China is one of the leading countries when it comes to the usage of cryptocurrencies. Mostly because of all the trading and mining activity that takes place there. As of September of this year, China-based cryptocurrency exchanges made up over 45 percent of the global market share and it is estimated that about 80 percent of all Bitcoin transactions take place in Yuan.
Unfortunately for Chinese traders, authorities of the country declared early last month that all trading activity related with cryptocurrencies was now considered illegal. This ban on digital currencies took a lot of people by surprise, mostly because a bunch of regulations regarding Initial Coin Offerings had been made just a few days earlier and most people involved thought these restrictions wouldn’t go much further than that.
This ban will undoubtedly have several consequences in the market of cryptocurrencies. China’s influence in the world’s economy is just too big to have such an event pass by unnoticed. But to understand the actual complexity of this issue we have to analyze it in more depth, so let’s get in context and try to look at the facts as they are.
Understanding the Ban
China’s central bank claimed that they decided to take action against ICOs because they were a mechanism for “illegal fundraising, illegal securities issuance, financial fraud and criminal activities”. In general, Chinese authorities justified the general ban by saying that these were disrupting the country’s financial order.
Some people claim that this is just another way for the Chinese state apparatus to control the country’s economy. Cryptocurrencies were removing financial boundaries for individuals that reside in a country that’s known for its strict currency exchange regulations and other forms of control over their citizens’ financial activity.
This is, however, an event that lines up with initiatives in the US and Japan, where governments have recently started to create legal means to regulate ICOs and the overall cryptocurrency market. Still, the measures that have been taken in these countries aren’t nearly as strict as banning all trading activity. Perhaps the Chinese authorities will eventually adjust to the policies adopted by their peers once the market’s situation has reached a more stable, mature state. After all, cryptocurrencies and blockchain tech in general represent a big opportunity to revolutionize a country’s financial system in many ways.
The first immediate consequence of this ban was the collapse of the value of many cryptocurrencies over the world. Bitcoin, for instance, dropped from about $4900 to below $4200 the day ICOs were deemed illegal in China. Although this impact actually seems to be rather small when you consider that the currency had surged more than 390% since the start of the year. A 15% percent drop could be perceived as a short rest in a climb that doesn’t seem to be stopping anytime soon. The value of bitcoin has since recovered and reached new heights well above the ones it had at that point.
As you can see, the most regrettable repercussion of the ban isn’t actually the price drop. It’s actually the dismantling of all startups that were in the process of performing an ICO. The Chinese government released a long list of ICO trading platforms and had them taken down. Most of the funds contained in these were returned to their investors or redirected to other places with stronger investor protection policies, which is most likely the reason why Bitcoin prices resurged very quickly.
The Current Landscape
As we mentioned, China’s regulatory measures aren’t the first seen from a developed country and are definitely not the last to come. A lot of governments are currently making a lot of effort to find ways to deal with the digital currency revolution that’s already knocking at their doors. The impact these currencies are having on society, positive or negative, is making financial authorities around the world realize that they need to be prepared for what’s to come and prevent it from getting out of their hands.
As contradictory as it may sound, China’s central bank declared publicly that they are developing their own cryptocurrency that’s supposed to serve as a digital version of the Yuan. They seemed to acknowledge the benefits in terms of cost, coverage, convenience and security that a government-backed digital currency could have on the country.
This, of course, is most likely just another way of preventing Chinese citizens from bypassing the country’s capital and currency controls, but it’s still a step towards a more positive direction. As more and more big institutions get involved in the cryptocurrency revolution, there’s a bigger chance they can reach a middle ground and join forces with the ones involved in this market to get the most out of all the innovations.
As for Bitcoin and the other currencies, they’re still thriving and reaching unprecedented heights, so measures like China’s ban don’t necessarily have to translate into a lethal hit for the cryptocurrency market as long as they’re carried out carefully. It shows that this revolution is here to stay and that we’ve got to take advantage of it while it’s still a fertile field for opportunities.
Will Regulation Be the End of Bitcoin?
In a way, government regulations on cryptocurrencies are something that contradicts their nature. A lot of people attribute the success of Bitcoin to the moment in time where it was created. The world’s economic recession of 2008 hit hard a lot of people who, as a consequence, ended up losing the trust they had for state-controlled financial systems.
Digital currencies represented a nice alternative that could free them from the restraints imposed by governments and banks. The fact that governments are putting their hands on this means, for some, that cryptocurrencies are starting to become the same thing they were meant to avoid. Still, the fact that they have the internet on their side means that their complete regulation is a scenario that’s nearly impossible to picture. Right now, many US and Chinese citizens are bypassing legal restrictions on ICOs by using VPNs and similar tools and, as long as prohibitions are imposed in similar circumstances, this will keep happening.
Although, the lack of regulations on digital exchanges is a topic that’s really worth discussing. Worst-case scenarios on this market are some very extreme catastrophes that could really affect the global economy. For instance, some like to see Bitcoin’s accelerated increase of value as a ‘bubble’ that’s about to explode. Similar to what happened in what’s now called the dotcom bubble which seriously impacted the technology industry.
If the price of Bitcoin drops dramatically, worldwide markets could take a hit. This is the main motivation for governments to start preparing themselves with regulations and legislation on the topic. It’s only up to us to handle this revolution with the responsibility it demands and exploiting its virtues to get the best out of them.
Cryptocurrencies are changing the world in unprecedented ways. They’re not only creating a very prosperous market and investment opportunities for a lot of people. They’re allowing many others to have access to a financial system that seriously improves their lives and chances are that this will only improve with time, but only if it’s handled properly. As more people realize this, the way of digital currencies into the mainstream world will only open more and more.
If you’re one of the ones affected by the Chinese ban, then you shouldn’t panic just yet. Cryptocurrencies are just too much of a good thing to be left out completely. Some estimate that this ban will only be temporary, and even if it’s not, chances are that you’ll still be able to find a way to join the market again like it happened with the regulations imposed over other things.
Please share your opinion about the news in the comments.