In the upcoming months, the Chinese government’s imposition of a nationwide ban on local cryptocurrency exchanges and trading platforms could backfire if the government, People’s Bank of China (PBoC), and the country’s financial regulators do not resume cryptocurrency trading activities.

Last week, in an interview with South China Morning Post, a Chinese cryptocurrency trader operating with an online alias known as “Victor” stated that many Chinese traders have been circumventing the government and its impractical regulations by investing in cryptocurrencies through over-the-counter (OTC) markets and off-shore or global bitcoin trading platforms.

“They can’t set rules to stop me from investing in what I want to invest in. They say you are protecting me, but as long as I think this is good, they have no way to intervene. I can do over-the-counter trades or I’ll go offshore … My wallet is my wallet. I’ve never registered my identification card,” Victor toldSCMP.

According to cryptocurrency market data providers such as Coin Dance, the trading volumes of OTC markets including LocalBitcoins have increased drastically since the imposition of a nationwide ban on Chinese cryptocurrency exchanges. Since early September, the weekly trading volume of LocalBitcoins China has increased from 20 million to 115 million Chinese yuan.

Since November of 2016, the Chinese government and its financial regulators have cooperated closely with local cryptocurrency exchanges to establish practical regulatory frameworks and implement investor protection. Large-scale cryptocurrency trading platforms including OKCoin, BTCC, and Huobi allocated significant resources and capital to comply with the requests of the Chinese government. Still, in September, the Chinese government terminated the services of cryptocurrency exchanges, rendering all of their collaborative work and initiatives irrelevant.

But, the end result for the Chinese government has been the flow of funds and trades from a strictly regulated market to unregulated OTC and offshore markets. Initially, the Chinese government has decided to regulate the Chinese cryptocurrency exchange market because it had wanted to oversee transactions and implement necessary Know Your Customer (KYC) and Anti-Money Laundering (AML) policies. Through the imposition of a nationwide ban on cryptocurrency exchanges, the Chinese government has returned back to square one, wherein bitcoin and cryptocurrency trades are unregulated, unverified, and private.

This month, Japan has taken a completely opposing approach to the Chinese government by officially authorizing and licensing 11 cryptocurrency exchanges including BitFlyer, a major global cryptocurrency trading platform with over 800,000 users. In a statement, BitFlyer CEO Yuzo Kano explained that efficient and practical regulations from the Japanese government has allowed the Japanese cryptocurrency exchange market to be at the epicenter of the global cryptocurrency industry.

“Japan has been exploding with demand for both bitcoin trading as well as virtual currency services. The FSA’s approval for bitFlyer to operate as a Registered Virtual Currency Exchange, and the agency’s openness and forward thinking regulation could not come at a better time for the blockchain space,” said Kano.

As Japan, the US, and South Korea evolve as major cryptocurrency exchange markets with practical regulatory frameworks and support from local financial regulators, markets like China will continue to isolate themselves from the cryptocurrency industry and innovation. If the US and South Korea also move on to introduce national licensing programs for cryptocurrency exchanges as hinted by Keith A. Noreika, the Acting Comptroller of the Currency, China would be replaced by neighboring markets even if it resumes trading activities in the future.

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