China Did Not Fully Prohibit Cryptocurrency Transactions

Contrary to the widespread portrayal by Western media outlets of a Chinese cryptocurrency “ban,” cryptocurrency transactions continue to flourish in China. In a single month of the previous year, reports reveal that Binance undertook $90 billion worth of cryptocurrency trades on the Chinese mainland, positioning China as the premier market for the leading global exchange.

How can this activity persist? While it might be alluring to frame this as a narrative celebrating the elusiveness of decentralized finance from regulatory regimes, the reality is not entirely captured by this interpretation. Cryptocurrency has not vanished within China; a comprehensive ban is not in effect.

This differs significantly from the impression cast by Western media, which repeatedly cites a Chinese prohibition on cryptocurrency trading. The sheer volume of such claims requires no enumeration – a simple search will demonstrate the common refrain. But when querying several Chinese industry experts about the accuracy of labeling cryptocurrency as banned in China, I was met with a resounding sentiment of disagreement. The prevailing consensus is that the personal possession or trading of cryptocurrencies by individuals isn’t illegal, though it lacks legal protection.

Legal interpretations aren’t confined to casual discourse alone. An article by writers from a Fujian province court acknowledges that “administrative mandates and policies do not impose a blanket ban on virtual currency dealings.” Additionally, a Chinese law company conveyed in a detailed publication that “currently, there are no legal statutes or administrative regulations expressly precluding Bitcoin transactional activities in our nation.”

Understanding the reasons for the presumption of a total ban on crypto in China requires acknowledging the clear government clampdown on the cryptocurrency sector, with numerous crypto-associated activities being unequivocally banned.

In China, significance is often attributed to that which is not explicitly forbidden. Observers commonly pay heed to regulatory silence, exploiting the undefined areas to their advantage.

Reviewing well-known regulatory interventions and their actual stipulations is informative. In 2013, China imposed restrictions on financial institutions’ engagement with Bitcoin. Notably, in 2017, China prohibited initial coin offerings (ICOs) and signaled that virtual currency exchanges were unwelcome. Prior to the 2017 measures, China was a major force in Bitcoin volume trading. The crackdown relocated crypto trading to a legal gray zone, prompting BTCC, China’s oldest Bitcoin marketplace, to shutter its Chinese trade operations in 2017.

2021 witnessed an even more stringent crackdown, with ten Chinese official bodies endorsing an extensive list of prohibitions. The document underscores that virtual currencies lack the status of legal tender, categorizes virtual currency-centric business as illegal financial activity, and designates offering virtual currency exchange services to Chinese residents via the Internet as an illegal act. The document also intensified actions against domestic crypto mining. Despite these constraints, the legislature did not proscribe private cryptocurrency possession nor individual peer-to-peer trading.

Another telling section in the 2021 regulations addresses the legal perils of engaging in virtual currency investment and trading, noting that individuals bear responsibility for any losses incurred from investments that conflict with public morality.

The distinction might seem like a minor technicality. Some would argue that China’s regulations effectively amount to a ban due to the challenging barriers they create for cryptocurrency trade. However, to grasp the actual context, one must consider not only the written rules but also their enforcement.

The claim that China’s harsh stance halted cryptocurrency commerce is inaccurate. Data from Chainalysis indicates that Chinese traders profited by $86 billion from cryptocurrency between July 2022 and June 2023. Trading persisted through international accounts and sometimes required the use of a virtual private network (VPN). Alternative methods, such as peer-to-peer exchanges on apps like WeChat or Telegram, have likewise remained viable. Additionally, some have utilized overseas entities to fulfill institutional know-your-customer (KYC) prerequisites on exchanges.

While Bitcoin’s decentralized nature presents challenges for governmental containment, the portrayal of stealthy cryptocurrency trading in China is misleading. For instance, the aforementioned WSJ article revealed collaboration between local law enforcement and Binance to pinpoint illicit activities among the exchange’s vast user base. A Reuters investigation also found that mainland access to bitcoin faced fewer obstacles than commonly assumed.

That extensive cryptocurrency commerce survived China’s regulations implies that the country’s leadership did not aim to eliminate cryptocurrency entirely. Instead, the objective was likely to elevate the threshold for entry, thereby shielding the general populace from potential losses and civil unrest. This aligns with one of China’s central policy tenets: ensuring social harmony.

Crypto remains a cautious concern for China, which seeks to prevent its use for bypassing capital restrictions, while simultaneously recognizing the potential of blockchain technology. Case in point is China’s initiative on releasing a Web3 white paper, along with its development of a central bank digital currency.

This notion is perhaps clarified by the developments in Hong Kong, which is striving to position itself as a major digital asset epicenter in Asia, and by extension globally, as seen inrecent strides. Considering Hong Kong’s “one country, two systems” relationship with China, its relatively open attitude towards cryptocurrency likely bears Beijing’s tacit approval. Maintaining some degree of openness to cryptocurrency in Hong Kong, if not the mainland, permits China to mitigate risks while staying in the loop.

In interpreting China’s stance on cryptocurrency, scrutiny must extend beyond official regulations and contemplate the population’s practical applications of them. To view the Chinese policy as an absolute ban on cryptocurrency is to oversimplify the complexities of one of the global market’s most significant players.