In the first of a three-part series, CT looks back at Chinese authorities’ attempts to make the People’s Republic impregnable to the crypto phenomenon, and the industry response.
Take a quick look at CnLedger, a Twitter-based Chinese crypto news information source, and a tweet pinned at the top of its profile might come as something of a surprise:
Next time people tell you bitcoin is banned in China, show him this pic. pic.twitter.com/MC3Q2yzBcx— cnLedger (@cnLedger) February 8, 2018
On Sept. 30 2018, China’s oldest tech journal, the Beijing Sci-Tech Report (BSTR), announced it would be offering subscriptions payable in Bitcoin (BTC). And Ethereum Hotel, reportedly the “first” Chinese hotel to accept Ethereum (ETH) as payment, is poised to open its doors in the country’s southwestern Sichuan Province.
How does all this square with Beijing’s notorious onslaught of anti-crypto regulations? How is it possible that you can buy a McLaren or Ferrari using major cryptocurrencies, and yet cannot legally operate a cryptocurrency exchange in the country?
What of official reports that China’s initial coin offerings (ICO) industry continues to find means of "reemerging,” despite a domestic blanket ban on the fundraising model? And how do all these facts align with the Chinese central bank’s exploration of issuing its own digital currency, which started as early as 2014?
Cointelegraph looks back at Chinese authorities’ cumulative attempts to make the People’s Republic impregnable to the crypto phenomenon — and the whip-smart industry response — in the first of a three-part series, spanning 2013 to the present.
2013: Restrictions on financial institutions’ Bitcoin dealings, stark warnings about financial stability threats, but a hands-off approach to crypto trading
In a Dec. 3 circular, the Chinese government defined Bitcoin as a virtual commodity, declaring that it was not recognized as legal tender. The government said the directive was needed to “protect the property rights of the public, protect the status of the renminbi [RMB]* as the statutory currency, prevent risks of money laundering and protect financial stability.”
* Renminbi or [Chinese] yuan are interchangeably used to refer to China’s national fiat currency.
While warning that “excessive speculation” in virtual currencies* “harms the public interest and the legal currency status of the RMB, the government nonetheless allowed citizens to freely participate in the online trading of such commodities “at their own risk.”
* The term 虚拟货币 (“virtual currencies”) is used to designate cryptocurrencies in Chinese.
2013’s so-called ‘Notice on Precautions Against the Risks of Bitcoin’ was signed by five official entities, the People’s Bank of China (PBoC), the Banking Regulatory Commission (CBRC), the Ministry of Industry and Information Technology (MIIT), the China Securities Regulatory Commission (CSRC), and the China Insurance Regulatory Commission (CIRC).
The notice stipulated that financial and payment insitutitions were prohibited from dealings in Bitcoin, including banks, and that crypto exchanges should register with the government’s Telecommunications Regulatory Agency and comply with anti-money laundering (AML) and know-your-customer (KYC) measures. It also advocated for financial institutions to propagate investment and virtual currency education in order to “guide the public to establish correct monetary concepts and investment philosophy.”
The PBoC considered at the time that “the public lacks sufficient understanding of Bitcoin, and some individuals have been caught up by faddishness or a speculative mentality in holding, using and trading in Bitcoin,” warning that “ordinary investors who blindly follow the crowd can easily suffer major losses.”
2016: PBoC reveals it has been studying the possibility of issuing state-backed digital currency since 2014
On Jan. 20 the PBoC held a Digital Currency Seminar, attended by PBoC governor Zhou Xiaochuan, the bank’s deputy governor, and a gamut of experts from domestic and foreign research and financial institutions, as well as consulting firms — including representatives from Deloitte and Citigroup. In its official press release, the central bank stated its intent to launch a state-backed digital currency, considering the move would have “positive practical and far-reaching historical, significance”:
“Since 2014, [the PBoC] has set up a dedicated research team [to thoroughly study] a framework for digital currency issuance [encompassing its prospective] circulation, environment, legal problems, the impact of digital currency on the economic and financial system, [and] the relationship between legal and privately issued digital currency.”
The central bank stated that it considered that a state-backed “legal” digital currency could bring down the high cost of distributing and circulating paper notes, as well as bring greater transparency to economic transactions — thereby reducing money laundering, tax evasion, and other criminal acts. It also proposed its issuance would have a positive impact on financial inclusion, help to improve China’s new financial infrastructure, and enhance the efficiency of payment and settlement systems .
The statement further proposed that digital currency would give the central bank greater control over the circulation of money, bolstering economic and social development. Reports at the time estimated that around $843 billion of capital had flowed out of China in the eleven months leading up to November 2015 — meaning that policy makers were being forced to inject funds into the system in order to prevent interest rates from rising.
Even as the bank lauded the “great importance” of its digital currency project and praised participants’ rigorous analyses of relevant theoretical matters, practical exploration and development prospects, it notably remained silent on the phenomenon of decentralized cryptocurrencies such as Bitcoin.
2017: PBoC exchange scrutiny
On Jan. 6, the country’s central bank, the PBoC, released a notice that it had contacted relevant regulatory authorities and ordered them to meet with major Bitcoin trading platforms to scrutinize their business operations and regulatory compliance and carry out a corresponding “clean-up” where necessary. The notice reaffirmed the official stance that Bitcoin was not considered currency by China’s government.
Renewed attention came as the estimated share of global Bitcoin trading denominated in the Chinese yuan was commonly set at between 50 to as high as 90 percent.
The day before the bank’s action, Jan. 5, the global Bitcoin market had taken a steep 21 percent price plummet, with Bitcoin tumbling from over $1190 to $938. The South China Morning Post (SCMP) reported that — in the midst of the coin’s vertiginous decline — Chinese investors were experiencing system failures on major exchanges such as BTCC and OKCoin.
PwC China Fintech Partner William Gee told SCMP that “investors suffered losses as they were unable to trade, possibly because of the sudden price fluctuation and large sell offers.” The official China Securities Journal had for its part stated that:
“Regulators have noticed that some Bitcoin platforms crashed during the recent market volatilities, causing some investors, particularly those trading with leverage tools, to bear huge losses because they were unable to log on to the website during the sell-off.”
Domestic industry leaders stepped up to calm investors, as news of the on-site inspections only further unsettled market participants. Bobby Lee, CEO of the popular Shanghai-headquartered BTCC exchange, tweeted on Jan. 6:
“BTCC regularly meets with the People's Bank of China and we work closely with them to ensure that we are operating in accordance with the laws and regulations of China. The press release put forth from the PBOC today outlines that there is significant volatility in Bitcoin trading, and also quoted from a notice released in 2013 saying that Bitcoin is a virtual good and doesn’t have legal tender status. All of our users should be aware of the current policies on virtual goods as well as the risks involved in trading in volatile markets.”
On Jan. 11, the PBoC launched spot checks into leading domestic crypto exchanges BTCC, Huobi and OKCoin. Reuters contextualized the move at the time as part of Beijing’s efforts to “stem capital outflows” and “relieve pressure” on the yuan. The agency noted that the yuan had fallen 6.6 percent against the dollar over the course of 2016 — the worst chapter in its price performance since 1994.
Several crypto analysts had gone so far as predict an eventual “quasi-synchronization” between the yuan’s declining fortunes and Bitcoin’s ascent, noting that Chinese investors were increasingly using the cryptocurrency as a vehicle for conveying value into more stable foreign currencies — and also as an instrument for speculative trading. The Omni Foundation’s Patrick Dugan proposed that “for every one percent that the yuan devalues, Bitcoin pops 10-15 percent.”
On the day of the inspections, PBoC’s Shanghai headquarters clarified that “in order to prevent market risks,” the central bank was scrutinizing exchanges’ business practices and regulatory compliance standards, mentioning only BTCC by name.
View of the action as being tied to escalating capital outflows was widely echoed, with China’s QQ.com reporting that the bank’s crypto exchange scrutiny was “possibly to investigate the use of the digital asset to evade capital controls.”
The trend significantly raised the stakes for Chinese crypto traders; director of the Finance and Securities Research Institution at Wuhan University of Science and Technology, Dong Dengxin, observed that “the policy risks of Bitcoin trading in China are higher” because of the country’s capital controls. “If bitcoin trading disturbs China’s financial order, there’s a possibility it will be deemed illegal or banned.”
China’s ‘big three’ exchanges, Huobi, OKCoin and BTCC — which had hitherto been zero-fee — soon announced in separate statements on Jan. 22 that they would begin charging clients a flat 0.2 percent commission fee for each transaction. The exchanges are said to have rationalized the move by stating that such fees would help “curb market manipulation and extreme volatility.”
An insider source claimed at the time that while the exchanges had not received direct instructions from the PBoC, they had decided to introduce trading fees to align with the bank’s wishes “to see the Bitcoin market cool down.” The platforms also stopped margin lending under the pressure of PBoC’s intensified scrutiny.
On Feb. 8, the central bank then warned nine smaller domestic exchanges that they faced potential closure if they violated regulations or offered margin lending. Of the larger exchanges, OKCoin and Huobi issued statements on Feb. 9 they would be halting Bitcoin withdrawals completely, with BTCC reviewing the matter and subsequently announcing on Feb. 15 it would be suspending crypto withdrawals until March 15.
The withdrawal freeze on all three platforms eventually lasted until early June, and had an almost immediately-felt impact on the Bitcoin market. As CryptoCompare.com’s Charles Hayter observed mid-February:
“When China sneezes Bitcoin catches a cold. The PBoC moves to regulate Bitcoin more stringently will bring short term woes. Volumes can be expected to again slow in China as more friction is incorporated in the form of KYC and AML policies. For the duration of this transition the CNY-BTC pairs can be expected to trade at a discount to other fiat-BTC pairs.”
2017: criminalization of ICOs
On Sept. 4, a total of seven Chinese central government regulators — the PBoC, the Cyberspace Administration of China (CAC), MIIT, the State Administration for Industry and Commerce (SAIC), CBRC, CSRC, and CIRC — jointly issued an Announcement on Preventing Financial Risks from Initial Coin Offerings (ICO Rules).
The announcement stated that ICOs that raise “so-called virtual currencies” such as Bitcoin and Ethereum “through the irregular sale and circulation of tokens” are engaging in “unauthorized” public financing, which is illegal.
It reiterated that virtual currencies involved in ICOs are “not issued by the country’s monetary authority” and therefore are neither legal nor mandatorily-valid tender. They are divested of the legal status of fiat currencies and so “cannot and should not be circulated nor used in the market as currencies.”
The ICO Rules further warned that a host of financial crimes — such as the illegal issuance of tokens or securities, illegal fundraising, financial fraud, or pyramid schemes — may be associated with ICO projects, and that, if discovered, such cases would be transferred to the country’s judiciary.
The announcement ordered all types of ICOs to “be stopped immediately” and to return any assets held in investors’ accounts to these investors as soon as possible.
2017: official restrictions on crypto exchanges
Not only were domestic ICOs banned, but the first of a series of restrictions were imposed on cryptocurrency exchanges. Pursuant to the new rules, exchanges were forbidden from enabling clients to convert legal tender into crypto, or vice versa; from buying or selling virtual currencies as a central counterparty; and from setting a price for virtual currencies, or providing other related brokerage or commission services.
Further, the MIIT stated it would shut down websites, delist crypto-trading mobile applications from app stores, and would request that the SAIC revoke the business licenses of exchanges.
The Sept. 4 announcement also extended the existing prohibition on financial and payment institutions’ crypto dealings, stating that they were forbidden from “directly or indirectly” providing products or “services such as account opening, registration, transaction clearing or settlement” for ICOs and virtual currencies. They were also barred from providing insurance services to both ICOs and crypto-related businesses.
Lastly, the seven regulators robustly warned against investors being “fooled” by ICO and crypto-related investments, soliciting the public to “report relevant violations in a timely manner.” The announcement ordered financial industry organizations to “self-discipline” and “stay away from market chaos,” in order to collectively maintain a “normal” financial order.
Following the announcement, on Sept. 15 the Beijing Internet Finance Risk Working Group met with senior officials of crypto trading platforms in the Chinese capital, ordering them to set a deadline for ceasing their trading services; to immediately stop registering new clients; and to outline a detailed plan for how to refund clients’ assets. Authorities were also reported to have issued similar orders to crypto exchange officials based in the cities of Shenzhen and Shanghai.
“The scope of the cleanup” was not limited to curtailing major exchanges’ operations, but aimed at an internet-wide swoop of related websites, internet forums, as well as chat groups on WeChat and QQ — two of China’s most popular social media platforms. The former counted a staggering 963 million active users at the time.
In a media interview mid-September, Lokman Tsui, an assistant professor at the School of Journalism and Communication at the Chinese University of Hong Kong, noted that many hitherto active crypto-dedicated groups on WeChat were swiftly disbanding:
“If you are a group chat leader you have two choices, either you are going to super actively monitor the group, because your livelihood is at stake, or you’re going to delete the group. It’s a chilling effect.”
China’s largest crypto exchanges swiftly fell into line with Beijing’s orders. BTCC told customers on Sept. 14 it would completely shut down on Sept. 30 in accordance with the new restrictions, and would refund any renminbi, Bitcoin, Litecoin and Ethereum held in users’ accounts.
Huobi made a similar announcement on Sept. 15, stating it would be halting new registrations and deposit services, and would be ceasing all services by Sept. 30. OKCoin announced on Sept. 15 it would cease all trading on Sept. 30.
By mid-September 2017, reports were emerging that the impact of the protracted freeze on services at major domestic crypto exchanges as they had faced scrutiny from the PBoC had seen the country’s share of global Bitcoin trading drop to just over 10 percent.
Yet even as the dust was just beginning to settle on the September ban, Chinese investors were increasingly turning to alternatives such as peer-to-peer (p2p) platforms and OTC trades; China’s LocalBitcoins market posted its highest-ever weekly volumes of 115 million yuan during the week leading up to Sep. 23.
By Oct. 27, the “second life” of China’s exiled “crypto barons” was already becoming apparent — 19 formerly China-based companies had already applied for a Japanese crypto exchange license. Other crypto-“friendlier” jurisdictions at that time were deemed to include Hong Kong, Singapore and South Korea.
On Nov. 1 OKEx launched an OTC platform, with the Chinese yuan tellingly the only supported fiat currency at the outset. The company’s financial market director, Lennix Lai, said that the new OTC service would aim to serve Chinese investors, many of whom had been tiding over the tumultuous 2017 fall by trading p2p.
Alongside their relocations overseas, OKEx and Huobi’s OTC platforms thus enabled domestic investors to use mobile payment methods such as Alibaba’s Alipay or Tencent’s WeChat Pay to purchase cryptocurrencies. OTC purchases were typically made a ten or even twenty percent premium as compared with prices on global crypto exchanges, due to the intensity of demand in an increasingly stifled trading climate.
In November, the government caught up: China’s National Committee of Experts on Internet Financial Security issued a Bitcoin OTC report, remarking that “over-the-counter trading is booming,” and that “this warrants further attention.”
The report took stock of burgeoning number of OTC platforms, highlighting that whereas only four such platforms had been active before October, the number had now risen to twenty one.
Taiwan-based OTC platform OTCBTC, according to media reports, had seen $100 million in transactions in the first 50 days since its launch in October.
In an interview with SCMP, Leonhard Weese, president of the Bitcoin Association of Hong Kong, further observed that even as OTC services had not been officially banned, increasing concerns over government surveillance were pushing p2p traders to encrypted messaging services such as Telegram:
“Telegram is very popular for large over-the-counter trades. While WeChat is used by the less paranoid.”
In those last months of a turbulent year, Wesse considered that China’s “authorities are more worried about the narrative, rather than what people actually do. Once it gets widely reported that Bitcoin trading is well and alive in China, the government will again try to put a lid on it.”
2013-2017: the evolution of a toughened anti-crypto stance
Between 2013-2017, China’s authorities thus evolved an increasingly draconian stance as their perception of the financial risks posed by cryptocurrencies hardened. In 2013 they deemed Bitcoin to be a “faddish” and speculative phenomenon, thus prohibiting financial institutions’ dealings with crypto, yet allowing individual investors to bear the risks for their trades.
Pressure on the yuan and escalating capital outflows provided fresh impetus for coordinated action from the country’s regulators; they specifically targeted the ICO space, perceiving it to be rife with dangers for wider fiscal stability, and took action against online trading platforms. The measures nonetheless inadvertently fostered alternative channels such as OTC trades and did not prevent exchanges from flourishing in “friendlier” overseas jurisdictions.
Cointelegraph’s three-part series will continue to trace Chinese authorities’ continued attempts to ring-fence crypto from mainland investors, as they broadened their offensive to tackle the mining industry, as well as perceived regulatory “loopholes,” both on- and offline.