Chinese investors’ indifference to the government’s largest crackdown on cryptocurrency trading since 2017 highlights the challenges Beijing faces as it tries to curb speculation in digital assets.
Since the ban on domestic exchanges in 2017, the steady recovery of over-the-counter trading platforms used by Chinese cryptocurrency traders has given way to subconscious selling. A key indicator of local sentiment-the exchange rate between the renminbi and the stablecoin Tether-according to data from the encrypted data platform Feixiaohao (equivalent to China’s CoinMarketCap), the index fell after the government issued a warning earlier this month 4.4%, but more than half of the losses have since recovered.
After the frantic surge of Bitcoin and other tokens in the past six months intensified the Communist Party’s long-standing concerns about the possibility of individual investor fraud, money laundering, and transaction losses, China stepped up its crackdown. However, transactions on local OTC platforms and peer-to-peer networks are difficult to track, which means that it is difficult for the authorities to implement wholesale bans.
After concerns about China’s declining purchasing power caused digital assets to fall by nearly $1 trillion from a record high in mid-May, this may give global cryptocurrency enthusiasts a sigh of relief.
Regarding the losses and blows, “I don’t care,” said Charles, a 35-year-old Shanghai real estate consultant who asked to use his English name only. He has been buying cryptocurrencies since 2017 and claimed to have lost $11 million in three days in the most recent pullback. “For me, this is a return to the profits I have made in the past few months,” he said. “I’m considering the 10-20 year range.”
According to official media reports, before China banned cryptocurrency exchanges in 2017, local investors estimated that they owned 7% of the world’s bitcoin, accounting for about 80% of transactions. The exchange ban makes it impossible to measure these numbers today, but it is still widely believed that offshore venues accessed by Chinese investors through domestic over-the-counter trading platforms and virtual private networks play an important role in the cryptocurrency world.
It is difficult for the Chinese government to track domestic transactions involving the renminbi and digital currencies because they are usually conducted in two separate steps.
The first occurred on over-the-counter trading platforms operated by companies such as Huobi and OKEx, which allow traders to post bids and offers. Once the two parties agree on the price, the buyer will use a separate payment platform-operated by their bank or a financial technology company such as Ant Group-to pay the seller in RMB. Digital coins are usually hosted by over-the-counter trading platforms until the RMB payment is cleared and then transferred to the buyer. Chinese regulators are often unable to link one step of a transaction with another.
Since RMB transactions are conducted entirely within China’s domestic financial system, the risk of large-scale capital outflows is relatively low. But this has not stopped the government from warning financial companies and individual investors to stay away from cryptocurrencies.
Regulators this month reminded banks and payment companies of the requirements to identify and block suspicious transactions, noting that facilitating cryptocurrency transactions often violates bank rules. The State Council of China called for the ban on Bitcoin trading and mining, vowing to “resolutely” guard against financial risks.
Policymakers may be keen to avoid any major market chaos around the 100th anniversary of the politically sensitive Communist Party in power on July 1.
After the government issued a statement, Huobi said that it has stopped its mining machine custody services in mainland China and is reducing futures contracts and leveraged investment products in some markets. It is not clear whether the company plans to shut down its over-the-counter trading platform.
According to people familiar with the matter, so far, Chinese regulators have not labelled personal transactions illegally, but the crackdown will involve public security departments because some of these activities are suspected of facilitating money laundering and terrorist financing.
The Beijing police have distributed printed warnings about the potential risks associated with cryptocurrencies. According to a notice seen by Bloomberg, virtual currency is one of the popular methods of the latest scam. Anyone who is “in a panic, indistinguishable or unsure of what to do” should call the listed local police contact.
On social media, some cryptocurrency investors have unconfirmed claims that they were recently subpoenaed by the local police and warned of the risks of investing in cryptocurrencies. An investor said that the local authorities asked him to sell his shares. Another said that the police asked him to delete the trading application from his phone.
The person familiar with the matter, who asked not to be named, said that Chinese officials viewed the success of cleaning up the P2P lending industry two years ago as a model for cracking down on cryptocurrencies. After fraud and breach of contract became rampant, the country eliminated the P2P industry, which in some cases led to suicides and street protests. In its heyday, the industry had more than 50 million users and $150 billion in outstanding loans.
The extreme price fluctuations of cryptocurrencies have left their mark. In a high-profile case, a Chinese man from the eastern city of Dalian killed his 3-year-old after losing 20 million yuan ($3.1 million) in a leveraged Bitcoin bet in June last year. Daughter and tried to commit suicide with his wife, according to local media reports.
Three weeks ago, Beijing science and technology worker Peter invested 20,000 yuan into cryptocurrency, just in time for the latest round of volatility. Within a few days, his investment portfolio grew to nearly 100,000 yuan, and then quickly fell back to 14,000 yuan. He echoed the philosophy of timely enjoyment of global cryptocurrency traders: “If everything goes to zero, it doesn’t matter. But what if one day it brings me sudden wealth?”