinese citizens losing money because of cryptocurrencies. The fact of the matter is that regulation was coming sooner or later and PBOC just beat everyone else to the punch. The same thing happened in Japan, where we saw a similar crackdown for the exact same reasons (zero fee trading, capital outflows). Bitcoin’s price dropped because people panicked and sold Bitcoin to avoid losing more money on exchanges that were not prepared for PBOC’s announcement.

The final myth is that Bitcoin is now finished in China. In reality, this is the best thing that can happen to Chinese Bitcoiners. We will begin trading on more international exchanges and also use Alipay and other online payment providers that are not as strict as those based in China. This crackdown by PBOC was a blessing in disguise for the rest of the world because it gave them a competitive advantage over Chinese Bitcoiners.

The complete domination of the cryptocurrency market by any country is over and we will see many more decentralized exchanges and cryptocurrencies allowing for anonymous trading in 2018. I expect to see Binance, OKex and other international exchanges growing very rapidly during this transition. China will continue to be a leader in mining hardware because it has access to cheap electricity and a lot of engineering talent that can quickly deploy new mining hardware. This will allow China to continue being a world leader in cryptocurrencies, even while trading is done on exchanges based outside of its borders.