China's Crypto Ban: Where To Invest Now?

Despite China's ban on cryptocurrency transactions, Chinese citizens are still finding ways to invest in digital assets. The ban, which came into force in September 2021, was imposed by the People's Bank of China (PBOC) to purportedly curtail financial crime and prevent economic instability. However, it is speculated that the ban was also an attempt to combat capital flight from China, as cryptocurrencies provided a means for citizens to circumvent strict capital controls. In response to the ban, Chinese investors have turned to grey markets, overseas bank accounts, and foreign exchanges to continue trading cryptocurrencies. The underground crypto market in China is thriving, with crypto-related activities in the country bouncing back. This raises questions about the effectiveness of the ban and the potential for regulatory changes in the future.

The impact of China's ban on Bitcoin

Background

China, once a global hub for Bitcoin mining, outlawed cryptocurrencies in September 2021. The ban was implemented in phases, with restrictions on financial institutions engaging in crypto transactions, domestic crypto mining, and finally the use of cryptocurrencies.

The Impact

The ban had a significant impact on the Bitcoin ecosystem, with miners and investors in China forced to either cease operations or find alternative means to continue their involvement with Bitcoin.

Displacement of Miners

The displacement of miners from China to other regions, particularly North America, has been a notable outcome of the ban. The world's largest Bitcoin mining pool, Foundry, is now based in the United States, and several miners trade their shares on public markets. This has contributed to a more geographically dispersed mining network, reducing the previous concentration of mining power in China.

Continued Demand for Bitcoin

Despite the ban, demand for Bitcoin in China has persisted, with investors turning to grey markets, overseas bank accounts, and crypto exchanges in regions like Hong Kong to acquire cryptocurrencies. Crypto data platform Chainalysis reported a significant increase in crypto-related activities in China, with its global ranking in peer-to-peer trade volume jumping from 144 in 2022 to 13th place in 2023.

Environmental Impact

The displacement of miners from China has also had an unexpected environmental impact. China's energy mix, which is largely reliant on coal-fired power, has been replaced by more sustainable energy sources in other regions. Jurica Bulovic, Head of Mining at Foundry, reported that miners in their pool have a 71% usage rate of "green energy" or ESG-friendly energy.

Price Volatility

The ban caused major sell-offs and price volatility for Bitcoin, but the long-term impact on prices is less clear. Some, like Shanghai-based finance executive Dylan Run, view Bitcoin as a "safe haven" and have increased their investments. Run's crypto investments are up 45% as of 2024, while China's stock market has been sinking for three years.

Regulatory Challenges

The ban has also highlighted the challenges of enforcing restrictions on decentralized technologies like Bitcoin. Despite the strict ban, China's crypto market recorded an estimated $86.4 billion in raw transaction volume between July 2022 and June 2023, indicating that capital flight enabled by cryptocurrency transactions continues.

Alternative Cryptocurrencies

Lastly, the ban has likely influenced the development and adoption of alternative cryptocurrencies. With Bitcoin inaccessible to many in China, other cryptocurrencies may gain traction, particularly those that offer enhanced privacy, security, or decentralization features.

How to invest in cryptocurrency after China's ban

China's ban on cryptocurrency transactions came into force in September 2021. The ban prohibits all cryptocurrency exchanges, trading, and transactional uses. However, that doesn't mean that cryptocurrency investment is completely inaccessible to those in China. Here are some ways that Chinese citizens can still invest in cryptocurrencies:

Overseas Bank Accounts

Mainland investors can open overseas bank accounts to buy crypto assets. For example, after Hong Kong's open endorsement of digital assets, Chinese citizens have been using their $50,000 annual forex purchase quotas to move money into cryptocurrency accounts in the territory.

Crypto Exchanges

Despite the ban, some crypto exchanges such as OKX and Binance still offer trading services to Chinese investors, guiding them to use fintech platforms to convert yuan into stablecoins for trading cryptocurrencies.

Over-the-Counter Channels

Much of China's crypto activity takes place through over-the-counter channels or informal, grey market peer-to-peer businesses. For example, some individuals use bank cards issued by small rural commercial banks to buy cryptocurrencies through grey-market dealers, capping each transaction at 50,000 yuan to escape scrutiny.

Hong Kong Crypto Stores

Brick-and-mortar crypto exchange stores have sprouted in Hong Kong's busy business and shopping streets. These offline shops are lightly regulated, and customers can buy cryptocurrencies with a minimum of HK$500 and without providing any identity documents.

Stablecoins

Chinese investors continue to purchase Bitcoin and other cryptocurrencies using stablecoins such as Tether (USDT) instead of Chinese yuan. Tether is a cryptocurrency that is notionally pegged to the value of the US dollar, making it stable and easier to exchange for other cryptocurrencies.

Crypto-Related Businesses in Hong Kong

Some Chinese brokers and financial institutions are exploring crypto-related businesses in Hong Kong, which has endorsed digital assets. For example, the Hong Kong subsidiaries of Bank of China, China Asset Management, and Harvest Fund Management Co are all exploring businesses dealing in digital assets.

While these methods allow Chinese citizens to continue investing in cryptocurrencies, it is important to note that the Chinese government's ban and strict capital controls are still in place, and there may be risks associated with attempting to circumvent these restrictions.

The future of cryptocurrency in China

China was once a global hub for cryptocurrency trading and mining, but in recent years, the country has taken a hard stance against cryptocurrencies, citing concerns about financial stability, speculative risk, and energy usage. In 2021, the Chinese government banned all cryptocurrency transactions, and the country has been cracking down on the industry ever since. Despite this, there is still some crypto activity in China, with people finding creative ways to access banned crypto assets.

The ban on cryptocurrencies in China

China's ban on cryptocurrencies came into force in September 2021 when the People's Bank of China (PBOC) prohibited all cryptocurrency transactions. This was not the first time China had taken steps to restrict the use of cryptocurrencies; in 2017, the country shut down domestic cryptocurrency exchanges and initial coin offerings (ICOs). The PBOC justified the ban by citing the role of cryptocurrencies in facilitating financial crime and posing a risk to China's financial system due to their speculative nature.

The impact of the ban

The ban on cryptocurrencies in China has had a significant impact on the industry, with many exchanges and mining operations being forced to close or relocate. However, it has also driven a thriving underground market, with Chinese citizens finding ways to access banned crypto assets through overseas bank accounts, crypto exchanges, and over-the-counter brokers. According to a report by the crypto data platform Chainalysis, China recorded an estimated $86.4 billion in raw transaction volume between July 2022 and June 2023, despite the ban.

The future of cryptocurrencies in China

It is difficult to predict the future of cryptocurrencies in China, but it seems unlikely that the country will lift the ban anytime soon. The Chinese government is reportedly developing its own digital currency, known as the Digital Currency Electronic Payment (DCEP) or digital yuan, which will be centrally controlled and backed by the government. This could be an attempt to internationalize the yuan and reduce reliance on the US dollar in international trade and finance. There are also concerns that the DCEP will be used by the Chinese government to spy on its citizens, as it will allow real-time monitoring of how money is spent.

The impact on investors

The ban on cryptocurrencies in China has had a mixed impact on investors. On the one hand, it has made it more difficult for Chinese citizens to access and invest in cryptocurrencies. On the other hand, the decline of China's stock market and property sector has made crypto assets more attractive to investors looking for safer alternatives. Some investors have turned to cryptocurrencies as a hedge against the declining value of Chinese equities, with Bitcoin, in particular, being seen as a "safe haven".

The effectiveness of China's cryptocurrency ban

China's cryptocurrency ban, which came into force in September 2021, has been only partially effective in curtailing crypto trading within the country. While the ban has pushed crypto trading into a grey area, it has not completely stamped it out.

The People's Bank of China (PBOC) banned all cryptocurrency transactions, citing the role of cryptocurrencies in facilitating financial crime and posing a risk to China's financial system due to their speculative nature. The ban was also likely an attempt to combat capital flight from China, which has long been a concern for Chinese authorities.

Despite the ban, Chinese investors continue to find creative ways to access and trade cryptocurrencies. They use overseas bank accounts, crypto exchanges like OKX and Binance, and over-the-counter channels to buy crypto assets. The Hong Kong special administrative region, with its public endorsement of digital assets, has also become a popular destination for Chinese citizens to invest in cryptocurrency.

The ineffectiveness of the ban is evident from the data. Crypto data platform Chainalysis reported that the Chinese crypto market recorded an estimated $86.4 billion in raw transaction volume between July 2022 and June 2023, with a significant proportion of large retail transactions. This suggests that the ban has not deterred Chinese investors from engaging in crypto trading.

The ban has had some impact, however. It has pushed crypto trading into a grey area, making it more difficult for Chinese investors to access and trade cryptocurrencies. The ban has also likely contributed to the decline of China's stock market, as investors seek safer alternatives offshore.

Overall, while China's cryptocurrency ban has had some effect, it has not completely eradicated crypto trading within the country. Chinese investors continue to find ways to access and trade cryptocurrencies, highlighting the challenges of regulating decentralized currencies like Bitcoin.

The impact of China's ban on the global crypto market

China's ban on cryptocurrency transactions

In September 2021, the People's Bank of China (PBOC) banned all cryptocurrency transactions, including trading and mining. The official justification for the ban was to curtail financial crime and prevent economic instability. However, there are other possible reasons behind the ban, including China's new economic policy of greater state intervention and attempts to combat capital flight from the country.

Impact on the global crypto market

As one of the world's largest cryptocurrency markets, fluctuations in China's crypto market often impact global crypto prices. The ban caused a drop in Bitcoin's price of more than $2000 (£1460). Additionally, China's crypto market recorded an estimated $86.4 billion in raw transaction volume between July 2022 and June 2023, which had an impact on the global crypto market.

Continued crypto activity in China despite the ban

Despite the ban, crypto-related activities in China have increased, with its global ranking in peer-to-peer trade volume jumping from 144th in 2022 to 13th in 2023. Chinese investors are using creative ways to own cryptocurrencies, such as through grey-market dealers, overseas bank accounts, and crypto exchanges like OKX and Binance. The underground crypto market in China is thriving, with daily volumes running into several million yuan.

Impact on Hong Kong's crypto market

Hong Kong's open endorsement of digital assets in 2023 has made it an attractive destination for Chinese investors to allocate their assets offshore. Chinese citizens are using their $50,000 annual forex purchase quotas to move money into cryptocurrency accounts in Hong Kong. This has led to an increase in crypto-related businesses in the territory, with subsidiaries of Chinese financial institutions exploring opportunities in digital assets.

Global impact and challenges

The ban has had a significant impact on the global crypto market, causing a drop in crypto prices and liquidity, and an increase in volatility. However, the ban has also presented challenges for China, as capital flight enabled by cryptocurrency transactions is likely to continue despite the restrictions.

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