Crytptocurrency is Alive and Well in China

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About 4,000 years ago, the Chinese invented a game called “Keno” – which is still played today. It’s number-matching game – a cross between bingo, poker and roulette.

Over the last 40 centuries gambling in China has been banned completely more than 100 times.

Throughout the Xia (1900-1600 B.C) and Shang (1600-1027 B.C.) dynasties aristocratic Chinese continued to gamble.

China’s Central Government currently sanctions a variety of lotteries, including The China Sports Lottery and the China Welfare Lottery.  Outside of the lotteries, an estimated one trillion Yuan ($160 billion USD) is wagered in illegally in China every year.

Chinese culture tends to embrace math and risk taking. It follows that cryptocurrencies have become extremely popular in Asia.  According to Bloomberg, in January 2017, 95% of the world’s Bitcoin trading was done inside China’s borders. Bitcoin mines are buildings equipped with industrial microprocessors where “miners” solve complex math problems and are rewarded with digital currency.

Sichuan province (pop. 81 million), which occupies most of the Sichuan Basin and the easternmost part of the Tibetan Plateau – is sometimes referred to as “the capital of bitcoin mining”.

Up in the remote mountains, China has cheap hydropower, ideal for the high electricity needs of the computers required for mining bitcoin and other cryptocurrencies.

These mining operations are typically tucked away from prying eyes – sometimes 50 miles from the nearest paved road.

By February, 2017 things started to change.  First, the Chinese government stopped Bitcoin investors from removing their coins from exchanges.  By January, 2018 the yuan had officially disappeared from cryptocurrency markets.

So – are virtual currencies dead in China?

Not at all.

According to Michael Foster, co-founder of Local Ethereum, “China’s over-the-counter market for cryptocurrency is currently booming.”

Although it is illegal in China to hold initial coin offerings, or to trade cryptocurrencies, many of the Chinese bitcoin mining companies are still operating. For traders, a variety of technical mechanisms, involving Virtual Private Networks (VPNs) allow traders to complete transactions.

After the crackdown, some Chinese cryptocurrency companies like Huobi set up offices in Hong Kong, Singapore and South Korea. Binance – a crypto-to-crypto currency exchange recently opened a trading center in Japan.

The Chinese government perceives cryptocurrency as a threat to its ability to control flows of money into – and more importantly – out of – China.

Currently, Chinese citizens can only move $50,000 a year out of the country.  Virtual currencies offer a work-around to those regulations.

Donald Zhao, a Chinese currency expert said: “It is common for people to use VPNs to trade cryptocurrencies.”

Cai Wensheng, a billionaire Chinese entrepreneur, recently told a conference audience, that despite the new regulations, 80% of the world’s bitcoins are still being mined in China.

China executes about 2,000 offenders every year – including white collar criminals. Chinese courts have a 99.9% conviction rate. The insides of Chinese prisons are rumored to be unpleasant.

You may wonder why anyone would incur the risk of prosecution mining Bitcoins in a country with such a draconian penal system.

This goes back to the issue of gambling.  Most Chinese are law abiding.  But when substantial illegal rewards are within reach – risk-takers will come out of the shadows.

For instance, in 2016 China’s President Xi loudly announced his intention to crack down on corrupt officials (“tigers and flies) who accept bribes or abuse their power.

Despite the warning, the Beijing-based Central Commission for Discipline Inspection released the following statistics for 2017:

  • 122,100 individuals criminally prosecuted
  • 159,000 individuals punished for corruption
  • 61,000 officials punished for lack of frugality
  • 1,300 fugitives returned to China for punishment
  • $151 million USD illegal monies recovered

Even though China has been averse to cryptocurrencies, it’s embraced blockchain technology, which is the technology that underlies cryptocurrencies and a number of other non-currency based applications.

According to the World Intellectual Property Organization (WIPO), in 2017 China led all nations in blockchain patent registration.  Of the total 406 blockchain patents filed, 225 were from China, 91 from the U.S. and 13 from Australia.

In fact, the Chinese government has financially backed the China Blockchain Development Center – which has the stated objective to commercialize and standardize of blockchain technology. China’s conflicting position on cryptocurrencies and blockchain, underscores the disruptive potential of both technologies. It would be easy to proscribe both, but China doesn’t want to get left out of a blockchain revolution.

In spite of the recent pullback in the cryptocurrency market, we are still long-term bulls. We believe the shakeout is very healthy for the market, and once things stabilize and the space matures, it has a very bright future.

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