Crypto regulation in China - Bans, blockchain acceptance, and the implications on a global scale
By Chenyu Zhou
China’s ban on the use and trading of cryptocurrencies persists until today, this however does not mean that China is against the technology, as they believe that blockchain and cryptocurrencies will play a huge role in advancing towards the future.
- It has been one year since the Chinese government completely banned initial coin offerings (ICOs) in China
- China continues to strengthen regulation and implemention of anti-crypto measures
- However, the regulatory clamp down on ICOs is not a denial of the importance of blockchain technology as China recognizes the potential of the technology.
It has been one year since the Chinese government completely banned initial coin offerings (ICOs) in China. On September 4, 2017, seven central government regulators, including the People’s Bank of China (PBoC), issued an announcement on preventing financial risks associated with ICOs. The announcement stated that fundraising through ICOs was “suspected to be illegal and disruptive to economic and financial stability,” and thereby forbidden in China. Moreover, the announcement stated that cryptocurrency exchanges were prohibited from offering exchange services between fiat currencies and tokens or virtual currencies, as well as providing any relevant services. In addition to this, financial institutions were not allowed to provide any services related to ICOs and cryptocurrencies, such as opening bank accounts, registration, trading, and clearing. While it is still legal for individuals to hold or trade cryptocurrencies, this was a death sentence to all ICOs and cryptocurrency exchanges in China. As a result, Bitcoin traded against Chinese Yuan — which accounted for over 80 percent of global Bitcoin trading before China’s ICO ban — has since dropped to under 1%.
The Crackdown Continues Over the past year, the crackdown has only amplified, with China continuing to strengthen regulation and implementing anti-crypto measures.
The PBoC has published many other notices warning against the systemic financial risks, which may be caused by not only cryptocurrencies and ICOs, but also disguised ICOs in the form of Initial Fork Offerings (IFOs), Initial Miner Offerings (IMOs), and Initial Exchange Offerings (IEOs). The Chinese government has also banned all commercial crypto and blockchain related events in the region and prevented Chinese investors from trading cryptocurrencies on overseas exchanges, as most of them are now blocked by China’s Great Firewall.
WeChat, China’s largest social media and messaging app, has also blocked a number of media accounts linked to promoting ICOs and cryptocurrency trading. Meanwhile, Alipay, WeChat Pay and commercial banks are banning accounts involved in over-the-counter (OTC) cryptocurrency trading services in China.
Blockchain Without Borders After the ban many Chinese ICO projects and crypto exchanges have moved to countries such as Singapore, Japan, and Australia, whose governments have shown more leniency and tolerance towards cryptocurrencies and ICOs. However, despite relocating, many ICOs and exchanges continue to accept retail investors and traders from China — a move which is still illegal and may not be free from the jurisdiction of Chinese criminal laws. Moreover, if the founders or senior executives of ICOs or exchanges are Chinese citizens, they may still be subject to Chinese criminal liabilities as well.
A Ban on Crypto but Big on Blockchain To understand China’s attitude towards cryptocurrencies, people should first have an overview of the macroeconomic situation of China. Over the past few decades, China has maintained a high GDP growth rate and has become the second largest economy in the world. However, the leverage rate is getting higher and the risks associated with its financial system are accumulating at the same time. Therefore, stabilizing the financial system has been the top priority for the Chinese government in recent years while the US-China trade war is complicating the authorities’ efforts to fix the economy. Given the circumstances, the rationale behind the Chinese government banning cryptocurrency exchanges and ICOs due to the associated financial risks becomes clearer.
However, the regulatory clamp down on ICOs is not a denial of the importance of blockchain technology. In the "13th Five-Year Plan" issued by the state council, blockchain, along with big data and artificial intelligence, has become a national focus. The government has made it clear that blockchain technology and digital currencies should be researched to better service to the real economy.
Senior officials of the PBoC have publicly encouraged the use of blockchain technology to improve the convenience, speed, and the cost of retail payments. In fact, the PBoC established the Digital Currency Research Lab with a goal of researching and issuing its own legal digital money. Chinese tech companies and financial institutions such as the PBoC, Baidu, Alibaba, Tencent, and many additional blockchain startups are actively making breakthroughs with blockchain technology and have filed an impressive number of blockchain patents.
Implications for Investors Therefore, investors in the industry should focus more on blockchain technology itself, rather than speculating on the cryptocurrency market. The technology is still immature, which is a challenge, but also a great opportunity for entrepreneurs in the industry. Investors are paying more attention to technologies and protocols that can empower blockchain in terms of scalability, security, privacy, interoperability, and so on.
The integration of blockchain technology into RegTech (Regulatory Technology) is also worth mentioning, as government bodies and authorities have started to pay attention to its potential. RegTech is blended with blockchain to make the onerous task of regulatory banking easier and can allow for a reduction in the risks involved in meeting the operational compliances and reporting obligations.
Given that blockchain is one of the most revolutionary technologies since the internet, China may eventually encourage the use of blockchain technology in equity crowdfunding and put security tokens under compliance in the future, with the U.S. regulation on security tokens and cryptocurrencies as an example.
Keywords: Cryptocurrency, Blockchain, Technology, ICO, Bitcoin
Institution: People’s Bank Of China
Region: East Asia