China’s Unique Crypto Paradigm | Part 1

Ever since China announced an ICO ban back in September last year, there has continued to be further antagonistic moves by the regulators towards cryptocurrency legality. Suffice to say the path so far has been far from ideal, with China being at the forefront of countries whose officials are yet to embrace cryptocurrency truly and have enforced numerous regulations to ban cryptocurrency altogether.

However, the fact remains, despite the entire negative furor by the regulators, China remains a significant player within the crypto universe, and more importantly, the bans haven’t decreased the Chinese people’s appetite for all things related crypto- one bit.

The Chinese people continue to circumvent the national bans and enjoy involvement in a variety of crypto-related topics, from ICO’s to trading. China remains the world’s largest holders and miners for Bitcoin- with Chinese mining pools in control of more than 70% of Bitcoins network collective hash rate, the measuring unit of the processing power of the network.

Concurrently, reports are being published on a weekly basis, with many emphasizing the rewards the Chinese public is reaping from their cryptocurrency adventures. Be it Chinese entrepreneurs dominating China’s rich list or a lack of effectiveness of the bans, the Chinese society is still managing to get involved in cryptocurrency activities. There is a definitive sense of the tide turning and hope remains that this current onslaught from the government will be withstood and allow for a rich flourishing shortly.

So what is the current state in Chinese cryptocurrency and just how much is the regulatory framework effective in its aims? The following article will be part of a three-part series analyzing the architecture of existing Chinese developments in the crypto universe and the actions that have followed. This article will carefully examine the initial regulatory actions taken by officials in stemming what they believe was social instability cultivated by cryptocurrencies and the variety of methods of doing so.

 ICO Ban Introduced 

China originally introduced a clampdown on Initial Coin Offerings (ICOs) in September 2017. The People’s Bank of China announced that ICOs were illegal and were to be banned with immediate effect. At the time, the announcement had a massive impact on the price of Bitcoin dropping over $200 following the news. Chinese authorities further required individuals and organizations to refund investors for any existing funds raised via ICOs.

The ban was issued nine months after an earlier warning to bitcoin exchanges urging their compliance with the relevant laws and regulations, to inhibit market manipulation and fraudulent activities.

As ICOs investment does not offer traditional share offerings such as a stake or equity, often what investors are instead exchanging their money for a digital token, which has the understanding of increased value as long as the token continues to be popular.

Understandably, the risks are high but so are the rewards. While there were many legitimate ICOs taking place, there were almost equally some illegal and fraudulent ICOs as well. It was this unregulated Wild West situation that resulted in the risk-averse Chinese regulators to issue a blanket ban on this type of fundraising before it “disrupts the social order,” as stated by the central bank.

Stability Remains The Main Priority

China’s financial market is enormous, protracted and very difficult to control adequately. Combined with the rapid implementation of innovative technologies has resulted in bubbles on a wide variety of classes, with some more respectable than others. This leads to potentially significant problems.

Taking trillions of dollars-worth financial products lacking sufficient transparency with minimal regulations, include a shortcut to success environment, results in a festering pool of issues that could explode at any minute. With China’s social party ethos based on complete stability and control, there were never any doubts that actions were going to be implemented.

Despite the Chinese ICO market being relatively small in comparison to the overall economy, it had been picking up the pace. The Beijing Internet Finance Association reported that during the first seven months of 2017, approximately 65 ICOs raised nearly $400 million. While a publication by the Financial Times, which stated that in July and August alone, over $750 million was raised- no doubt enforcing action from the authorities.

Great Firewall of China Takes Hold

Following the initial crackdown of ICOs by Chinese authorities, in February earlier of this year, China announced the blockade of websites relating to cryptocurrency trading services and ICOs- the ban applied to all residents in the country.

Despite ICOs being banned altogether, this allegedly didn’t stop crypto enthusiast from accessing foreign services within the country or entirely eradicate trading activities.

An article published by Financial News, a publication with connections to the People’s Bank of China (PBOC), wrote: “To prevent financial risks, China will step up measures to remove any onshore or offshore platforms related to virtual currency trading or ICO.”

The article further states, “ICOs and virtual currency trading did not completely withdraw from China following the official ban … after the closure of the domestic virtual currency exchanges, many people turned to overseas platforms to continue participating in virtual currency transactions. Overseas transactions and regulatory evasion have resumed, risks are still there, fueled by the illegal issuance and even fraud and pyramid selling,”

The move aimed at tightening regulations on residential investor’s ability to participate in foreign ICOs and cryptocurrencies, as they believe there is still substantial risk in doing so.

The ban and overall much stricter stance by China- which is an effective blanket ban on all activities relating to cryptocurrencies- intends to slow down the involvement into the ICO and digital currency trading frenzy that had engulfed the Chinese population. The hysteria caused among retail investors resulted in massive price volatility and increased levels of fraud, a significant point of concern for regulators whose political credibility bases on social stability.

After reports of the firewall ban, advertisements have ceased on Baidu and Weibo, two of China largest search engine and social media platforms.

Wayne Cao, a founder of a company which offered 10 billion tokens in an ICO, says “the tighter regulation from the PBOC will most certainly impact the cryptocurrency industry.”

 “Most of the Chinese ICO projects are invested in by Chinese investors. So if they are blocked, the whole cryptocurrency market will be dragged down.”

Up until this ban, new offerings had pegged to established cryptocurrencies such as Bitcoin, and this allowed public retail investment through ICOs, with the requirement of having existing digital wallets available. The coins would subsequently then be traded on foreign exchange websites, with broader participation after ICOs were completed.

China had already banned ICOs and cryptocurrency exchanges in September, but trading by individuals continued to remain a cloudy point of contention with numerous businessmen relocating to Japan or Hong Kong, while still retaining the ability to acquire funds from mainland investors.

Further Banning of All Crypto Related Accounts and Events

Continuing the Chinese government’s crusade against all things crypto related, it was announced in August; officials had shut down some blockchain related news accounts on the WeChat social app, and also forbid hotels in downtown Beijing from hosting promotional events relating to cryptocurrency in a refreshed clampdown on all digital asset activities.

A document released by the Chaoyang District government in Beijing shows the ordering to close offices and hotels from carrying out crypto related events by the local financial authorities and police.

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Numerous blockchain and cryptocurrency orientated online media publications discovered that their official public accounts on WeChat were blocked due to violations of new regulations from the Cyberspace Administration of China, which demand content providers within chat apps be compliant with national interests and public orders.

Blockchain media outlets played an essential role in providing specific, timely information regarding cryptocurrency prices and reviews on blockchain-related projects, despite the on-going cryptocurrency ban. Like the majority of Chinese news services, these platforms fundamentally required WeChat to engage with audiences outside of their apps and websites. Some of the most popular blockchain news platforms such as Huobi News and Jinse Caijing were blocked as part of the crackdown.

Next week’s article will elaborate on instances of how cryptocurrency related activities continue to thrive despite the best actions of the regulatory authorities.

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