Cryptocurrencies and China have often been at odds in the past decade, with the Chinese government and other financial institutions like the People’s Bank of China (PBOC) banning various actions and aspects related to Web3. The most recent ban, and the most extreme one, came in 2021, as the PBOC banned all cryptocurrency transactions in the country, for a variety of reasons. And, while the situation surrounding the future of crypto in the country remains somewhat foggy, there have also been small signs that the bank and the Chinese government have started to lessen their grip over everything crypto, especially with regards to Hong Kong. Let’s explore why China announced a series of crypto bans in the past decade and why it may eventually overturn its own decision regarding the Web3 ecosphere.
A series of crypto bans and their causes
China first challenged the crypto world in 2013, when it made accessing crypto exchanges in the country more complicated for its citizens but did not outright ban the acquisition and storage of crypto. In 2017 however, the PBOC did take the ulterior step of banning crypto exchanges from operating in the country, but, again, did not forbid the ownership or mining of digital assets. And, finally, in September 2021, The PBOC announced the ban of all cryptocurrency transactions in China, making it illegal for its users to buy crypto or exchange services/goods for cryptocurrency.
While there are several reasons why Chinese authorities saw it necessary to take these significant steps to abolish the use of crypto in the country, the primary one is simple: capital flight. According to Chainalysis Blockchain data, roughly $50 billion in crypto left East Asian accounts between 2019 and 2020, with much of this outflow likely pertaining to China. Therefore, China felt the necessity to ban crypto and take more actions – for example limiting the purchase of foreign currencies at $50,000 a year – to rectify this outflow, especially considering Chinese nationals were able to acquire foreign assets in a much more facilitated manner through crypto.
And capital flight has not only recently been a worry for China’s economic entities: In 2017, the same year the PBOC banned the operation of crypto exchanges in the country, China also added restrictions on foreign investments by Chinese companies, indicating that capital flight was also then a major reason as to why financial institutions felt the need to challenge the rise of cryptocurrencies. However, the economic debacle faced by the world following the pandemic served only to accelerate China’s decision to ban crypto, with PBOC officials warning that the more rapid recovery of Wester economies like the American one could lead to further capital flight from the country. But capital flight is not the only reason that this decision was taken by the PBOC in 2021: among other worries relative to cryptocurrency, money laundering, the unclear legal status of crypto and the Yuan’s possible devaluation have also played an important role in the gradual banning of crypto assets.
An open door to Web3 in the future?
The ban of crypto trading and mining had a significant impact on the crypto world, as bitcoin’s hash rate dropped roughly 50% following China’s ban on mining in 2021, causing the currency’s value to plunge. However, Chinese authorities may yet decide to experiment in the Web3 ecosphere n the near future. As much as the several bans in the past decade have disrupted the movement and development of crypto projects in the country, there are still no specific laws against holding digital assets in China. Moreover, China is also actively working to implement a central bank digital currency (CBDC) known as the “digital Yuan”, a move that other major countries are also exploring with their national currencies.
In addition, and most importantly, two major cities and financial hubs, Shanghai and Hong Kong, have started developing their own Web3 projects, with the authorities’ blessing. Shanghai has announced it will spend billions of dollars to develop metaverse projects, while Hong Kong is attempting to develop its crypto industry and become a global crypto hub. Chinese officials allegedly appear open to this proposition, having already entertained the possibility in various meetings this year, indicating that Hong Kong is free to explore this pursuit so long as it does not threaten Chinese financial stability.
While these may end up being empty promises, considering China, and the PBOC, have tightened up crypto restrictions in years following covid, they may also be the start of a new relationship between digital assets and the global giant. After all, many economic powers – like Brazil and some US states recently – are opening their doors to at least exploring the possibility of major crypto projects. China will not want to be left behind as countries develop more or less-open crypto policies within their own economies, and this year will tell us a lot about their future intentions regarding digital assets.
