Dovey Wan is a partner at Primitive Ventures, a crypto asset investment fund, and a member of CoinDesk’s advisory board.
This essay is presented as a part of No Closing Bell, a
series leading up to Invest: Asia 2019 focused on how the Asian crypto
markets are interacting with and impacting global investors. To keep the
conversation going in person, register for Invest: Asia 2019 coming up in Singapore on Sept. 11-12.
There remains a great deal of confusion surrounding the legal status of cryptocurrency in China.
Between headlines like “China Bans Bitcoin”, “China Bans Crypto
Exchanges?”, and “China Bans Bitcoin Mining,” it’s no surprise that most
people are unclear on where China stands on cryptocurrency and whether
that has any real bearing on how its citizens behave.
We hope to demystify this and offer some insight into the legal status of cryptocurrency and related matters.
In law
In China, bitcoin is legally recognized and protected as virtual
property. This has been the law since 2013 and the classification was
reconfirmed in the recent Hangzhou court ruling.
However, this does not recognize bitcoin or other cryptocurrencies as
legal currency. Hence, any use of Bitcoin as a currency is illegal.
Occasional peer-to-peer OTC transactions are acceptable, as long as the
behavior remains on a small scale. All mainland financial institutions
are barred from any involvement in virtual currencies and foreign
entities are also prohibited from serving mainland customers.
China has been progressively restricting more aspects of cryptocurrency within its borders dating back to September 2017, when it began by banning ICOs because of the financial risk and frequent fraud.
Since then, China has not hesitated to prosecute
seriously offending ICOs or crypto scams, which were clearly scamming
their customers, such as Hero Chain, EOSPLUS, TronDotWallet, PlusToken,
MGC, and DOGX. Some of them raised a ton of money from retail and exit
scammed, some disguised as wallets or high-yield quant fund. The largest
among them is PlusToken,
which has scammed over a whopping $3 billion in total. Core team
members of PlusToken were arrested earlier this year in Vanuatu with the
help of local police and are now facing decades in jail.
The ICO rules also restricted the activity of cryptocurrency
exchanges domiciled in mainland China, as they are considered to be
facilitating illegal fundraising and financial crimes. To preserve their
businesses after the ban, these exchanges restructured and moved
overseas to countries such as Japan, Singapore and registered in countries like the Seychelles and Malta.
However, some exchanges, including Huobi and OKEx, continue to
conspicuously serve Chinese customers in crypto to crypto trading, and
facilitate yuan to BTC/USDT exchange disguised behind a peer-to-peer OTC
front.
The regulatory requirements on bitcoin mining are relatively fuzzy,
the “ban” was not issued by a legal or regulatory department, but rather
came from a “industry structure reform recommendation” from a state planning agency, which usually serves as a guideline instead of actual regulation.
Hence, we haven’t seen any material impact on local mining facilities
due to this “ban”. While many Chinese miners are currently looking for
foreign sites, that is primarily due to fierce local competition rather
than regulatory concerns.
In practice
The actual handling of cryptocurrency in mainland China in practice doesn’t reflect the letter of the law, however.
It’s no secret that Chinese citizens remain deeply involved in
cryptocurrency mining, trading, and ICOs/IEOs. While official figures
say that the percentage of cryptocurrency trading attributable to the
yuan has dropped from 90% to 1% in the wake of the 2017 regulation, this
does not account for over-the-counter trading which is where most fiat
to crypto volume in China has shifted to since the regulation.
OTC options are offered by exchanges like Huobi as well as by locally
managed WeChat groups. These OTC desks take the form of a marketplace
where buy and sell orders are offered manually and transactions are done
in a peer-to-peer manner. The platform here merely acts as a place for
buyers and sellers to discover each other, rather than facilitating
trades itself as exchanges do.
Payment can be handled between two parties once they have agreed on a trade through WeChat, Alipay, or banking wire, though China is attempting to crack down on that
as well by blocking mobile payment platforms from processing crypto
related payments. The biggest risk of peer-to-peer OTC trading is
counterparty risk. If you want to buy Bitcoin from someone you have to
1) Agree on the price with that party, 2) Send RMB first, 3) Receive
Bitcoin once the other party has received the payment.
For this reason, most of the OTC WeChat groups have very strict rules
for dealing with new members and only deal with those who have been in
the group for long enough to have a good track record.
To give you a sense of the volume that these desks handle, Huobi OTC
has surpassed $100M USD in volume and WeChat OTC groups such as this one
report processing a daily volume of $300k a day on average. There are
thousands of similar WeChat OTC groups operating at a small scale, but
together add up to a significant amount of crypto trading volume
originating from China that is not accounted for by official figures.
If one has the desire, buying cryptocurrency in China is by no means difficult. There are plenty of tutorials such as this one
outlining various simple ways to purchase cryptocurrencies with RMB.
Local liquidity for Bitcoin and USDT are excellent, despite what the
regulators’ official statements might suggest.
Once traders have gotten their hands on Bitcoin or USDT, they can
then freely exchange that for other cryptocurrencies on exchanges, even
ones that try to block Chinese customers, by using the credentials of
people from other countries. KYC materials can be obtained for a mere $75 online
and allow Chinese citizens access to exchanges as well as IEOs and
ICOs. Crypto-to-crypto volume on exchanges like Huobi, OKEx, and Gate.io are still very dominated by Chinese retail, and OKEx derivatives trading is also dominated by Chinese whales and traders.
As a result of the ban, different trading behaviors and selections of
assets have emerged on these Chinese dominated exchanges compared to
those on US exchanges like Bittrex, Bitstamp and Kraken.
After the ban, China took to using Tether ($USDT) as a substitute to
yuan in trading pairs. Tether has since developed into a USD replacement
in even some non-crypto cross-border business cases. This is one
possible explanation for why Tether has been so resilient to negative
press such as the Tether-Bitfinex $850 million cover-up and over 60% of newly issued Tether is traded in Chinese background exchanges —it is supported by the crucial role it plays in the huge amount of crypto trading that depends on it in China.
Because of the central role it plays, people in China don’t care
whether it’s fully backed by reserve, as long as they remain able to
exchange USDT for Yuan with local counterparties.
China’s legal actions against cryptocurrency certainly had a huge
impact on crypto activity within its borders. It changed the landscape
of crypto trading in China and caused many crypto companies to move
overseas. But the resilience and perseverance of Chinese crypto
entrepreneurs are remarkable, which clearly manifests “what doesn’t kill
you makes you stronger”.
Cryptocurrency is still alive and well in China.
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