Did China just ban cryptocurrency?
Wondering why the cryptocurrency market just threw itself off a cliff? Here's your answer.
The Cyberspace Administration of China has released a sweeping set of laws aimed at curbing the unruliness of the blockchain. The new regulations were published on 10 January and will start being enforced from 15 February 2019.
The gist is that the Chinese government shall have complete control over the information published on any blockchain in China; that users cannot be anonymous; and that blockchain providers need to start showing their users formal terms and conditions and service agreements that highlight the responsibilities of each party.
Here are the rules and some background in more detail:
Note: This is obviously not legal advice. It's a Google-translated and mildly editorialised interpretation of the new regulations.
- All blockchain providers within China are required to operate according to these standards. The Internet Information Office of each relevant region will be responsible for enforcing the laws.
- Self-policing will be encouraged. Essentially, everyone working on or with blockchain in China will be urged to get on board with the new rules.
- Blockchain providers must be able to control the blockchain, including the ability to remove illegal content from the blockchain and control what kind of information is published on it.
- Blockchain providers will be required to collect personal identification information from blockchain users, based on their company, ID card number or mobile phone numbers. Blockchain providers cannot serve anonymous users.
- Blockchain providers will be required to codify the terms and conditions of their platform, and obligations of providers and users, under formal service agreements.
- Anytime a blockchain provider develops new products, features, functions or starts offering new services, it should report to the local Internet Information Office to subject it to a "safety assessment".
- Blockchain providers and users should not use blockchains for illegal purposes (go figure), including those which "disrupt social order". Prohibited content shall not be copied, published or disseminated on blockchains.
- Blockchain providers must be registered, must clearly show the details of its registration so people know it's a legitimate service, and will be periodically inspected.
- Blockchain providers are required to take appropriate measures when they encounter users who break the law, such as alerting the appropriate authorities, and are required to take timely action to prevent the spread of illegal information.
- Blockchain providers are required to cooperate with authorities and render technical assistance where needed.
- There will be trouble for those who do not comply.
Did China just ban cryptocurrency?
Some cryptocurrencies might be safe, but others could be right out.
The skinny is that users and providers can only use legal blockchains, and decentralised networks are not legal because the service providers are not able to control the dissemination of information on the blockchain or remove illegal (ie embarrassing for the Chinese government) information.
Plus, there seems to be some broadness around the definition of a blockchain service provider. The regulations (via Google translate) describe blockchain providers as "the entities or nodes that provide the blockchain information service to the public" and "the organisation that provides technical support for the blockchain information service".
At the same time, it also calls for the blockchain industry to "strengthen self-discipline" and "improve the professional quality of the staff of the blockchain information service", although that part still seems to be a general guideline and doesn't have any penalties attached to it.
On the whole it sounds like there might be enough wiggle room for unpleasant things to happen to developers, node operators, wallet providers, blockchain users of any kind, and anyone else in China who can be identified as having touched an illegal blockchain in an illegal way.
How will this affect cryptocurrencies?
"Badly" seems like a safe answer. And the markets wasted no time throwing themselves off a cliff.
It might be time to start dividing cryptocurrencies into two groups: the potentially legal and the soon to be illegal in China.
The strictest element of the new regulations, which will probably be the deal breaker for most, is that it's only legal to provide or use a blockchain if the Chinese government is able to control the data on it, including removing it if needed. This means there has to be some kind of backdoor or way for a single entity to control transactions, remove blocks and so on.
Bitcoin and Ethereum might be right out, then. And does this mean EOS can only be legal in China if at least two thirds of its block producers are located in China so they can tamper with the blockchain as requested?
Other cryptocurrencies might fare better and it could actually bode well for the centralised ones which might accrue users from the exodus elsewhere. For example, China-based VeChain and its highly-malleable reputation-based DPOS system might do alright.
But what this means for China's cryptocurrency miners is another big question that might be tough to answer.
Is it actually enforceable?
The regulations come into play on 15 February, so the world won't have to wait too long to find out how this all plays out.
Wherever there is some kind of central authority behind a cryptocurrency, or where there's a wallet provider serving residents of China or where there's a mining manufacturer, they might have to start collecting user identities and showing terms and conditions if either they are based in China, or if the user is.
Of course, there's still nothing preventing people from just keeping on anonymously using international wallets, public blockchains and similar, but it might still whittle down user numbers considerably.
And there may also be the possibility that it's all just too difficult to effectively enforce so people kind of awkwardly ignore it, or that there's a lack of clarity in the formal definition of "blockchain" being used in these regulations. Arguably blockchains are decentralised by definition, so any network which meets the requirements imposed by these regulations isn't actually a blockchain.
Similar previous pushes against user anonymity were met with raised eyebrows and suggestions that the Chinese government doesn't really understand how decentralisation works. And some previous rumours of a Chinese cryptocurrency ban were an outright hoax. But this time the new rules might mean business.
Disclosure: At the time of writing the author holds ETH