Everything you need to know about the cryptocurrency ban in China

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When China announced severe restrictions on Bitcoin (BTC) mining and cryptocurrency trading in 2021, the blockchain industry was rocked. By the end of September 2021, the government had completely banned all cryptocurrency transactions after enforcing the prohibition in stages. Soon after Beijing's decision, Bitcoin's hash rate fell precipitously, and Chinese crypto exchanges fled the country, leaving many BTC fans concerned about how the sector will rebound.

China's policies affect the adoption of cryptocurrencies globally because it has the second-largest economy in the world. But it doesn't necessarily mean that Bitcoin is a hopeless cause. It's interesting how China's crypto prohibition illustrates how challenging it is to restrict cryptocurrency.

History of China's Crypto Ban

Even though China's 2021 crypto ban was the harshest in the country's history, those working in the industry weren't surprised by it. Many veteran cryptocurrency traders have lost track of the number of times China has "banned Bitcoin." Understanding the origins of 2021's crypto mining ban requires a review of China's past Bitcoin limitations.

2011: Interest in Bitcoin Ramps Up

The whitepaper Bitcoin: A Peer-to-Peer Electronic Cash System was released in 2008 by the person who created Bitcoin, Satoshi Nakamoto. Even though Bitcoin became accessible in 2009, it wasn't until 2011 that more Chinese people began to pay attention to cryptocurrencies.

The centralized exchange of Bitcoin in China is the main cause of the rise in Bitcoin acceptance. This local Bitcoin exchange was founded in 2011 by software programmer Bobby C. Lee. A significant portion of the worldwide Bitcoin trading activity in the early days of cryptocurrency was driven by Bitcoin China.

2013: China Bans Crypto and BTC Adoption Grows for The First Time

In China, Bitcoin became so widely used that many companies started using it as payment. Notably, the biggest search engine in the nation, Baidu, declared that it would accept Bitcoin payments in 2013. 

The proof-of-work (PoW) algorithm used by Bitcoin was also well known at this time, and the Chinese mining market began to take off. Entrepreneurs Micree Zhan and Jihan Wu founded the ASIC manufacturing firm Bitmain to address the demand for cryptocurrency mining. The term "ASIC," which stands for "application-specific integrated circuit," describes computers made specifically to solve algorithms on the Bitcoin network. Bitmain continues to be a key supplier of Bitcoin mining hardware.

Despite increasing BTC usage, China made its first move to halt Bitcoin trade in 2013. Chinese banks are no longer permitted to hold or conduct business in virtual currencies like Bitcoin, according to new regulations released by the People's Bank of China (PBC) addressing crypto transactions at financial institutions.

It was still lawful for Chinese residents to purchase, store, and send cryptocurrency after the initial BTC ban. However, the PBC made it more difficult to access cryptocurrency from exchanges like Bitcoin China. In fact, in response to the PBC's new regulations, Bitcoin China quickly stated it would no longer accept yuan deposits.

2017: China Outlaws Crypto ICOs

Chinese authorities tightened their restrictions on cryptocurrency trading during the 2017 crypto bull market. However, officials were more focused on ICOs, or "initial coin offerings," which are digital tokens intended to represent an ownership stake in a new cryptocurrency project, than on bank transfers or BTC mining.

Trading in ICOs increased significantly after the introduction of smart contract blockchains like Ethereum (ETH) and the rise in speculative activity during the 2017 bull market. However, many of these ICOs ended up being frauds due to the lack of regulation in the cryptocurrency industry.

China outlawed any platforms that offered ICOs to reduce demand for the ICO mania. An exchange was required to reimburse investors for any ICOs they sold. Additionally, China forced a large number of centralized crypto exchanges (CEXs) to shut down. During this time, Bitcoin China's name was changed to BTCC, and the company moved its main office to the United Kingdom.

2021: China Bans Crypto Mining

Chinese authorities discussed outlawing Bitcoin mining in 2019, although they didn't do so until 2021. A definitive ban on cryptocurrency mining was issued by China's State Council as Bitcoin was trading at around US$55,000 per coin. Shortly after, the hash rate on the Bitcoin network fell by 50%, and in the months that followed, the price of BTC plummeted to around US$30,000.