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    Cryptocurrency in China: Over the Counter, Under the Table





    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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