What Are The Obstacles Ahead?
A representative, born in the mid-1990s, is now in charge of a crypto-based lending platform. He said although the team was established in May this year, it has already earned tens of millions of renminbi in transaction volume. If this momentum continues, a profit of several million yuan a year is likely. “Compared to ICO, it’s much faster to make money on this platform. In recent days, investment institutions are only interested in profitable projects. If they think you are kind and modest, they are not likely to partner with you. You need to know how to be aggressive, sell yourself, and prove that you can make money quickly.”
Chen Wen said that many project parties are currently in contact with him. The pledged loan backed by cryptocurrency is a business that requires no expertise. Anybody can do it. Essentially, the brand determines whether a project is competitive. A project that has more publicity and security can attract more investors. After all, the crypto-based lending platform is a gambling business driven by luck. If you are lucky, money comes easily.
For these platforms, crypto-based lending business is lucrative because of the development of its funding sources and the processing of the pledged cryptocurrency.
In theory, after the borrower pledges the cryptocurrency, the cryptocurrency will be stored at a specific address (a few platforms use smart contracts based on the Ethereum system) to ensure that the pledged cryptocurrency will not be misappropriated. Because the platform is still in its early stage of development, the model is not fully developed yet. Hence, if people who are in charge of the platform quantify a part of these cryptocurrencies to make an investment or to lend quantified fiat money to other borrowers, then that’s another opportunity for profit. Chen Wen said he is now considering how to use some of these pledged cryptocurrencies more efficiently.
Regarding funding sources, most crypto-based lending platforms use their funds (got mainly from shareholders during venture rounds). Obviously, people who are in charge of these platforms are more concerned about how to find new sources of funding than deciding whether they are legally authorized to lend.
“If new funds are not added, platform managers will consider setting up wealth management platforms to raise more funds. The ideal way is to connect with overseas financial institutions and get cheaper funds.” Chen Wen’s team is currently in contact with overseas institutions for related business.
The profitability of this e-lending industry has attracted more people to crypto-backed pledged loans. Although these people were born in different eras and come from various sectors, they are driven by the same profit-seeking initiative and share a common belief in blockchain.
They probably have thought about the possibility that this profitable business, which has become increasingly popular in the second half of this year, would trigger regulatory supervision. They didn’t expect government controls to come so fast.
On August 24, China Banking and Insurance Regulatory Commission, the Centralyberspace affairs commission, the Ministry of Public Security, the People’s Bank of China, and the State Administration for Market Regulation co-released the “warnings regarding prevention of illegal fundraising in the name of virtual currency and blockchain.” The notice showed that criminals were issuing so-called virtual currency, virtual assets, and digital assets to raise fund. This behavior violates the legitimate rights and interests of the public on the disguise of financial innovation and blockchain technology. Such activities are not based on blockchain technology. Instead, criminals exploit the concept of blockchain for fundraising, pyramid schemes, and fraud.
Regulation is going on at the same time. On the evening of August 21, some cryptocurrency-related WeChat public accounts were shut down. WeChat made an official announcement that these public accounts were suspected of publishing ICO and speculating cryptocurrency transaction information, violating the “interim provisions on the administration of the development of public information services provided through instant messaging tools.” As a result, these accounts were shut down permanently, and their contents were blocked.
On August 22, the office of Financial and Social Risk Prevention and Control Leading Group in Beijing Chaoyang district confirmed that the “notice on further cleaning up and renovating cryptocurrency trading venue” would soon be issued, requiring shopping malls, hotels, and office buildings to ban all forms of cryptocurrency promotion and related activities.
The impact was clear and immediate. On August 23 and 24, two events related to blockchain were canceled. Some platforms, which involved in cryptocurrency trading, no longer made any statement.
A person in charge of cryptocurrency lending platforms said the impact is limited, given that they have already opened up overseas markets. Even if the server is blocked in China, they can still target foreign users.
“Most users are still from China. The crypto-based lending platform is a conventional financing and lending model. The model itself is fully developed, but it is not suitable for any cryptocurrency transaction. On the one hand, there are too many fake tokens. On the other hand, it faces regulatory uncertainty.” Hu Jie, a professor at Shanghai Advanced Institute of Finance, said the ban on the server is only one aspect, the future of the cryptocurrency lending platform depends on the way regulators supervise the operation team.
Xiao Wei, director of the China Banking Law Society, stressed that Chinese laws are based on territorial jurisdiction, supplemented by personal jurisdiction, and the principle of protectionism. According to provisions of Articles 6, 7 and 9 of the Criminal Law of China, for illegal and criminal activities, even if the e-lending platform focuses on overseas markets and the server is located overseas, supervisors in China are still authorized to interfere in the business. As long as the platform is operated by a Chinese national, even if he or she carries out criminal activities abroad, Chinese law still has jurisdiction over the business.