China's Crypto Investment: What's The Timeline?

China's relationship with cryptocurrency has been a tumultuous one. Once the Bitcoin trading and mining capital of the world, the country has since banned all crypto transactions, exchanges, and trading. This ban was enforced in 2021, and while there have been rumours of it being lifted, as of August 2024, there has been no official announcement. Despite the ban, some Chinese investors continue to find creative ways to invest in cryptocurrencies, such as through grey-market dealers, overseas bank accounts, and crypto exchanges in Hong Kong.

Crypto trading and mining banned in China since 2021

Crypto trading and mining have been banned in China since 2021. The country's leadership struggled for several years to find ways to control the spreading popularity of cryptocurrencies and keep them from devaluing and replacing its fiat currency.

In September 2017, China imposed a ban on all cryptocurrency trading exchanges, and in 2019, trading crypto-currency was officially banned in China. However, people continued to trade via online foreign exchanges.

In May 2021, the State Council announced further crackdowns on Bitcoin mining in China, and by June, the Chinese government had told banks and payment platforms to stop facilitating transactions and issued bans on "mining" the currencies.

In September 2021, China's most powerful regulators intensified the crackdown with a blanket ban on all crypto transactions and mining, hitting Bitcoin and other major coins. Ten agencies, including the central bank, financial, securities, and foreign exchange regulators, vowed to work together to root out "illegal" cryptocurrency activity.

Despite the ban, some Chinese citizens continue to find creative ways to own cryptocurrencies, such as by using bank cards issued by small rural commercial banks to buy cryptocurrencies through grey-market dealers. They also operate in a grey area by trading on crypto exchanges based outside of mainland China, such as OKX and Binance.

China's central bank has stated that cryptocurrencies must not circulate and that overseas exchanges are barred from providing services to China-based investors. It has also barred financial institutions, payment companies, and internet firms from facilitating cryptocurrency trading nationally.

The Chinese government is reportedly developing a digital currency of its own, which will be pegged to its currency, the Renminbi.

Chinese investors continue to buy Bitcoin using Tether

China has had a rocky relationship with cryptocurrencies. While it was once the Bitcoin trading and mining capital of the world, the country's leadership struggled to find ways to control its spreading popularity and keep it from devaluing and replacing its fiat currency. As a result, China's government banned cryptocurrency exchanges, trading, and transactional uses in September 2021.

Despite the ban, Chinese investors continue to purchase Bitcoin using the stablecoin Tether, a cryptocurrency whose value is pegged to an external asset like the US dollar. Tether is highly liquid, integrated with major Southeast Asian exchanges, and permissionless, making it perfect for servicing Chinese investors who have been shut out of the crypto market by their government.

According to a report by Sino Capital, Tether's $5 billion surge in market capitalization since 2020 can be attributed to Chinese investors. The report notes that Tether is a very popular way for Chinese crypto investors to enter the market, as most exchanges offer a range of over-the-counter (OTC) options. OTC trading desks, a brokerage model that became popular in China during its post-Cold War industrial boom, allow investors to gain access to restricted markets.

Chinese investors face several challenges when trying to purchase Bitcoin directly. Trading Chinese yuan for Bitcoin is not illegal, but it will result in bank account locks or closures. As a result, many investors turn to Tether as a more discreet option. While not entirely legal, USDT-to-Bitcoin trading is tolerated in China.

The use of Tether by Chinese investors has allowed them to continue influencing the Bitcoin market despite the government's crackdown. This influence is evident in the increase in trade volume between Tether and Bitcoin, driven by Chinese investors seeking to trade Bitcoin using Tether instead of Chinese yuan.

It is important to note that the Chinese government is reportedly developing a digital currency of its own, which will be pegged to its fiat currency, the Renminbi. This government-backed digital currency, often referred to as a central bank digital currency (CBDC), is rumored to be called the digital yuan, e-yuan, or e-RMB.

China's economic downturn pushes investors to crypto

A Safe Haven?

China's economic woes have seen investors turn to cryptocurrencies as a safe haven, with Bitcoin being the most popular. The Chinese economy and its stock markets have been in decline for three years, and traditional fields such as property and stocks are performing poorly. As a result, investors are looking for alternative investment opportunities, and many are turning to crypto.

A Creative Approach

Despite crypto trading and mining being banned in China since 2021, investors are finding creative ways to access crypto assets. They are using overseas bank accounts, grey-market dealers, and crypto exchanges like OKX and Binance to buy cryptocurrencies. These exchanges guide investors on how to use fintech platforms to convert yuan into stablecoins, which can then be traded for cryptocurrencies.

A Thriving Underground Market

The underground crypto market in China is thriving, with daily volumes running into several million yuan. Crypto-related activities in China have increased, with the country's global ranking in peer-to-peer trade volume jumping to 13th place in 2023, up from 144th in 2022. The Chinese crypto market recorded an estimated $86.4 billion in raw transaction volume between July 2022 and June 2023, despite the ban.

A Potential U-Turn on Crypto?

There are rumours that China may lift its crypto ban due to its worsening economic situation. China's troubled history with crypto has seen it ban ICOs, mining, and other crypto-related activities since 2013. However, with its economy in decline, there is speculation that China may turn to crypto as a last resort to stabilize its economy.

The Future of Crypto in China

While there has been no official announcement regarding a potential lift of the ban, China's recent endorsement of crypto trading in Hong Kong suggests a softening stance. With the country's financial institutions also exploring crypto-related businesses, the future of crypto in China may be positive.

Hong Kong acts as a testing ground for crypto

Hong Kong, a Special Administrative Region controlled by China, has been described by experts as a "testing ground" for mainland China to potentially reintroduce crypto. Hong Kong's new crypto regulations, which allow retail users to invest in tokens, may be an experiment for the People's Republic of China (PRC).

Hong Kong has historically been a crypto hub in the region, but its reputation was damaged by the riots that erupted in response to a bill that would have allowed the extradition of Hongkongers to China, as well as the city's harsh COVID-19 restrictions and crackdown on political dissent. With its new crypto rules, Hong Kong is attempting to restore its status as a leading financial hub.

The regulatory requirements for virtual asset trading platforms in Hong Kong include "suitable" onboarding processes, disclosures, and more. Tokens traded on these platforms must pass a minimum criteria to ensure that retail investors are less susceptible to market manipulation. The Securities and Futures Commission (SFC) has issued licenses to only two crypto firms as of June 2023.

Hong Kong's crypto ambitions appear to have the tacit support of Beijing. Representatives from China's Liaison Office and other officials have regularly attended crypto meet-ups in the city and have exchanged business cards and WeChat contact information. This low-key support suggests that China may be using Hong Kong as a testing ground for digital assets.

Despite the ban on crypto in mainland China, there is a thriving underground market. Chinese citizens are using their annual forex purchase quotas to move money into cryptocurrency accounts in Hong Kong. Additionally, exchanges such as OKX and Binance still offer trading services for Chinese investors, guiding them to use fintech platforms to convert yuan into stablecoins for crypto trading.

While there are no indications that China is softening its stance on crypto, the developments in Hong Kong suggest that the country may be warming to the idea of cryptocurrency and that the city could be a testing ground for future efforts.

Chinese crypto miners use clandestine power sources

China was once the Bitcoin trading and mining capital of the world. The country's first cryptocurrency exchange, BTC China, opened in 2011, and by 2014, it was home to Bitmain, one of the world's largest cryptocurrency mining equipment manufacturers and mining pool operators. However, China's government struggled to control the cryptocurrency's spreading popularity and its potential to devalue and replace the country's fiat currency. As a result, China implemented a series of bans on specific cryptocurrency actions until all transactions were prohibited in September 2021.

Despite the ban, some Chinese crypto miners have found ways to continue their operations clandestinely and evade detection. It is estimated that up to 20% of the worldwide bitcoin network remains in China. These underground miners often use creative methods to conceal their activities and power their operations.

One common technique is to spread mining equipment across multiple sites so that no single operation stands out on the country's electrical grid. Additionally, some miners have gone "behind the meter," drawing electricity directly from small, local power sources that are not connected to the larger grid, such as dams. This allows them to operate with better profit margins and lower chances of detection.

To further conceal their activities, miners may use virtual private networks (VPNs) to mask their geographic digital footprints. They may also join cryptocurrency mining pools, combining their computing power with miners from around the world. By hiding their hashrate, or collective computing power, they can make their operations appear smaller and less suspicious.

The use of clandestine power sources by Chinese crypto miners is driven by the desire to continue mining activities despite the government's ban. However, it also presents challenges and risks, including the constant threat of detection and potential legal consequences.

As Beijing continues to crack down on the crypto mining industry, miners face increasing difficulties in maintaining their operations. The government has taken various actions, such as conducting self-compliance checks, screening IP addresses, and raiding illegal underground mines. Despite these efforts, some miners continue to find ways to evade detection, highlighting the resilient nature of the underground crypto mining community in China.

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