People in China and the Cryptocurrency Ban
How it works
Boasting the world’s second largest economy, China is a central focal point for any cryptocurrency business. Starting earlier this year, that became a whole lot harder when China instituted a ban on all cryptocurrency related activity. By August, that even included popular communication apps where people simply discussed cryptocurrency markets and news.
The ban has been enforced by shutting down Chinese-based crypto trading exchanges, leaving Chinese bitcoin buyers with no way to trade the popular asset. This has prompted the companies to move servers out of the country and register their business entities in new locations.
The government recently sent a shockwave through the community by shutting down 124 exchanges that were purported to be based outside the country, but were subsequently determined to still be operating from China.
“The latest warning and potentially increased monitoring of foreign platforms are targeted at a batch of smaller exchanges that had claimed to be foreign entities but are in fact operating in China claiming they have outsourced their operations to a Chinese company. Those exchanges whose website landing pages are in Chinese have drawn particular scrutiny by regulators,” said Terence Tsang of TideBit, a centralized exchange based in Hong Kong and Taiwan.
Still, the Chinese government has been particularly vocal and persistent in attempting to block all forms of cryptocurrency trading. This is based on a belief that the central authority should be the only entity to issue currency, and has led them to at least allow people to own bitcoin as an ‘asset,’ instead of a currency.
In addition to shutting down exchanges and messaging websites, China has also blocked websites that provide access to ICOs, and shut down payment services that accept cryptocurrency, bitcoin included.
Despite these attempts by the Chinese government to stop people from buying bitcoin in China, creative investors and traders still manage to be an integral part in the global cryptocurrency marketplace.
There are a variety of ways that Chinese-based companies and investors are circumventing the many efforts of the government to crack down on crypto trading.
Moving exchanges outside the country
The primary method for continuing trading is through the aforementioned moving exchanges outside the country. By setting up a legal entity outside China, exchanges can operate despite the local ban. There’s currently strong competition as companies work to quickly get up and running under new addresses from other locations.
2) Using VPNs (Virtual Private Networks)
Besides the exchanges moving out of the country, investors are using technology to mask their activities from scrutiny by the authorities. Using VPNs (Virtual Private Networks), Chinese traders convert fiat money into a stablecoin like Tether (USDT), which is pegged to the US Dollar, and use that to exchange for cryptocurrencies – most commonly bitcoin.
Chinese regulators do have the technical ability to shut down VPNs, but it remains unclear how they would identify the particular traffic without cutting off all other uses of the technology at the same time. By using peer-to-peer transactions, there’s very little that regulators can do to stop the regular trade of cryptocurrency.
3) Despite the ban, third-party payment companies still work with crypto
In a recent article, South China Morning Post pointed out that regulators are working with third-party payment companies to stop processing payments that appear to be linked to cryptocurrency trading.
“However, traditionally it takes numerous conversations with different stakeholders to reach a consensus on configuring a firewall, which lengthens the process. There are no current or even foreseeable restrictions on using VPNs in China, providing a potential loophole for traders to access exchange platforms,” the source said.
These loopholes have continued to thwart regulators, who aim to completely suppress cryptocurrency trade in the country. While the ban hasn’t stopped trade, it did significantly slow. After shutting down those 124 exchanges, the global volume for trading bitcoin went down 30%. However, as entities adapt, the impact has proven much smaller.
In a somewhat ironic twist, despite all the suppression of cryptocurrency trade, the Chinese government is bullish on the use of blockchain for business solutions.
As regulators all around the world grapple with the ever-growing cryptocurrency market, one thing is clear: even when powerful governments like China step in, they find it very difficult to suppress trade. The very nature of cryptocurrency, and the privacy and security that the underlying blockchain can provide, means it’s going to prove very difficult to regulate.
For the global cryptocurrency market, and for investors outside China, that is good news. Losing such a large economy would be devastating. For now, creative Chinese private investors and cryptocurrency businesses will continue to use their creativity to stay in the game.