There is no single approach in the world regarding the legal regulation of cryptocurrency. Most countries are wary of legalizing this payment instrument, fearing problems associated with tax evasion, terrorist financing, fraud and other illegal transactions.
Nevertheless, the issue of legalization of cryptocurrencies has recently moved to a different level as the market capitalization of cryptocurrencies grew to over USD 237 billion by 2020, with several leading Cryptocurrencies such as Bitcoin skyrocketing in value in 2021.
With countries working to assess and evaluate the scope and dynamism of cryptocurrencies, nations that made strict regulations to eliminate the use of cryptocurrencies are rethinking the earlier decisions. China is one of the countries that is revisiting the earlier regulations and working on amendments.
As Hong Kong started the regulation of digital assets, China has begun sending signals that it might reconsider its crypto ban. Consequently, providing hope for a potentially lucrative crypto market in the future. The current regulatory developments in Hong Kong and technological advances in mainland China suggest that the crypto ban might finally be lifted.
Since 2014, the PBOC has been developing a digital fiat currency fully backed by the government. The PBOC began conducting studies of digital currency several years ago when it established an Institute of Digital Money within the PBOC that has employed approximately 1000 researchers. Despite its
apparent interest in developing a digital currency, the government has taken a very cautious approach.
In March 2018, citing prudence, the need to avoid excessive speculation, and the country’s desire for the financial sector to serve the “real economy,” Xiaochuan Zhou, the then-head of the PBOC, cautioned that China was in no hurry to develop digital currency. According to Zhou, Chinese regulators do not recognize virtual currencies such as Bitcoin as a tool for retail payments like paper bills, coins, or credit cards, and banking systems are not accepting any existing virtual currencies or providing relevant services.
Likewise, in 2017, several other government agencies issued statements announcing the ban of
initial coin offerings (ICOs) in China, warning that tokens or virtual currencies involved in ICO financing were not issued by monetary authorities and could neither be accepted legal tender nor circulated and used as a currency in the markets.
Moreover, the Chinese government has severely cracked down on the private trading of cryptocurrencies in the name of protecting investors and reducing financial risk. Such restrictions have included the prohibition of ICOs, restricting cryptocurrency trading platforms, and discouraging the country’s massive Bitcoin mining market, which sent ripples throughout the global cryptocurrency markets.
In early 2018, the government banned all offshore cryptocurrency trading platforms after it was unable to eradicate trading following the shutdown of all domestic websites. This strict regulatory approach fits within the context of China’s overall economic growth and financial markets over the past 20 years.
The Chinese government has supported the development of the underlying blockchain technology to help modernize China’s financial system and to become a global leader in this cutting-edge technology, which it believes will have a similar economic and technological impact as the development of artificial intelligence. In 2019, President Xi Jinping stated that China needed to “seize the opportunities” presented by blockchain because it represents an “important breakthrough in independent innovation of core technologies.”
China now appears to be subtly shifting its stance on cryptocurrency. Hong Kong is forging ahead with new regulations suggesting that the crypto ban might finally be lifted. Hong Kong’s Monetary Authority (HKMA) is making substantial progress in crafting a regulatory framework for cryptos pegged to traditional financial assets, known as stablecoins. HKMA’s announcement of a stablecoin regulatory regime by 2024 is a significant development. Especially for a region that has traditionally taken a contrary approach to mainland China, where cryptocurrency trading remains illegal.
