Regulatory review and outlook for the cryptocurrency market in China

Cover pic

This is a guest post by Zarc Gin who we interviewed last week. Zarc works for a Chinese VC Fund called Warp Speed Capital. Daily Fintech subscribers may recognise the name as somebody who has also provided insight to us related to Insurtech in China. In this post we asked Zarc for his take on how the regulatory crackdown that started in September is affecting the market.

Regulatory Review – the most strict regulation policy in 2017

China has been one of the biggest market for almost every aspect of Bitcoin and Cryptocurrencies, from Bitcoin mining to trading volumes in exchanges. According to news from Tencent Finance, trading volumes of Bitcoin in China accounted for 80% of overall trades globally last August.

However, things changed dramatically after the regulatory crackdown in China in September. At 3 p.m. on September 4th, seven government agencies including Chinese central bank, Cyberspace Administration of China, Ministry of Industry and Information Technology of the PRC, State Administration for Industry and Commerce China Banking Regulatory Commission, China Securities Regulatory Commission and China Insurance Regulatory Commission have issued a joint statement on the risk of ICO and banning of cryptocurrency exchanges. Most of the Bitcoin investors in China are opportunists, speculators and even gamblers, some of them made a fortune by being there early, but most of them suffered badly from the drastic fluctuation of Bitcoin price. The statement from Chinese regulators is meant to protect individual investors and keep the economic environment stable.

After Chinese government issued the ban on exchanges, Bitcoin and altercoins’ price took a hit globally, dropping from $4900 to $3300 (data extracted from here). Trading volumes in China also plummeted and now more than half of world’s Bitcoin trades take place in Japan. Both investors and exchanges in China have been seeking their Bitcoin opportunities overseas since then. Despite of the decline within China, Chinese investors and exchanges still managed to become one of the major forces in the Bitcoin world.

By running through one of the major regulatory crackdown in China last year, we can see that the moves Chinese government made on regulations could have impact on the Bitcoin and cryptocurrency market, at least for a short period of time, it means both opportunities and risks for global investors.

Regulatory outlook – getting tighter or loosening up?

Encouraging the development of blockchain technology while tightening the regulation on cryptocurrency trades have been the attitude from Chinese regulators to the blockchain revolution for a long time. The blockchain hype caused by the surge of Bitcoin price in the end of 2017 has strengthened their will to isolate blockchain from cryptocurrency and treat them differently.

So as far as cryptocurrency is concerned, I think the regulation on it will get tighter in 2018. Despite of the ban on exchanges last September, Chinese exchanges have found their way to bypass the regulation and made a huge fortune during the surge last December.

Exchanges like Binance, Huobi and OKEx have moved their base to districts like Hong Kong and Singapore to avoid regulation from China mainland. But a vast majority of their users are still from China mainland. Investors can only make crypto-to-crypto trades in exchanges now, and if investors want to buy/sell crypto with RMB, the exchanges will help set up buyers and sellers and make sure this kind of trades happen outside the exchange system.

This pattern worked out perfectly for exchanges, they attracted new users from Fiat Currency trade and charged fees from crypto-to-crypto trades. Since the trade volumes are tremendous, they are making a huge profit out of it.

But it seems that the good time for exchange won’t last long; rumors of tighter regulations against crypto exchanges are flying every day in China. For example, Binance has issued a statement on Feb. 1st that said will no longer provide service for users in China mainland. They have blocked all IP addresses from China. It’s either that they were warned by Chinese regulators or they have heard inside information and made a quick move.

In the beginning of this March, the official Wechat account of Huobi and OKEx either changed its name or got banned. Sources even said that CEO and COO of Huobi haven been restricted to go abroad.

Rumors also said that there will be a major move from regulators on March 15th, the World Consumer Rights Day.

Rumors are speculated by the public, but it is undoubtedly that there are plenty of chaos and uncertainty for cryptocurrency in China.

The Bitcoin world is still undergoing the process of ‘de-sinification’, which by my definition, is to get rid of the influence caused by Chinese authorities. After the major regulatory crackdown last September, I would say we are already 50% through the process, because Chinese authority is relatively a small factor in the current bearish market, but as long as centralized exchanges are still in the core of cryptocurrency trades, authorities are capable of making a big move. Maybe we can completely get rid of government influence when the decentralized exchanges find a way to become the mainstream for cryptocurrency trade.

Image Source

Bernard Lunn is a Fintech deal-maker, author, adviser and thought-leader.

You can reach out directly to discuss our market development services by sending an email to julia at dailyfintech dot com

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.