The final article concerning the state of cryptocurrency in China will provide an overall summary of the nascent industry. Whereas Part 1 closely examined the regulatory steps taken by officials to halt all cryptocurrency related activities, Part 2 scrutinized the effectiveness of such policies and the many examples of cryptocurrency involvement continuing to thrive. Part 3 will evaluate what the future holds for cryptocurrency in China and a personal opinion towards future success.
China’s Initial ICO Ban Was Reasonable and Temporary (Probably)
Following the People’s Bank of China’s (PBoC) original banning of Initial Coin Offerings (ICOs), there was a massive $35 billion wiped off total market capitalization in just four days. The ban was issued as the bank labeled token sales “illegal and disruptive to the economic and financial stability.”
However, while a blanket ban on ICO activity may seem very harsh (despite many Chinese residents still participating in numerous new offerings), it is not as bad as it may seem. At the time, the ban was among the better and more sensible options to protect investors at the very early stage.
While the general reactions to the U.S. Securities and Exchange Commission’s (SEC) warning on ICOs back in 2017 were positive, it was criticized by many for not further clarifying the issue. Declaring that tokens ‘might’ be securities has had a minimal effect on many future ICOs. The support showed by Quebec and the Isle of Man and their ‘light regulation,’ was regarded by many as a more productive way to handle ICOs.
Due to the tremendous size of the Chinese ICO market, individual case analysis is impractical. Also, the severity of the risk attached is alarming — the central bank estimates that a shocking ninety-percent of ICOs in China up until that point had been fraudulent.
Yet, China is not averse to financial innovation. While it was initially slow to the securitization sector, it has since developed rapidly. China’s payments industry is also among the most technologically advanced worldwide.
And as recent developments have shown, the Chinese central bank will not stand in the way of blockchain innovation. They most recently advertised openings for their blockchain sector as well as an active push on blockchain research, even sending a delegation to the U.S for further knowledge. Late last year it had also been revealed the bank was testing a blockchain-based digital currency.
Unlikely to Remain
It can be said the ICO ban doesn’t definitively discourage either ICOs or innovation. China understands that it needs to continue to modernize its financial system and combined with its stringent desire to become a significant player in the global market, it’s highly unlikely the ban will continue to stay in place for long.
It is likely that the restriction on ICOs will be similar to that of a pause. This will allow the market time to settle down and the regulators an opportunity to explore more sensible options and introduce better consumer protections. Also, the Chinese regulators have a history of stepping in, slowing things down, and then stepping back out again.
In a country infamous for its long traffic jams, this makes for a good analogy relevant to financial market regulation. Too much pressure on the accelerator (low-interest rates and relaxed authority) will lead to high speed and possibly calamitous results. However, slamming on the brakes (regulation and blanket bans) results in no progress, but provides sufficient time to examine the surroundings and plan necessary measures.
Once they are in place, this should provide the digital tokens a reasonable and sustainable start.
China Dominates Crypto Mining — Has Huge Influential Ability
A recent report published by Princeton University and Florida International University on October 5th, 2018 revealed China’s substantial influence on Bitcoin via public policy and private mining activities.
The report, titled, The Looming Threat of China: An Analysis of Chinese Influence on Bitcoin, argues that China has real intentions to control Bitcoin activity and more specifically have technologically mature capabilities to execute an attack against the Bitcoin network, in relation to the country’s tight economic control rules over the global internet infrastructure. Chinese officials are fully aware of Bitcoin’s increased value and economic utility, and the significance of disrupting such a vast and sprawling network.
It states, “One of the most powerful potential adversaries is the country of China, which has expressed adversarial positions regarding cryptocurrency and demonstrated powerful capabilities to influence it.”
The paper explains the dominance of Chinese businesses mining Bitcoin, resulting in the strict centralization of the protocol. Researchers state that six mining pools control mining — with China being the location of five — and, in tandem, contribute to eighty-percent of Bitcoin’s hashing power. It is well known that Chinese companies such as Bitmain and Antpool are the predominant players in Bitcoin mining.
Unsettling Situation
The research reveals that the five Chinese mining pools control seventy-four percent of the Bitcoin hash power. Akin to the country’s stringent policies, control over the network could result in damaging censorship attacks.
Blocks mined in China are close to a greater share of hash power, meaning validations and consensus are more quickly achieved compared to blocks elsewhere. Additionally, managers of the mining units have control over the inputs of their rigs; the hashing power is as a result indirectly controlled by Chinese authorities, who by law are authorized to influence a company’s business decisions.
This information exemplifies how the Chinese government can completely take control of regional hashing power, achieving an advantage in the selection of specific blocks for the ledger, which is crucial for a 51% attack.
The researchers believe that China’s ‘Great Firewall’ is responsible for mining rewards being distributed unfairly. They have noticed that non-Chinese miners suffer from increased hashing power in competing for rewards within the network, as China controls the flow of information for non-residents. This unscrupulous step is achieved via the mining of empty blocks which don’t contain any transactional data, yet provides rewards to miners while consuming expensive resources for the process.
The report substantiated their claims by combining the average rates of empty blocks produced by each mining pool, seeing that those based out of China created a much higher percentage of empty blocks — over seven percent. For comparison, the percentage for the non-Chinese pools was two percent.
However, empty mining blocks result in a much less efficient network, which led the researchers to question why the mining of empty blocks encouraged the Chinese miners. The benefits of such mining are limited to the respective miner. Additionally, mining such blocks result in filled blocks moving up the queue for confirmation, increasing the likelihood for the empty block miner capturing the filled block as well.
Sinister Motivations
In total 19 attack vectors were available to Chinese mining pools, under four categorizations: censorship, disruption, deanonymization and weakening consensus.
The deadliest action would involve destroying the Bitcoin network by forcing non-Chinese miners out and combining all the hash power to control Bitcoin; a moved named the ‘Goldfinger Attack.’ A second option would be to ‘weaponize’ the control over the network to destabilize foreign economies.
Both instances would result in rational miners fleeing the protocol and have no incentives for newcomers either. Bitcoin is steadfast in its role as an ‘ideological opposition’ to China’s communist ideologies and party so the country will aim to lessen the rise of any opposing factors as it strives to become a superpower.
While the report’s narrative plays out rationally, it presents a somewhat damaging view of China, especially with the latter’s push towards introducing blockchain standards and conducting government-backed experiments with the technology supporting cryptocurrencies.
China may act on its control over Bitcoin, but by destroying a network worth $114 billion and the foundations to millions of peer-to-peer transactions globally would undoubtedly shatter the nation’s reputation enormously.
Final Thoughts
The three-part series have carefully detailed the many complex ways China is still connected within the crypto universe. Despite the many regulations that were introduced, the actions by its residents prove that cryptocurrency related activities are stronger than ever.
We’ll most certainly see more questions regarding cryptocurrency credibility and viability. However, the fact remains the sheer attention afforded to the industry by Chinese officials already offers that validation. The short-term bans on ICOs and cryptocurrencies will prove to be minor setbacks and will only encourage the space on the longer term. Since China’s ICO ban, the markets have rebounded sharply, and there continues to be great interest among Chinese contingent ICOs. Following the Chinese banning of ICOs, only one month after the event, Japan’s Financial Services Agency showed initiative by officially endorsing 11 companies as operators of cryptocurrency exchanges with no plans to ban ICOs. China is very likely to drop its ban, only after introducing effective policies for regulation.
With tech markets worldwide continually investing in cryptocurrencies, it’s doubtful that reputation sensitive countries such as China will not allow themselves further innovation. Cryptocurrencies have the potential for being the future support for the financial industry, and eventually China, along with many other countries, will legitimize them.
The general sentiment among cryptocurrency enthusiasts worldwide is that the industry will survive this onslaught from Chinese regulators and in due time, prosper to a booming success. The future remains very encouraging for crypto and this includes China — however, should China in the very slim chance decide not to be involved in this future, it can make the situation very, very difficult for the industry.
Edited based on original article published on BLOCKZONE, leading digital media, events and information services company of GBIC
