Assessing The Impact of China’s Crypto Crackdown

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China’s relationship with cryptocurrency is a tale of contradictions. Once a global leader in Bitcoin mining and cryptocurrency trading, the country seemed poised to dominate the digital currency landscape. But all of a sudden, it became one of its biggest adversaries. And it doesn’t seem to plan to budge despite the increasing global appeal of the industry.

In this article, we’ll dive into the far-reaching effects of China’s crypto crackdown—exploring the resilience of underground trading, Hong Kong’s emergence as a pro-crypto haven, and the role of China’s Central Bank Digital Currency (CBDC) in shaping the future of digital assets in the world’s second-largest economy.

Let’s uncover how a nation once at the forefront of the crypto revolution is now reshaping the industry in unexpected ways.

A Brief History/Context of China’s Relationship With Crypto

We can trace China’s relationship to as far back as 2011 when BTC China, the country’s first cryptocurrency exchange, was launched and paved the way for a flourishing crypto ecosystem. Remember, the first iteration of cryptocurrency as we know it today was introduced in 2009. The Chinese people were in on crypto long before the world caught on.

By 2013, even Baidu, China’s largest search engine, started accepting Bitcoin for its website security services—an early sign of mainstream adoption. A year later, Bitmain, a pioneering giant in cryptocurrency mining equipment, was founded, cementing China’s role as a crypto powerhouse.

Yet, this embrace of innovation came with growing scepticism from the Chinese government. In 2013, regulators began to signal their discomfort by barring financial institutions from handling Bitcoin transactions. What started as a cautious stance soon escalated, fueled by concerns over cryptocurrency’s potential to destabilize the yuan and undermine China’s tightly controlled financial system.

By 2017, the government banned initial coin offerings (ICOs), and by 2021, the People’s Bank of China (PBoC) took the ultimate step—declaring almost all crypto-related activities illegal. Trading, mining, and even promoting cryptocurrencies were swept under the ban, leaving the global crypto industry to grapple with the fallout.

Impact on China’s Crypto Market: Has Trading & Use Really Stopped?

China’s 2021 crackdown on cryptocurrency imposed sweeping restrictions on trading, mining, and other crypto-related activities, significantly disrupting the global crypto landscape. The effects of this crackdown were felt not only within China but also reverberated across international markets, reshaping the dynamics of the cryptocurrency industry in multiple ways.

However, despite the government’s restrictions, crypto activity in China has not ceased entirely. Instead, it has shifted underground. Chinese investors have developed innovative ways to bypass the ban, leveraging over-the-counter (OTC) trading desks, virtual private networks (VPNs), and decentralized exchanges (DEXs).

A 2024 Chainalysis report revealed that the total crypto trading volume in China via OTC desks exceeded $20 billion. Remarkably, trading volumes in Q2 2024 were three times higher than those in the same period of 2021, shortly after the ban was enacted.

The ban succeeded in some aspects, though. It led to a sharp decline in web traffic to crypto trading services originating from China, a trend that had begun as early as mid-2020. This can be partly explained away because of the shift in the use of unofficial and cloaked means to access the services. But the biggest success the ban had was in the Chinese crypto mining sector.

The Great Mining Migration

Before the crackdown, China was the epicentre of Bitcoin mining, contributing to up to 75% of the world’s Bitcoin mining capacity. However, in the summer of 2021, the government’s measures led to a dramatic shift in the mining landscape. The crackdown forced miners to relocate to other regions with favourable conditions.

Neighboring Kazakhstan became a major beneficiary of this migration thanks to its inexpensive and abundant coal-based energy, relaxed regulatory environment, and political stability.

The United States also emerged as a new hotspot for mining operations, offering miners access to renewable energy sources, advanced infrastructure, and a robust legal framework. As a result, the global distribution of Bitcoin mining became more diversified, reducing China’s dominance in the sector significantly within a matter of months.

But here comes the interesting contradictions. China is playing a significant role in the crypto industry, both positively and negatively.

Hong Kong’s Role As A Crypto Oasis

While mainland China tightened its grip on cryptocurrencies, Hong Kong emerged as a bright spot for the industry. In the last few years, the city’s administration has introduced crypto-friendly regulations and initiatives that have captured global attention.

Notably, Hong Kong recorded the highest year-over-year growth in Eastern Asia at 85.6% and currently ranks 30th on the Global Crypto Adoption Index. The city was the first jurisdiction in Asia to approve the public trading of Bitcoin and Ether exchange-traded funds (ETFs).

It also has a highly active OTC market, which has made it a hotspot for institutional investors and high-net-worth individuals. According to Chainalysis, Between July 2022 and June 2023, Hong Kong received $64 billion in crypto transactions, a figure not far behind mainland China’s $86.4 billion despite its significantly smaller population.

Hong Kong is already known as a global financial hub. This pro-crypto stance is part of a broader effort to retain that status. The city’s legal system recognizes cryptocurrencies as property, offering protections for traders and investors. The Hong Kong Monetary Authority has invested heavily in fintech, providing subsidies for training finance practitioners and fostering innovation.

However, the fact that its disposition contradicts Mainland China’s is something hard to imagine. Hong Kong already has an interesting relationship with China. The “one country, two systems” governance model ensures that Hong Kong’s financial system remains distinct from the mainland. Thus, Hong Kong’s alignment with global financial markets allows it to develop as a cryptocurrency hub independently of Beijing’s policies.

China’s CBDC: A Replacement for Crypto?

Another twist to the story comes from Mainland China itself. China has aggressively promoted its Central Bank Digital Currency (CBDC), the digital yuan (eCNY), after its crackdown on cryptocurrencies.

Unlike decentralized cryptocurrencies such as Bitcoin, the eCNY operates under a fully centralized framework controlled exclusively by the Chinese government. The People’s Bank of China’s pilot project has seen significant growth, with cumulative transaction volumes reaching RMB 6.6 trillion ($910 billion) by May 2024. The adoption of the digital yuan has also been bolstered by increased corporate use cases, with 950 million transactions recorded by mid-2024.

While the eCNY has achieved significant traction domestically, its centralized nature creates scepticism about its potential to rival the global influence of cryptocurrencies. For crypto enthusiasts, decentralized systems represent a financial innovation and a philosophical departure from state-controlled monetary frameworks.

Ultimately, China’s CBDC strategy reflects its broader political and economic objectives: maintaining control over its financial ecosystem, advancing the internationalization of the yuan, and offering an alternative to private cryptocurrencies.

Whether the yuan will complement, compete with, or fall short of the impact of cryptocurrencies in China remains to be seen, but its influence is undeniable.

Looking Ahead: Will China Unban Crypto?

China’s crypto crackdown reveals the government’s desire to maintain control over capital flow. However, the persistence of underground crypto trading and Hong Kong’s aggressive push to establish itself as a digital asset hub highlights the limits of mainland China’s restrictions.

Some observers speculate that Hong Kong’s accelerated efforts to become a cryptocurrency hub might eventually influence mainland China to ease its crypto policies. Proponents of this view, such as Tron founder Justin Sun, argue that global trends, like the recent approval of spot Bitcoin ETFs in the U.S., signal an unstoppable momentum for cryptocurrency adoption. This perspective overlooks one critical factor.

China has invested heavily in its digital yuan, and it is unlikely that Beijing would welcome competition from private crypto assets that could undermine its monetary authority.

Though some of the top stakeholders in the country’s financial market have urged the government to rethink the ban, there is still very little indication that an official action will be announced soon.

In conclusion, China’s crypto story is far from over. While the government’s crackdown has undoubtedly reshaped the crypto landscape within its borders, the global implications and future developments remain uncertain. The interplay between regulation, innovation, and market forces will continue to shape the trajectory of cryptocurrencies both in China and on the international stage. We will have to see how Beijing intends to play this out.

Disclaimer: This piece is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.

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