In 2021 headlines about China banning cryptocurrency sent the market into a downward spiral, but it was far from the first time this has happened.
This has been happening since at least 2013. Everytime the cryptocurrency markets start to move it seems as if news about China banning cryptocurrency is sure to follow.
Cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) are heavily decentralized, which limits any central government's ability to stop them. China has taken the most aggressive anti-bitcoin stance of any country in the world – banning cryptocurrency on-ramps, mining and bank usage.
Instead of Bitcoin, China wants the people to use a different digital currency, the digital Yuan, which is entirely controlled and manipulated by the Chinese government.
Has China Banned Crypto Before?
China has a long history of attempting to stop Bitcoin and maintain a firm grasp on the monetary supply, but it wasn’t always this way.
Until 2016, China encouraged innovation in the digital asset space and quickly became the country with the largest amount of bitcoin miners in the world.
In 2016, China ordered the shutdown of cryptocurrency exchanges in all of China except Hong Kong. Then in 2017, China made initial coin offerings (ICOs) illegal.
In 2021, China made Bitcoin mining illegal and forced something now known as the Crypto Great Migration. Crypto miners from China ceased operations overnight and had to choose whether to sell off their equipment or pack up and move to another country entirely. This not only caused massive strain to the miners, but also to the Bitcoin network, whose total hash power was cut nearly in half.
Is it Possible to Shut Down Bitcoin?
Realistically, the only way Bitcoin could truly be stopped would be for every nation state in the world to come together and agree to ban it. This is the power of decentralized technologies, and what makes blockchain so important for humanity.
More than likely, the governments of the world will eventually be forced to concede to Bitcoin and other decentralized currencies or risk losing their relevance in the economic sphere.
This has become increasingly true as the global economy continues to become more borderless and interconnected via the internet. Countries will soon have to compete for entrepreneurs and those that are the first to adopt and support the crypto economy likely will position themselves for future success.
The Digital Yuan
Despite China’s rejection of Bitcoin, it is still an advocate of digital currency. The Chinese government has decided to digitize the Yuan instead of adopting bitcoin — a strategy that may very well blow up in their faces down the road.
The digital Yuan is a blockchain-based form of the traditional Yuan, China’s national currency. Unlike many blockchain currencies, however, the digital Yuan’s blockchain is not decentralized. It is controlled and manipulated by the Chinese government.
So why put it on the blockchain? More than likely for the transparency of information the blockchain provides. The blockchain will give China even greater ability to monitor money flows and determine how much money each of its citizens has.
This highlights an important point about blockchains: They are not all decentralized. Just because a blockchain has multiple nodes, does not mean that the majority has the interest of the people in mind. Other blockchains, such as the Binance Smart Chain (BSC), have been criticized for their levels of centralization.
What is Blockchain?
Blockchain is a buzzword used to describe decentralized technologies. Decentralized systems are anything that is not owned or controlled by a single entity, person or government. Instead, control is spread around the world to likeminded people with a set of common goals.
Let’s take the Ethereum blockchain as an example. The Ethereum blockchain is a virtual machine — a cloud computer. Think Amazon Web Services, except the computers that power the Ethereum blockchain are not all owned by Bezos. Instead, people around the world are paid to dedicate their computers’ power to the network.
This is important because no one person can make decisions for the group — it’s censorship resistant. Decisions are made by the majority, who have unique ways to achieve consensus. Consensus is determined by the majority of the network — whatever 51% of the network says is true will be recorded on the blockchain forever.
Bitcoin’s blockchain resembles more of a database than a computer. Bitcoin is digital gold, whereas Ethereum can handle turing-complete smart contracts capable of building full-scale decentralized applications.
Decentralized applications, also known as dApps, allow for more complex financial transactions. Lending platforms like Aave have more than $14 billion in liquidity locked on the platform despite being built by only 12 people. This speaks volumes to a smart contract’s ability to scale compared to traditional financial institutions.
Better yet, smart contracts cost far less to execute than a full-fledged bank with slow human employees and greedy executives. When loaning money to a bank, you may earn a 0.03% interest rate while the borrower pays 5%. The difference goes to the bank's bottom line.
On Aave, however, the interest rates are set by the market, and the lender earns nearly the entire interest rate. You can loan tokens like Compound (COMP) on Aave today and earn around 10% annual percentage yield (APY) on idle cash — not to mention potential appreciation of the underlying crypto asset.
Is Bitcoin Banned in China: Conclusion
While Bitcoin mining and on ramps are banned in China, Bitcoiners can sleep safely knowing their money exists on a decentralized database.
The Chinese government’s desperate desire to control the monetary supply may cause it to become irrelevant in a Bitcoin-dominated global economy of the future. Entrepreneurs discouraged by China’s stifling of blockchain and crypto innovation will choose to start businesses elsewhere. Perhaps in El Salvador, where Bitcoin gains aren’t taxed, and the cryptocurrency is accepted by retailers everywhere.