China’s Current Cryptocurrency Policies: Drawbacks and Possible Progressions
During the year, people on the Internet continuously excite around NFTs and metaverses, describing them as how the Internet should look in the next ten years. Beginning from the creation of Bitcoin in 2009, blockchain technology and cryptocurrencies are always under the spotlight, and an exciting part about Bitcoin is its mining mechanism. While enthusiasts around the globe are mining and trading Bitcoin and other cryptocurrencies, Chinese geeks are banned from participating in them. Trading cryptocurrency and Initial Coin Offerings have become illegal in China since 2017, and even mining them became strictly unlawful starting in 2021. Some critics may argue that banning crypto mining saves a substantial amount of electricity. However, a total negation towards cryptocurrency has caused the loss of energy and economic interests in various remote regions in China. Moreover, such a total ban has prevented the Chinese public from accessing multiple opportunities the thriving blockchain industry provided, worth more than $1.8 trillion now while failing to achieve the intended purpose of curtailing financial crimes and keeping economic stability.
Bitcoin mining is an energy-intensive process of creating new bitcoins and maintaining the security of the bitcoin network. China was once the dominant country in bitcoin mining for a noticeable time. Past estimates have shown that 65% to 75% of the world’s bitcoin mining happened in China — mostly in four Chinese provinces: Xinjiang, Inner Mongolia, Sichuan, and Yunnan (Sigalos). The energy sources for mining in these provinces are different. Sichuan and Yunnan’s hydropower make them renewable energy meccas, while Xinjiang and Inner Mongolia are home to many of China’s coal plants (Sigalos). By mounting numerous mining machines and utilizing the cheap energy sources in these provinces, bitcoin miners can profit from the fierce competition in mining bitcoin. Consequently, they contribute a significant portion of taxes to the local government. For some remote places, bitcoin mining has even become their dominant industry in the area, contributing significantly to the economic development of Chinese rural areas.
Despite creating numerous economic benefits, the mining industry faced significant problems in China. Due to the high pressure from regulatory authorities, China’s percentage in the industry has dropped dramatically. Michel Rauchs, Digital Assets Lead at the CCAF, declared mining operations in mainland China had effectively dropped to zero, from a high of 75.53% of the world’s total Bitcoin mining in September 2019 when this data was first recorded. In other words, the bitcoin mining industry has disappeared in a second due to the government’s new regulation policies in May 2021. Many bitcoin mining farm owners have migrated to places like Texas, US, where they also provide cheap energy sources. While banning crypto mining has helped China conserve energy and progress in reducing its carbon footprint. Some may argue that banning cryptocurrency mining saves a tremendous amount of energy and leaves them for more appropriate use. Indeed, cryptocurrency mining has been cursed as a pure waste of energy by many public opinions. However, since bitcoin mining in China has been primarily using hydropower energy or unused coal-generated electricity, these energies have been left unused, and the hydropower energy is wasted. In the meantime, after China’s total ban on mining, the Bitcoin network’s use of renewable energy sources like wind, solar, or hydropower dropped from an average of 42 percent in 2020 to 25 percent in August 2021 (Vries et al.). In other words, the ban left renewable energy in rural China unused and pushed bitcoin farmers to use unrenewable power elsewhere. With that said, China’s energy use and carbon footprint reduction did not disappear but instead transferred to other countries like Kazakhstan and the US. Such transfer has been contradictory to the purpose of saving energy and minimizing climate impact when China loses its leading role in crypto mining.
With the inability to continue mining operations, local governments in rural areas have also lost a significant source of income. Moreover, when China dominates the industry, it has ceded the precious seat to its competitors, like the US, with prospective future leaders in the field. Since the US “has a stable, transparent regulatory regime that considers the industry before making any changes to the law,” it has been attractive for miners to settle down, as farms cannot be easily moved like coins (Ashraf). With a considerable loss in economic interests and role of domination, many critics oppose the total ban on cryptocurrency mining in Mainland China.
Given that mining cryptocurrencies have facilitated China’s economic development by using excessive resources and the loss of domination, why is the government insisting on banning them? The People’s Bank of China argues that its ban on cryptocurrencies is to curtail financial crime and prevent economic instability (Shin). Admittedly, the one-size-fits-all approach should curb many money laundering activities utilizing blockchain technologies since exchanging between fiat currencies and cryptocurrencies is strictly prohibited. Based on current regulations, the ban also helps prevent economic instability since it stops Chinese citizens from exchanging more than $50,000 foreign currencies per year. Nevertheless, while a total ban on crypto hides the problem temporarily, the intrinsic properties of blockchain make them even more unregulated, opposing the purpose of The People’s Bank of China. Since blockchain is decentralized and anonymous, it would be impossible to know who is trading with whom. As official exchanges are banned, traders begin to use peer-to-peer trading, making buying/selling cryptocurrency more invisible. With that said, cryptocurrency transactions still exist in China and remain “de-regulated.” When the government is hoping for an overarching solution for cryptocurrency-related issues, it brings everything back to the dark side and makes it harder to regulate. Hence, the policies should be revised to fulfill their original purpose.
While China excludes itself from the crypto boom, it also wants to seize the benefits of blockchain. Despite the ban on mining and trading decentralized cryptocurrencies, China does allow blockchains with restricted functions if they are under regulations. The Blockchain Services Network, a Chinese state-backed blockchain company, plans to roll out infrastructure that would allow individuals and businesses in China to make, sell, and buy NFTs (Mcgregor). It is fair to say that the company provides the Chinese public with restricted access to NFTs legally. However, it mandates identity verification processes to allow the state to intervene when illegal activities happen. Users are only allowed to “buy NFTs using only Chinese yuan instead of the cryptocurrencies commonly used to trade NFTs outside China” (Mcgregor). In other words, such an NFT marketplace has not only lost its decentralized and anonymous trait but also excludes users outside China since the Chinese yuan is the only currency accepted for trading. As NFT creators seek platforms that promote high liquidity and freedom of trading, such regulations restrict such platforms from the ground up to compete with leading competitors, such as OpenSea. Without usability for global users, such laws restrain China’s blockchain industry from communicating and thriving at the same pace with other parts of the world, thus ceding plenty of opportunities to other nation-states.
Many critics hold pessimistic views towards the possibility of China changing its policies since they assume China wants complete control over everything. Indeed, China is exercising an overarching ban on cryptocurrencies. However, China is also actively supporting the development of its blockchain industry. Ant Chain, for example, is integrated with one of the country’s largest mobile payment apps, Alipay. However, until now, “Ant Chain’s operations have largely been restricted to one region — greater China — and its businesses have mainly been conducted in one language, Mandarin” (Ong). In other words, it is exclusively operated in China for Chinese users. The fundamental problem of this kind of blockchain is that they are strictly state-controlled, and more importantly, they do not have its cryptocurrency and is thus not decentralized. Without decentralization, the substantial meaning of using blockchain technology is lost, and it will be more efficient to implement them through cloud computing. Therefore, these blockchains hardly help China progress globally in the blockchain industry.
As discussed, China’s current policies on cryptocurrencies cause the loss of economic interest and renewable energy, curtail some financial crimes but leave the industry “de-regulated,” and separate the country’s blockchain industry from other parts of the world. What would be a better approach for China to regulate cryptocurrency mining and transactions, offering financial stability and broadening access to global opportunities?
Let’s see how the United States, with 16% of its population invested in cryptocurrency, deals with its regulations. As of today, the United States does not prohibit the use of cryptocurrencies or Initial Coin Offering but is developing legislation to control and regulate the industry within its borders (Alvarez 40). Many substantial regulations are enforced. The US Securities and Exchange Commission has classified many cryptocurrencies as securities and handled them accordingly, and the Internal Revenue Service has categorized cryptocurrencies as properties and hence taxable. In other words, US citizens have the freedom to trade bitcoins as they wish, but they ought to complete identity verifications and fulfill capital gain tax duties just like trading stocks. The United States’ current cryptocurrency has found a balancing point between allowing the free development of its blockchain industry and curbing possible financial crimes and capital leaks. Comparatively, China’s current policies lean heavily on curbing possible financial crimes, consequently preventing the industry from thriving and creating gray areas.
However, it does not mean China’s current policies have no room for improvement. Based on China’s current financial regulations, a possible step forward for China can be to alleviate the total ban and gradually start building its cryptocurrency regulating regime. A starting point would be to lift the complete prohibition and issue exchange licenses to several compliant cryptocurrency exchanges. Like the United States taxes cryptocurrencies on capital gains, based on China’s current filing of personal income tax system returns, China can require its citizens to report capital gains by trading cryptocurrencies on state-approved exchanges. Moreover, if “a taxpayer receives virtual currency in exchange for services,” it is fair to charge them taxes based on the “fair market value of the virtual currency” (Erdmann 60). For occasional occurrences, cryptocurrencies are used as mediums of exchange. The taxpayer should report these activities and fulfill income taxes correctly. With the mandate of state licensing and taxation, China will be able to keep fiat-related cryptocurrency exchange activities under its regulations. In the meantime, the country will gain additional economic benefits from taxes and offer energy-intensive remote regions of China another pathway to economic development.
Moreover, with China’s current foreign currency policies enforced, capital leaks are essential to the government’s regulation goal. Thus, it will be innovative to think of cryptocurrency as a form of foreign currency and frame it into the current foreign currency regulations. Each individual will be restricted to trade $50,000 worth of cryptocurrency each year within the existing framework without special approvals. Although not as promising as trading freely in the United States, it is a significant leap for China from its zero-tolerance of cryptocurrency transactions. Moreover, as citizens fulfill their taxation duties for the first $50,000 worth of cryptocurrency, the state can allow them to apply for a higher limit of trading and thus gradually open up the market to Chinese citizens. In this way, China can track potential financial risks and regulate the industry based on its needs.
Without losing state control, these policies will facilitate the revival of China’s blockchain industry. Based on previous harsh regulations, most Chinese blockchain companies have moved aboard to Europe and the United States, causing a loss of talents. As these new regulations gradually open the industry, local talents are exposed to opportunities that are hidden beforehand. Moreover, with the country’s overwhelming number of Internet industry practitioners, many will consider changing to the blockchain industry, as it might be the next era of Internet progression. These highly potential promising developments in the industry will soon bring China back to one of the dominators in the blockchain industry and continue exerting influence on the industry globally.
As nobody can make bricks without straws, China’s current cryptocurrency regulatory policies are not arbitrarily decided but a multilateral effort of various institutions. Nevertheless, it causes the loss of economic interest and renewable energy and obstructs professionals’ access to global opportunities. When considering possible refinements of current policies, it is essential to take China’s status quo of maintaining financial stability into context. Based on that, policymakers should pave ways to help the country’s blockchain industry thrive instead of implementing a one-fits-all solution. With progressive regulatory policies, blockchain industry workers have better chances to thrive and compete with global competitors and thus help the revival of China’s blockchain and cryptocurrency industry. By regaining dominant roles in the industry, China progresses in its extraordinary journey towards globalization and more significant global influences.
Works Cited
Alvarez, Michelle. “A Comparative Analysis of Cryptocurrency Regulation in the United States, Nigeria, and China: The Potential Influence of Illicit Activities on Regulatory Evolution.” ILSA Journal of International & Comparative Law, vol. 25, no. 1, 2018, pp. 33-.
Ashraf, Aoyon. Bitcoin Mining After the China Ban: US Dominance Is Set to Continue. 13 Oct. 2021, https://www.coindesk.com/markets/2021/10/13/bitcoin-mining-after-the-china-ban-us-dominance-is-set-to-continue/.
Erdmann, Charlotte A. “The Taxation of Cryptocurrencies.” The Florida Bar Journal, vol. 95, no. 4, July 2021, pp. 58-.
Mcgregor, Grady. “China Banned Cryptocurrencies, but It’s Going All in on NFTs.” Fortune, 14 Jan. 2022, https://fortune.com/2022/01/14/china-nfts-cryptocurrency-bitcoin-blockchain-ban/.
Ong, Jie Yee. “What Is Antchain?” MUO, 23 July 2021, https://www.makeuseof.com/what-is-antchain/.
Rauchs, Michel. “Geographic Shift — News & Insight.” Cambridge Judge Business School, 13 Oct. 2021, https://www.jbs.cam.ac.uk/insight/2021/geographic-shift/.
Shin, Francis. “What’s behind China’s Cryptocurrency Ban?” World Economic Forum, 31 Jan. 2022, https://www.weforum.org/agenda/2022/01/what-s-behind-china-s-cryptocurrency-ban/.
Sigalos, MacKenzie. “China Is Kicking out More than Half the World’s Bitcoin Miners — and a Whole Lot of Them Could Be Headed to Texas.” CNBC, 15 June 2021, https://www.cnbc.com/2021/06/15/chinas-bitcoin-miner-exodus-.html.
Vries, Alex de, et al. “Revisiting Bitcoin’s Carbon Footprint.” Joule, vol. 6, no. 3, Mar. 2022, pp. 498–502. www.cell.com, https://doi.org/10.1016/j.joule.2022.02.005.
