The Chinese Way of Cryptocurrency Regulation
Recently, the Chinese authorities have imposed a ban on cryptocurrency transactions and mining within the country, and begun fighting against services and exchanges that help circumvent the ban and trade cryptocurrencies in foreign markets. Both the storage of cryptocurrencies and investments in the industry were outlawed, and portals with information about cryptocurrency rates were blocked.
The Chinese Central Bank described its goal as follows: “Resolutely stop the popularization of virtual currency, strictly suppress illegal financial activity and crime, protect the property of citizens and by all means maintain economic and financial order and social stability.”
As a result, the only allowed cryptocurrency in China should be the digital yuan.
In this article, we will talk about the Chinese way of developing cryptocurrencies and what the digital yuan is.
Did you hear about China’s digital surveillance system? You can learn more here.
A little history
Before the first cryptocurrency rush in 2017, China had become a very influential player in this industry, turning into a center for both trade and production of equipment for mining and direct bitcoin mining. However, soon the country’s leadership decided on its final position: a strong government was not compatible with decentralized and anonymous cryptocurrencies.
A super-confident digital currency posed a threat to the state. At the same time, they decided on a new direction: China needs a digital yuan. Now that its own virtual currency is getting closer to reality, the pressure on cryptocurrencies is increasing.
In 2011, the first BTC China crypto exchange was launched in China, and in 2013, the largest manufacturer of mining equipment, Bitmain, was created. They were followed by the emergence of new crypto exchanges and mining farms. In China, they were well acquainted with electronic means of payment thanks to Q-coin, an in-game currency from Tencent. It was valued on the secondary market, and people resold it for real yuan.
Last fall, the first digital yuan replenished the wallets of ordinary citizens. As part of the largest trial run, 50,000 citizens of the country received 200 digital yuan each (about $30). They were available in a special application, the download link for which the government sent out via messages. On the screen of this application, people were able to see the coveted amount, which they could use to pay for purchases from 3,000 merchants (shops, cafés, taxis, etc.) participating in the trial.
In the summer of 2021, it was already reported that there were about 20 million wallets with digital yuan, and by November transactions totaling $9.7 billion had been carried out, and the number of pay points that are technically capable of working with digital yuan increased to 1.6 million.
These wallets are not only an application on a smartphone, but also wearable devices in the form of watches and bracelets.
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What is the digital yuan?
The digital yuan is like the regular paper yuan, but only in digital code. The existing popular cryptocurrencies at this stage are not just virtual money, but an asset, the measure of the value of which is constantly changing due to limited emission and the mechanism of supply and demand.
A digital yuan will cost the same as a paper one. It is also subject to inflation, is also issued by the Central Bank of China, and also circulates in the total money supply. The central bank refers the digital yuan to the monetary aggregate M0 – cash (similar to standard coins and banknotes in circulation in the economy.)
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Each unit of digital currency is uniquely identified, has a high degree of protection against counterfeiting, but has no material embodiment. In fact, it is stored in the database of the Central Bank, where its owner is recorded. This makes it related to non-cash money in a bank account in that it can be changed at any time to real pieces of paper, and the commercial bank is responsible for the safety of your account.
One might ask, why do they need a fully digital yuan? After all, in some rural area, you can’t always connect to the internet to pay for bread from your wallet in your phone. But the digital yuan has one key advantage that can make it more attractive: the ability to use it offline, without any internet connection.
As part of one of the testing stages, users of some Huawei and Vivo smartphones had an offline wallet function through a special application for offline payments. If there is no connection, this application does not need to perform an operation through the server system. Instead, the participants of the transaction had to verify the identity of the parties to the transaction, confirm the transaction information and make payment through the wallet.
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In addition, users can pay using offline QR codes, offline peer-to-peer payments based on short-range communication technology, or online payments through e-commerce platforms.
There are even real physical incarnations of wallets with yuan embedded in chips. Such a device was developed by the Postal Savings Bank of China. It is a card with a small black-and-white screen in the upper right corner, which shows the balance of funds.
Why do people need a digital yuan?
It seems that the digital yuan fits into the modern policy of tightening supervision of major technology giants in China. According to some estimates, almost $20 trillion passes through the Alipay payment system, and internet giants such as Alibaba control huge financial flows, trade, content, and data on hundreds of millions of users and are becoming too influential. China wants to regain control over payments that are increasingly hidden in mobile applications, the data from which belong to private firms.
This will give the government a more complete picture of how money moves in the country, what is hidden behind the cash turnover and in mobile payments, will help prevent illegal activities (including money laundering), and will also shed light on the shadow economy.
Official Beijing has long had a reputation of a government that closely monitors the lives of its citizens. Therefore, the digital yuan will be associated with another way of monitoring the population.
A significant difference between cryptocurrencies and the digital yuan is not only that the state runs the issuance of the latter, but also that the yuan will only have a certain “controlled anonymity.” To get a wallet, you only need a mobile phone number. However, in order to get that, you need to provide all your passport data, so that “anonymity” really remains only in quotation marks.
And the acceleration of the development of the digital yuan is associated with the threats that were seen in cryptocurrencies. That is why in recent years, crypto trading was first banned in the country, and then the miners themselves came under attack.
In addition, the circulation of the digital yuan will reduce the costs of issuing banknotes and operations connected with them (cash collection, ATM network), and it will be more convenient to calculate tax deductions and make incentive payments to citizens. Digital currency can also reduce transaction fees, as current payment systems (for example, Visa or Mastercard) receive their own remuneration for each transaction.
What other solutions do countries have?
In Japan, for example, bitcoin is recognized as legal tender, the operation of the market is regulated by the law on payment services, and the Financial Services Agency (FSA) acts as the supervisory authority. Cryptocurrencies can be used for settlements, exchanges are required to obtain licenses, and crypto companies are required to comply with KYC and AML requirements – to check customers and counteract money laundering, to undergo an audit once a year, to have a physical office, and keep accounting.
In Australia, the authorities recognized that cryptocurrencies are a digital revolution in the financial sector, and decided to regulate them in order to bring the market out of the shadows. This year, the country is preparing to adopt a new law on the regulation of cryptocurrencies.
Cryptocurrencies are allowed in Sweden, but there is no separate law regulating the activities of crypto companies. Exchanges and crypto services are required to work according to the rules of regulation of the financial services market – to register, provide transaction data and counteract money laundering.
But the country treats mining harshly: Sweden proposes to ban it throughout the country due to the fact that, according to the authorities, the mining of cryptocurrencies may interfere with compliance with the Paris Agreement on Climate Change.
Despite the difficult relationship with cryptocurrency at the state level, China’s enthusiasm for blockchain technologies is huge.
Taking into account state-funded research, state support for industrial crypto-mining enterprises, as well as the country’s clearly discernible tendency to be at the top of blockchain technology, it is safe to say that a number of breakthroughs in blockchain technology should be expected from China in the near future.
The list of countries with no tax for cryptocurrency mining – find them here.