When Bitcoin arrived in China it found a welcoming people, cheap electricity, and room to grow. Before long the industry in the country exploded, and for many years the global market followed the lead set by Chinese companies.

Even now, when the Chinese government has spent more than a year trying to squeeze cryptocurrency out of the country with increasingly repressive rulings, four of the ten biggest cryptocurrency exchanges in the world are from China, and two from Hong Kong. Clearly this is a relationship worth looking into.

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Everything is illegal

As things stand at the moment, it is not legal in China to hold an ICO or to trade cryptocurrency at an exchange. Chinese Bitcoin mining companies, long responsible for producing the vast majority of the world’s bitcoins, have been told to leave the country.

This year the national firewall was extended to stop Chinese citizens from using overseas cryptocurrency exchanges, and the central bank ordered financial institutions to stop providing funding to any activity related to cryptocurrency.

As of now it is legal to hold cryptocurrency, but making any transactions with it is not.

This policy direction has undoubtedly had its effect. According to Bloomberg, the yuan accounted for 93.2 percent of the world’s Bitcoin trading in January 2017. In February the People’s Bank of China decreed that people were allowed to buy and sell bitcoins but could not remove them from an exchange in any way. Exchanges complied with the instructions, and by June the yuan’s participation in the Bitcoin market stood at only 9.7 percent.

Exchanges started exchanging again in June, but the revival was short lived; more rulings in late 2017 meant that by January of this year the yuan had disappeared from the market.

But the industry is not dead in China – far from it. Michael Foster, co-founder of decentralised exchange Local Ethereum, told Finance Magnates that “China’s over-the-counter market for cryptocurrency is currently booming.” China is one its biggest sources of traders, and “tens of millions of Yuan worth of ether” have been traded on the exchange in 2018.

China’s long arm

Companies and traders have been finding ways to get around the ban. As Robin Zhu, COO of Huobi, told Coindesk: “If you have assets in an exchange and now you are prohibited from accessing it through a normal process, you definitely will rack your brain to get in there.”

Huobi is one of the major Chinese cryptocurrency outfits that moved abroad since the crackdown began late last year. The exchange opened offices in Hong Kong, Singapore, South Korea and the US. Other examples include Binance, which is consistently ranked in the world’s top three exchanges by trading volume, setting up offices in Japan and Hong Kong, and mining giant Bitmain which opened in Singapore, Canada and the US.

But by February the government caught up with these activities with its new restrictions. Donald Zhao, a Bitcoin trader who moved from Beijing to Tokyo late last year, said to the South China Morning Post: “I think the new move literally means it would be even harder to circumvent the ban in China … people promoting related business programmes may be arrested.”

It seems that the Chinese government recognises that cryptocurrency threatens its control over the economy. In this assertion it is at least partly correct; rules in China limit the amount of foreign exchange that can be held by citizens, and Bitcoin was being used as a way of getting around that. Donald Zhao said: “It is common for people to use VPNs [virtual private networks] to trade cryptocurrencies, as many exchange platforms relocated to Japan or Singapore.”

Ace Yang, executive director of a Beijing-based private equity firm, noted: “It’s positive news for Japan and Singapore, because demand for participating in trading is not diminishing and traders have got to go somewhere.”

Yi Gang

In this era of persecution, some in the media were excited by the appointment of Yi Gang to the governorship of the central bank because of his use of the word ‘inspiring’ when talking about Bitcoin once.

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Yi, who has a Ph.D. from the University of Illinois, is opening up China’s payments market to foreign firms for the first time and improving the convertibility of the yuan, according to Bloomberg. Because of these things he has been seen by some to be more progressive than his predecessor, Zhou Xiaochuan.

However his comment on Bitcoin was in 2013, and came in a speech in which he also said that it is “impossible” for the central bank to recognise its legitimacy. In addition, his policies seem to be a continuation of the bank’s long term goals – security, stability, and reducing the national debt.

Before Yi, Zhou had been pushing to both tighten regulation and free up the Chinese financial system in an effort to work on the debt, which has been at record levels since the last financial crisis. His policies were based on premier Xi Jinping’s assertion that “financial security is an important part of national security. Accurately identifying risk hidden dangers is a prerequisite for ensuring financial security.”

In Yi’s first public comment since gaining the position, he echoed this sentiment, saying that he welcomes openness in the market because closed markets become backward, which invites risk. This doesn’t seem to be a break from Zhao. According to Bloomberg, he also said: “Some institutions conducted illegal financial business without a financial license, and some illegal financial activities expanded rapidly under guise of innovation.” I wondered if this was a reference to cryptocurrency.

Contradictory?

Reading about events in China, things often seem contradictory. For example, the South China Morning Post reported that when the government announced its last crackdown on the 4th of February, advertisements for cryptocurrency stopped appearing on Baidu and Weibo, China’s biggest search engine and social media platform respectively. In other words, cryptocurrency was being actively advertised up until that point, despite most cryptocurrency-related activities being illegal since last year.

Local newspaper thepaper.cn last month reported that one major businessman (Cai Wensheng, net worth 1.77 billion USD) told other entrepreneurs at a finance conference that 80 percent of the world’s bitcoins are still being mined in China. Wensheng, founder of Meitu, said that if the mining industry is forced overseas, China will have to buy back Bitcoin instead of being able to sell it to “the South Koreans, Japanese, and Americans”. He made this comment only last month at an event called the Spring Festival, where five hundred venture capitalists and entrepreneurs gathered.

Given the backdrop, you may find it surprising to hear that the PBoC, under Zhou’s leadership, announced a five-year-plan (2016-2020) in connection with the promotion of financial technology – including blockchain. Zhou has actually made encouraging comments about cryptocurrency himself. For example, at a press conference on the 9th of March this year he said that a cryptocurrency backed by the central bank is inevitable, according to Coindesk. But three days before that, the social media accounts of many cryptocurrency exchanges on the social messaging app WeChat were shut down – OKEx, for example. The block included links to all previous content.

Is this contradictory behaviour? Perhaps not.

It can be argued that the government’s efforts to stamp out cryptocurrency activity are a result of that same government’s understanding of the significance and potential of the technology. An article published in Hackernoon argues that it is easier to restrict and direct a new industry while it is still growing than to try to control it when it has fully taken root.

The same article makes the point that because ICOs are not possible, marketing is of much less importance to businesses, which means that they can invest more in the actual product. Investors are of the venture capital variety, and they are interested in the technology behind their investments. This top-down system means that “the investors and backers for Chinese projects are hugely indicative of their potential.”

Projects

The Chinese blockchain sector is indeed packed. We have written about NEO, described by some as a competitor to Ethereum. There is THEKEY, a blockchain-based identity verification technology that is still under development, and QTUM, a competitor of NEO. These all have major financial backing. Others include Factom, SiaCoin and ZCash, which are all funded by a Chinese venture capital firm at which Ethereum founder Vitalik Buterin was a general partner until January of this year.

A few days ago, Ripple announced that it is making moves to enter the country. Interestingly, it is doing this by deliberately differentiating itself from other cryptocurrencies, perhaps demonstrating that it is savvy to the Chinese market. Its head of government and regulatory relations for Asia Pacific, Sagar Sarbhai, said: “We’re trying to get some regulatory clarity, we’ve started engaging informally with banks, FIs and payment providers, speaking to regulators and government bodies, trying to educate on what Ripple is and what our vision is.”

Conclusion

Foster said to Finance Magnates: “Asia accounts for nearly half of the world’s cryptocurrency trading volume, and China is leading the way in some of the most innovative blockchain projects.” But he also said: “Something had to be done to protect the Ethereum ecosystem from the Chinese government’s crackdown on cryptocurrency exchanges.” The differing tones of these two statements from an individual trying to run a cryptocurrency business in the Chinese market summarise the situation in China quite succinctly.

The former governor of the central bank once said of cryptocurrency: “We think that we need to be more cautious in this direction, because this doesn’t serve our goals that financial products shall serve the real economy.” When he said the real economy, he meant the Chinese economy – the government isn’t interested in money, digital or otherwise, leaving the country behind its back. At the same time, the booming blockchain sector shows that the Chinese government is interested in blockchain technology and cryptocurrency – but on its terms only.

Yi’s public comments seem to indicate that we can expect more of the same for the time being.