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The History of Bitcoin in China

China's history with bitcoin

China’s history of Bitcoin is a complex yet exciting and insightful matter that serves as an excellent case study for the whole industry.

Until recent government crackdowns, China had the strongest cryptocurrency market globally, with miners in the country contributing the majority of the hash power to the Bitcoin network. At the same time, many of the world’s leading exchanges and prominent digital asset businesses started out in the Asian nation.

However, the state instead went with another option and decided to ban all cryptocurrency-related activities just to focus on developing its digital yuan project to become a leader among major economies in the race to roll out its central bank digital currency (CBDC).

In this article, we will explore China’s history with Bitcoin, cryptocurrencies, and blockchain technology, from the early days of the industry to the most recent events.

Let’s dive in!

QQ Coin: China’s Case With Digital Currency Before Bitcoin

Period: 2002 – 2009

While Bitcoin officially launched in January 2009, China’s history with digital assets dates back to as far as 2002.

This is the year when Chinese internet firm Tencent introduced QQ coin (also known as Q coin), a centralized (pre-crypto) virtual currency that allowed its over 220 million users at the time to use it to purchase digital items at its store, which also proved to be an effective marketing tool to attract new customers and keep existing ones engaged.

However, QQ coin became so popular that many other online service providers started accepting it as a payment method for their offerings. Consumers found it a better alternative for small purchases than credit cards that weren’t really adopted by Chinese citizens.

Later on, the list extended with physical items like real estate and stocks as well as gambling to circumvent the country’s prohibitions around this field.

After a time, QQ coin got so popular that it turned into a parallel currency to the yuan, which led to a crackdown in 2007 by the People’s Bank of China (PBOC).

However, as its attempt was unsuccessful and resulted in a significant increase in the virtual currency’s price, the Chinese government decided to regulate the market in 2009. As per the new rules by the Ministry of Culture and the Ministry of Commerce, virtual gaming currency could be utilized exclusively to purchase digital items while making it illegal to redeem QQ coins for above their purchase price.

While QQ coin is reportedly used for a smaller portion of black market transactions (in addition to purchasing virtual items), the digital asset paved the way for China’s population to embrace cryptocurrency.

China Takes Leading Role in Crypto Adoption Soon After Bitcoin’s Launch

Period: 2009 – 2013

With the experience gained from QQ coin and the nation’s growing digital economy, crypto adoption went much more rapidly and seamlessly for both individuals and businesses in China after the launch of Bitcoin in January 2009.

One of the most important highlights during this stage is when BTCChina (BTCC) launched in June 2011 as the nation’s first cryptocurrency exchange.

However, real digital asset adoption only started in April 2013, when China’s first privately charitable fundraising organization became the first organization in the Asian country to accept Bitcoin donations and almost instantly received $30,000 in BTC from donors after the severe impacts of the Lushan earthquake.

This high-profile charity campaign was followed by a predominantly positive response from local and state media outlets, which many consider the first major facilitator towards Bitcoin adoption in China. No matter the truth of this statement, interest in cryptocurrencies started to surge significantly within the nation.

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According to Google Trends, search interest for the Chinese translation of the term “bitcoin” (比特 币) increased from March 2013’s 3 points to 18 points in April that skyrocketed to 73 points by December 2013. This represented a record-high interest among the search engines users that was only outpaced four years later during the peak of 2017’s bull market.

Later on in 2013, Chinese crypto entrepreneurs founded the cryptocurrency exchanges Huobi and OKCoin, along with Bitmain, which became the world’s largest Bitcoin mining equipment (ASIC) manufacturer by September 2018. At the same time, BTCChina took the lead from the infamous Mt. Gox platform to achieve a 32.5% market share in global crypto trading volume in December 2013.

Furthermore, cryptocurrency adoption has also reached large (non-crypto) businesses in China, such as the local search engine giant Baidu and Alibaba-owned ecommerce company Taobao that both had started accepting Bitcoin payments at the time from their customers.

However, besides the massive amounts of positive developments in the nation, China also had its share of adverse events between 2009 and 2013.

Probably the most important one happened in December 2013 when the People’s Bank of China banned financial institutions and payment services from trading cryptocurrency (or adopting it in any other way), citing that the action was necessary to prevent money-laundering via BTC. Although, this decision did not impact individual digital asset activity and only partly affected businesses.

As a result, while this caused Bitcoin’s price to fall and some confusion on the Chinese crypto market, digital asset adoption continued to rise among individual traders and private businesses in the country.

The Golden Era of the Chinese Crypto Market

Period: 2014 – summer 2017

In the last period, we explored how Bitcoin adoption kickstarted in China, in which the Asian nation managed to secure a leading role globally.

However, despite rapid developments in this field, the years until December 2013 only paved the way for the golden era of the nation’s digital asset industry, in which China served as a significant driving force behind the global crypto market.

That said, on the surface, 2014 wasn’t a good year for Bitcoin. Following the PBOC’s new rules for financial institutions, companies like Alibaba decided to ban all crypto-related activity. At the same time, digital asset businesses in China had to face new challenges, such as finding new ways to circumvent payment processors to fund customers’ accounts with fiat currency.

This was also the year when the $460 million Mt. Gox hack was revealed as well as when US authorities shut down the Silk Road 2.0 darknet marketplace (where BTC was used as the primary payment method for illicit products and services) and hosted two Bitcoin auctions seized from the original Silk Road.

At the same time, the massive BTC rally in late 2013 triggered a bear market for cryptocurrencies in 2014, in which Bitcoin’s price fell from $1,150 on December 4, 2013, to $320 by December 31, 2014.

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However, these adverse events didn’t stop China’s crypto market from expanding. In January 2014, the Chinese yuan dethroned the US dollar to become the top fiat currency for Bitcoin trading. By the end of the year, it was responsible for driving over 80% of the BTC volume on crypto exchanges.

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Interestingly, while this trend only reversed a bit throughout 2015 (when the CNY had an approximately 60% share), the yuan’s share in Bitcoin trading volume jumped way higher than 90% between early 2016 and early 2017.

In this era, China did not only dominate the crypto market in terms of trading activity. Individuals and businesses also leveraged the low electricity costs in multiple regions of the country, as well as the availability of relatively cheap and highly efficient ASIC equipment from local manufacturers to take the leading role in the Bitcoin mining market.

While three of the four largest Bitcoin mining pools were based in China in December 2015, possessing a combined over 60% share in the global hash power, this number increased to above 70% by the end of 2017.

Furthermore, the number of Chinese crypto businesses has continued to grow rapidly, with the likes of Binance and Kucoin experiencing surging demand for their exchange services soon after their launch.

At the same time, bullish trends started to dominate the cryptocurrency market in 2016, leading to a significant increase in digital asset prices between early 2016 and late 2017 due to the initial coin offering (ICO) boom that has also grown the number of startups in the industry within and outside of China.

And China was a major market for ICOs as well until the PBOC’s ban in September 2017. According to the estimates of the Beijing Internet Finance Association, crypto startups in China collected 2.6 billion yuan (nearly $400 million at the time) through 65 token sales throughout the first seven months of 2017.

Government Crackdowns Start Against Crypto

Period: September 2017 – 2019

While China continued to have a leading role in the cryptocurrency market after late 2017, the PBOC’s ICO ban in September 2017 marked the start of the local digital asset industry’s fall and also a series of government crackdowns against related activities.

On September 2, a committee led by the PBOC announced an immediate ban on raising funds via ICOs, arguing that this form of fundraising “has seriously disrupted the economic and financial order,” citing concerns over the increased risks of fraud and financial crime like money laundering.

In addition to the prohibition of token sales, the committee prepared a list of 60 cryptocurrency companies that would be subject to inspection and report at the time and ordered startups to refund investors for the funds they have raised throughout ICOs.

Of course, while this move drove down crypto prices for a couple of weeks, it neither halted the bull market’s advancements nor discouraged businesses and individuals in China from gaining exposure to digital assets through trading, investments, or mining. However, since it barred locals from participating in ICOs, citizens couldn’t access what became the main driving force behind 2017’s rising cryptocurrency market.

However, it was only the beginning of the crackdowns against the local crypto industry. Later in September, the government prohibited cryptocurrency exchanges based in Mainland China from offering fiat-to-crypto trading for their customers, ordering the companies engaged in such activities to close their businesses.

While the new rules still enabled Chinese citizens to trade, use, and invest in cryptocurrency, they had to utilize peer-to-peer (P2P) or over-the-counter (OTC) marketplaces or exchanges that are either based outside the nation’s borders or offer fiat-free services. Furthermore, many crypto trading platforms relocated their businesses to other jurisdictions, while some completely halted their activities.

In February 2018, the government extended the ban to all exchanges that serve Chinese citizens that include foreign service providers as well, blocking all websites that offer solutions related to ICOs or digital asset trading. According to reports on the case, this move was a necessary step from the state’s side, as locals could easily circumvent the rules introduced in September by utilizing an international exchange platform to gain exposure to crypto.

Of course, while this set of regulations didn’t stop cryptocurrency trading as citizens could still exchange digital assets in a peer-to-peer way – and didn’t really impact mining –, it significantly decreased the activity around the local industry.

In addition to reports of social media bans targeting crypto channels primarily on the WeChat messaging app, the PBOC extended its ban on ICOs with token airdrops in November 2018, which it considered “disguised” token sales.

In 2019, China’s National Development and Reform Commission (NDRC) published a revised draft list in which cryptocurrency mining was included along with over 450 further activities that it considered restricting or banning due to various reasons, such as the lack of decent measures safeguarding users, the inability to adhere to regulations, and a negative impact on the environment.

The Fall of China’s Crypto Industry Amid Rapid CBDC and State-Backed Blockchain Development

Period: 2020 – present

In 2020, after the pandemic hit the country, the crackdowns against cryptocurrency market participants became more significant and serious. Between May and December, miners either received notices from local authorities in Sichuan, Yunnan, and Inner Mongolia – three provinces highly favored by mining businesses –, or faced restrictions like the inability to access power from electricity providers.

In October, the PBOC published a draft law that reportedly aimed to prohibit creating or selling tokens that can replace the Chinese yuan as a currency on the market. Those violating the law could face fines up to five times the involved proceeds.

And this year, the Chinese government delivered the final blow to its cryptocurrency industry.

In addition to another series of investigations and restrictions against miners and consumer warnings about risks associated with crypto, ten agencies (including the PBOC and multiple regulators) joined forces in late September to introduce a blanket ban on all digital asset-related transactions and activity, including investing, trading, and mining.

And, unlike the government’s previous actions, this blanket ban effectively minimized (or nearly eliminated) cryptocurrency activity within the nation. In addition to causing a significant drop in crypto prices, China-based miners, businesses, and many other industry players have either ceased their operations or moved to jurisdictions outside the Asian country’s borders.

According to the University of Cambridge’s data, while China contributed 75.5% of the Bitcoin network’s hash power in September 2019, this number went down to nearly zero (or at least well above 5%) from July 2021, which allowed the United States to take the lead in this field with a 35.4% share in August 2021. At the same time, Chainalysis’ report shows that China fell back to the 155th place in terms of P2P exchange trade volume between January and June 2021 compared to its 53rd rank in 2020.

But why did the Chinese government decide to (nearly) eliminate its massive cryptocurrency industry? Fortunately, there’s an answer to this question that actually makes sense.

In the last few years, while taking a rather negative stance towards decentralized cryptocurrencies and blockchain solutions, China has put a major focus and dedicated a great amount of resources to developing state-backed DLT projects.

One of them is the Blockchain-based Service Network (BSN) project, which the government started piloting in October 2019 and launched in April 2020 in collaboration with companies like Huobi China, China Mobile, and UnionPay China. Featuring increased control from the state, BSN operates a global infrastructure for creating and deploying blockchain solutions that could help accelerate the development of the digital economy and smart cities.

In addition to the rapid development around the project, BSN has expanded its services with a multitude of partners as well as extended its availability with numerous regions and countries, such as Turkey, Uzbekistan, and Hong Kong, alongside mainland China.

However, a state-backed blockchain infrastructure is not the only reason why China decided to crack down on its local crypto industry. In addition to BSN, the PBOC has been rapidly developing its digital yuan central bank digital currency (CBDC) project in the last few years, which has allowed the nation to become the worldwide leader among major economies in this field.

With numerous completed pilots, China is at a late stage of its CBDC’s development, which the government plans to test at the 2022 Beijing Winter Olympics.

Based on all this information, the main reason behind the nation’s blanket ban against digital assets was to ensure that its CBDC and state-backed blockchain projects go as smooth as possible and without a major competitor in the form of decentralized cryptocurrencies.

From Lifting Bitcoin to Decentralizing the Crypto Market

Since 2009, China has played a crucial role in the rise of the digital asset industry, with the nation’s tech-friendly population leveraging their past experience and knowledge about virtual currencies to be among the first to adopt Bitcoin.

And, throughout the years, the Chinese cryptocurrency market has become a dominating force that was responsible for handling a massive amount of digital asset transaction volume and contributing the majority of Bitcoin’s hash power.

With so much of the activity concentrating in a single jurisdiction, one could argue that China’s dominance increased the centralization of the crypto industry.

For that reason, while China’s trading community has been instrumental in lifting Bitcoin, kickstarting its adoption, and testing its resilience, the government’s local blanket ban helps crypto to decouple from the Chinese market and become more decentralized and distributed.

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