The summer of regulatory action has meanwhile become a global phenomenon. Legislators and politicians wave their fingers and threaten the leading providers of virtual asset services in the industry – a term Coined by the FATF to describe exchanges, wallets, custodian banks and even DeFi platforms.
But when it comes to raids against cryptocurrencies, few places with the effectiveness and experience of the Chinese government do so.
Unlike in the United States, China’s regulators do not have a public debate about it. Decisions are made behind closed doors and announcements come quickly, posted on government websites or in speeches by well-prepared officials.
The guidelines come from the top and are quickly repeated and enforced by subordinate provincial or city-level officials, state corporations, and financial institutions. This top-down style of regulation makes the “China ban” appear very repetitive and strict. In reality, the same regulation can be repeated dozens of times by different industries, which terrifies the public but has very little additional impact on the industry.
3000 kilos of Bitcoin miners are flown to the USA. pic.twitter.com/d07y5GUBB3
– 8BTCnews (@btcinchina) June 21, 2021
What’s the problem this time?
Although ownership of cryptocurrencies was never officially banned, there was likely a need for reform in other areas of the industry. According to Winston Ma, former general manager and head of North America for China Investment Corporation, the Chinese government has pushed regulations with the aim of protecting consumers, moving closer to the goals of carbon neutrality and achieving greater financial stability.
While the latter reason is more subjective, it cannot be denied that China’s opportunistic mining industry and speculative private investors were largely unabated at the start of the year.
Ma will be among the first to see the effectiveness of the changes taking place, especially for the mining industry, telling the magazine:
“So far, the effects have been most obvious from an energy perspective: after the central government launched the cryptocurrency penetration campaign in May, large coal-based electricity producers like Inner Mongolia and Xinjiang, which was previously the two largest cryptocurrency mining hubs in China, were among the first Regions that quickly developed local rules for cleaning up mining companies. ”
This will not be a short term adjustment. Most of the major mining companies have relocated overseas, and the overall hash rate of BTC mining is still around 40% below its spring highs before the crackdown. Energy and climate policy were at the center of China’s important five-year plan, released this spring, that cemented the importance of clean energy for the foreseeable future.
Despite its importance to the crypto community, mining doesn’t add much to national GDP. Revenue for Chinese miners was just under $ 7 billion far too insignificant a number for the 12 month period ending June to move the needle for government.
The revenue from the ride-sharing app Didi was alone over three times that in 2020, and the Chinese government had very little hesitation in taking action after it was revealed that it had provided user data to U.S. regulators. Didi apps have been removed from domestic app stores, and now competitors are lining up to capture massive market share should Didi fail to resolve its legal issues.
Sally Wang, Vice President of Portfolio Marketing at Sino Global Capital, notes that the number of blockchain use cases has increased tremendously at the national, regional and city levels, even though Chinese regulators do not tolerate areas of risk that threaten financial stability.
“We’ve seen miners leave China, and we’ve also seen big fintechs like Alibaba experiment with NFTs. Tokenless blockchain projects in China have seen tremendous growth. ”
This type of development has allowed players to continue contributing to a healthy blockchain ecosystem in China, with local governments hosting major events like the World Blockchain Conference in Hangzhou and the coming International Blockchain Week in Shanghai in September.
Regulatory influence on the decline
The original raid The banning of ICOs and exchanges in 2017 hit the crypto industry at a fragile time. Most of the world’s trade at the time came from China or took place on Chinese stock exchanges, and the major ones were registered and based in the mainland. This made them exposed to the authorities and taught the industry a valuable lesson in dealing with geographic risk.
After that, key industry players like Binance, Huobi, and OKEx began moving to places like Hong Kong and Singapore, where regulators were more open-minded. As a result, these exchanges are now easily removed from the jurisdiction of the Chinese government, provided they are not too conspicuous when recruiting Chinese users.
As more of the industry moves overseas, the influence of regulators will diminish. Unfortunately, the miners who wanted to harness the low-cost energy from China’s abundant hydropower and coal-fired power plants haven’t been decentralizing anytime soon. This put them in a precarious position and triggered a wave of panic in China Cracked down on miners earlier this year. The good news for investors is that miners have now also relocated overseas, reducing the need for future negative regulation against the mining industry.
Reading the tea leaves with regulators
Retail continues to be a huge amount of uncertainty as large, predominantly Chinese, exchanges like Huobi and OKEx account for around 20% of global volume, according to FTX’s voicelume monitor. Binance accounts for over 50% of the global volume and likely has a large percentage of Chinese users as well.
While users cannot buy cryptocurrencies directly with fiat on these platforms, P2P transactions still make it easy for savvy users to buy on platforms like Binance by using Chinese bank accounts and commercial payment apps to trade between the yuan and stablecoins .
So far, the government has failed to throttle this volume, although bank accounts are occasionally frozen for transactions in P2P markets. The sheer volume of digital transactions makes this difficult to monitor, but it is possible that the government is not as keen on eliminating these channels entirely. Full shutdowns of exchanges and retail investors might be possible, but it would risk freezing China without a horse in the race – something China is reluctant to do.
Wang believes large-volume exchanges from China will continue to adapt, tells the magazine: “We anticipate that they will follow the global trend towards tighter compliance, and as we’ve seen they have already tried to limit leverage and reduce the scope of products available to new users.” Wang points out that, what happened earlier this year when exchanges like Huobi have restricted users Access to futures, a popular but high risk product that is often more like gambling than investing.
Ma remains less convinced of the short term future:
“China’s securities and banking regulators have yet to enact new regulations for trading cryptocurrencies. The uncertainty could mean real, long-term downward pressure on cryptocurrency prices. “
Ma isn’t the only one worried about what’s next. Many people in the Chinese community, including early entrepreneur Bobby Lee, have raised similar concerns, especially after regulators targeted so many companies and individuals in China’s private tech sector this summer.
Should further action be taken against retailers, many Chinese users could be concerned about their ability to cash out in the future, creating more fear in the markets. Then the question arises whether scandals, fraud and social unrest due to speculative investments could force the government to act. The best bet for cryptocurrency holders is an increase in sustainable development that is more technology focused. Rising prices for meme tokens like Dogecoin and Shiba Inu may be attractive to short-term traders, but it increases the likelihood that the government will put pressure on retail users and the exchanges serving them.
A Chinese proverb from which to draw wisdom is the idea of kill the chicken to scare the monkey.
In this story, a man slaughters a chicken to teach a lesson to his cherished dancing monkey. By comparison, China’s regulators won’t be shy of crushing a company if it means others will join in.
The international crypto community should hope that China’s leading projects will be able to navigate these new guidelines unscathed and continue to build a healthy blockchain ecosystem. Chinese entrepreneurship has consistently spawned the largest stock exchanges and major mining companies like Bitmain and Canaan, not to mention many of the leading venture capitalists and investors who have shaped the industry. The regulators’ next step could be an important one as we can figure out whether the top players will be the chicken or the monkey.