Last Friday afternoon, 10 Chinese government entities — including China’s central bank — issued a notice effectively banning all crypto-related activities in the country.
It is essential to understand what this ban is about, how it is different from previous bans and what its potential impact could look like.
Let’s start with what the ban covers.
The notice released by China’s top regulatory bodies focuses on three core issues.
First, the declaration clarifies that virtual currencies are not legal in the country and that any crypto-related transactions are illegal.
Not only does this announcement explicitly ban financial service providers like banks from opening accounts with crypto exchanges or crypto-related entities (which was already the case before), but this blanket ban also forbids the provision of other services, from marketing to IT, to such crypto firms.
Second, this ban also targets overseas crypto exchanges.
The notice explicitly mentions that the provision of crypto services by overseas exchanges to Chinese residents is illegal.
This was the first time that overseas exchanges were so explicitly targeted.
And finally, unlike previous announcements that were issued at most by a handful of government bodies or trade associations, this latest notice was the most coordinated yet, as the ban was issued jointly by ten separate government bodies, including the central bank, whilst explicitly mentioning the coordination on various enforcement aspects, from monitoring and information sharing to actual implementation.
Now, how is this ban different from previous bans?
First, this ban should not come as a surprise.
China has made its position on Bitcoin and cryptocurrency transactions quite evident in the past.
In 2017, for example, China issued a ban on ICOs.
And just this past summer, three industry bodies came out and warned the public against the risks of trading cryptocurrencies, with the PBOC stating that banks should not provide services to crypto companies.
Then came China’s clampdowns on crypto mining that saw a mass exodus of mining pools begin to relocate to more favorable jurisdictions.
But this notice leaves no area for interpretation and makes it crystal clear that Bitcoin and cryptocurrencies are no longer welcome in China.
There are several areas that I’m paying close attention to following this announcement.
First of all, while crypto transactions are now clearly outlawed, the question now becomes what happens with the existing ownership of crypto assets.
Two years ago, China confirmed that ownership of cryptocurrencies was legal, but a court ruling in 2021 took a slightly different approach.
It will be very interesting to see if this latest ban will impact the mere act of holding cryptocurrencies and whether or not they will still be considered property.
It will also be interesting to watch what happens to broader services in the space, specifically companies in mainland China that provide marketing, IT, data or hosting services to crypto companies and whether they will de facto stop servicing the industry.
The second thing to watch will be the impact on overseas exchanges.
This notification was quite clear that overseas exchanges’ provision of crypto services to Chinese residents is illegal.
This will directly impact the broader space, as while there are not that many exchanges officially based in mainland China, many of the global crypto exchanges, especially those with Chinese links, still service clients from the mainland for crypto to crypto or P2P trading, for example.
While many of the large centralized and regulated exchanges will probably stop accepting mainland Chinese clients (and potentially off-board them), it will be interesting to see what proportion of the overall exchange market does so.
Ironically, these Chinese crypto traders may soon feel what American crypto traders have been experiencing for some time, as most non-U.S. crypto exchanges have been banning “U.S. person” clients for quite some time.
However, the bigger question this ban raises is whether it can work.
Given that Bitcoin and its peers are decentralized currencies, it is, in practice, very difficult to completely ban them.
In theory, anybody in China who has an Ethereum wallet could start trading on these permissionless decentralized exchanges where there is no KYC (know your customer).
Even if certain websites are banned, many crypto traders in China and the United States already use VPNs to easily get around these restrictions.
Second, the decentralized nature of Bitcoin makes it impossible to stop old-school peer-to-peer transactions.
Bitcoin, by design, allows individuals to transfer value to one another with no centralized intermediary.
So it will be challenging to stop two individuals who meet in person and conduct a peer-to-peer Bitcoin transaction like in the early days of Bitcoin when people used to buy the asset at physical meet-ups.
And finally, it will be tough to stop PRC citizens who are traveling or even living abroad from buying cryptocurrencies.
For example, a PRC national could travel anywhere outside mainland China, buy some Bitcoin, put it on their hardware wallet, and come back to China.
Trying to prevent such activity is very difficult.
The many retail-focused OTC Bitcoin brokers next to the high-end stores or tourist areas that already cater to this market today in Hong Kong are a great example.
And let’s not forget the millions of Chinese nationals living worldwide, from students to workers.
Stopping them from buying or bringing some Bitcoin back home will be extremely difficult.
Now, what will the potential impact of this ban be?
First, while the market fell slightly following the news, this should not have a significant impact in the long term.
There have been numerous “Bitcoin bans” from China in the past.
Such a development was already expected and baked into the price of Bitcoin and other crypto assets, especially following China’s actions against Bitcoin mining this past summer.
It will be interesting to see whether this will accelerate the implementation of the official Chinese digital currency, the e-CNY, China’s central bank digital currency (CBDC).
China is light years ahead of other countries around the world when it comes to the development of CBDCs, with the government launching its research efforts in CBDCs back in 2014.
And over the last couple of months, there have been over US$5 billion in e-CNY-based transactions, with over 1.3 million use cases and over 30 million retail and corporate wallets opened.
And let’s not forget that the Winter Olympics are just around the corner and expected to begin on Feb. 4, when many believe the e-CNY will be made widely available.
Now, who stands to benefit from this development?
Many countries benefited from China’s ban on Bitcoin mining.
Before China’s actions against Bitcoin mining earlier this year, China was responsible for roughly 65% of Bitcoin mining around the globe.
Now, much of that activity has moved out — some to Russia and Kazakhstan.
And even more to the United States, meaning that America could wind up accounting for the lion’s share of Bitcoin mining activity down the line.
While the mining migration out of China consisted mainly of mining machines that do not contribute much to local economies, there is now a possibility following this latest ban to attract real human capital, from R&D to operations.
This can be a great opportunity for the likes of, say, Dubai or Miami, each of which is trying to position itself as a global crypto hub, especially when some of the natural landing spots of the crypto community in China, like Hong Kong or Singapore, are currently not as attractive due to unfavorable regulatory conditions, or simply due to very strict Covid-19 arrival restrictions.
It will be fascinating to see how this development unfolds over the coming months.
This op-ed reflects Henri’s personal views and not those of any organizations he is involved with.
