China has not completely banned crypto assets | CoinDesk JAPAN

Despite countless Western media reporting on China's “ban” on crypto assets (virtual currencies), cryptocurrency trading continues to flourish in mainland China.

In just one month last year, Binance reportedly handled $90 billion (1.332 trillion yen, equivalent to 148 yen to the dollar) in crypto asset transactions in China, making China the world's largest trading platform. This is Binance's largest market.

How is this possible?

It's tempting to turn this into a story about the power of decentralized currencies to escape government control, and that's certainly true to some extent. But that's only part of the story. The reason crypto assets haven't disappeared in China is because they are not completely prohibited.

This is very different from the impression received from Western media that mentions China's ban on crypto assets and ban on crypto asset trading. A simple search will reveal numerous reports from Western media.

However, when we asked several Chinese industry insiders whether they thought it was accurate to describe crypto assets as prohibited in China, the answer was a resounding “no.”

Their general view was that while it is not illegal for individuals to hold or trade crypto assets, their activities are not protected by law.

This interpretation is not limited to informal conversations. A court in Fujian Province noted that “administrative laws and policies do not completely prohibit trading in crypto assets.”

A Chinese law firm posted a detailed statement on its website stating, “Currently, there are no laws or administrative regulations in our country that prohibit Bitcoin trading activities.''

read between the lines

It's no wonder that many people believe that crypto assets are completely banned in China. Chinese authorities have clearly cracked down on the crypto industry, and there are certainly many crypto-related activities that are prohibited.

But in China, what is often not talked about has special importance. People tend to pay attention to things that are not explicitly restricted. And in that relatively empty space, they find room to maneuver.

Now, let's take a look at the famous crackdown on crypto assets and what it actually entails.

In 2013, China restricted financial and payment institutions' involvement in Bitcoin.

In 2017, China banned ICOs (initial coin offerings). China has also made it clear that it does not welcome crypto exchanges to operate openly.

Before the crackdown in 2017, China was the dominant country in Bitcoin trading volume. The crackdown didn't eradicate crypto trading in mainland China, but it certainly pushed it into a gray area. BTCC, China's oldest Bitcoin exchange, closed its trading operations in mainland China in 2017.

An even larger crackdown was carried out in 2021. The document, signed by 10 Chinese public institutions, listed a wide range of restrictions. According to it, crypto assets do not have the same legal status as fiat currencies. In other words, Bitcoin is not legal tender.

Furthermore, business activities related to crypto assets will be considered illegal financial activities. Exchanges must not operate as centralized entities that buy and sell crypto assets, and it is illegal for foreign crypto exchanges to provide services to Chinese residents over the internet. There are other restrictive statements as well.

In 2021, China also strictly cracked down on domestic crypto asset mining. However, there are notable gaps within these regulations.

For example, the 2021 regulations do not appear to restrict individual crypto asset holdings, nor do they restrict peer-to-peer transactions between individuals.

Another important passage in the 2021 document provides a clearer picture of China's official stance on crypto assets. That passage talks about the legal risks when participating in crypto investment and trading.

It states that if someone invests in crypto assets and violates public order and morals, the relevant civil legal measures will be null and void, and the resulting losses will be borne by the individual.

In other words, don't cry to the government if you lose your savings on meme coins. Personal crypto asset activities are not necessarily protected by law, but that is not the same as being prohibited.

social stability

The above sentence may seem to be poking at the corner of the box. It could be argued that Chinese regulations make crypto trading so difficult that they amount to a virtual ban.

But to understand the current situation, we need to look not just at the rules themselves, but also at how they are being enforced (or not).

It is a well-known fact that China's crackdown on crypto-asset trading has not stopped crypto-asset trading. According to Chainalysis, Chinese traders earned $86 billion from crypto activity between July 2022 and June 2023.

In some cases, they continued to use accounts opened at overseas exchanges. Sometimes I needed a VPN, sometimes I didn't. Peer-to-peer transactions were also possible via social media apps like WeChat and Telegram.

There are also stories of people establishing a company overseas through an intermediary and using that overseas company to perform KYC (identity verification) at a crypto asset exchange.

It is difficult for governments to contain decentralized currencies like Bitcoin. However, the prevailing Western media narrative, that people are trading crypto assets behind the scenes of Chinese authorities, is simply not true.

Put another way, if Binance had been doing $90 billion in trade in China, Chinese authorities would probably have known something.

In fact, the aforementioned Wall Street Journal article reporting on Binance's trading volume in China reveals that local law enforcement is working closely with Binance to identify criminal activity among Binance's more than 900,000 active users. He points out that they were working together.

After checking online crypto exchanges and interviewing retail investors, Reuters found that “accessing Bitcoin is not that difficult on the mainland.” The fact that so many crypto transactions survived the “ban” suggests that China did not intend to kill off crypto assets.

Rather, the main objective was to raise barriers to entry. In this sense, the new regulations were extremely effective. By making transactions more inconvenient, crypto assets can be prevented from spreading to amateur investors.

The last thing the Chinese government wants is for investors to take to the streets to protest their losses. It all comes down to one key principle in China's policy: It is to protect social stability.

leave room

China has reason to be wary of crypto assets. For example, authorities do not want crypto assets to be used to evade capital controls.

But at the same time, China has long embraced the potential of blockchain technology, with the Chinese government publishing the Web3 whitepaper.

China also has ambitious plans for a central bank digital currency (CBDC). The authorities may want to leave some leeway in the crypto assets themselves, just in case.

This hypothesis may help explain what is happening in Hong Kong. Hong Kong has taken very public steps to establish itself as the digital asset hub of Asia, if not the world.

Hong Kong and China are governed by a “one country, two systems” policy, and Hong Kong’s relatively welcoming stance towards crypto assets has at least received some approval from the Chinese government. Allowing crypto assets to flourish in Hong Kong, apart from mainland China, is a way for China to stay in the game while mitigating risks.

In China, we need to look not just at the content of the rules, but also at how people interpret them. To call China's policy a comprehensive crypto ban is to oversimplify the situation in one of the world's most important markets.

｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Image: ESB Professional / Shutterstock.com
｜Original text: China Never Completely Banned Crypto