In the aftermath of September 2017’s historic ban on initial coin offerings (ICOs), and the banishment of domestic crypto trading platforms, a resourceful crypto community was already showing signs of devising multiple means of circumventing the authorities’ increasingly draconian actions.
Part two of Cointelegraph’s three-part series continues to investigate the factors that catapulted China’s regulators to redouble their efforts to curb the meteoric rise of crypto trades; their unprecedented actions to try to cut the country’s crypto mining titans down to size; the response of China’s tech triumvirate — Alibaba, Tencent, and Baidu — to new constraints; and as ever, the proliferating means investors continue to use to scale an “impregnable” anti-crypto wall.
January 2018: Pressure on China’s Bitcoin miners
In December 2017, Leonhard Weese, president of the Bitcoin Association of Hong Kong had observed: China’s “authorities are more worried about the narrative, rather than what people actually do. Once it gets widely reported that Bitcoin trading is well and alive in China, the government will again try to put a lid on it.”
Wesse’s predictions were sound: as early as January 4, local reports revealed that financial regulators had frozen an unknown number of OTC trade accounts country-wide. The combined value of those frozen in the southern cities of Shenzhen and Guangzhou was said to be over 300 million yuan ($46.1 million at the time); around thirty further accounts were said to have been frozen in the northern province of Hebei.
Sources further indicated that a policy to curb the country’s thriving Bitcoin mining industry was in the works. Due to the country’s abundance of cheap energy and hardware, early 2017 reportsshowed that over two-thirds of global mining pools were based in China.
Mining behemoths, such as Beijing-born Bitmain, not only benefited from the power glut in coal-rich regions such as Xinjiang and Inner Mongolia, but were reportedly being cut bespoke deals by local government. In Mongolia’s Ordos city, authorities were said to be offering
Bitmain a subsidized electricity rate of just four U.S. cents per kilowatt hour — 30 percent cheaper than the going rate for other local industrial firms.
On January 2, a leaked memo from the PBoC to a top-level government internet finance group — the Leading Group of Internet Financial Risks Remediation — reportedly proposed that Bitcoin miners should make an “orderly exit” from China due to them consuming “huge amounts of resources and stoking speculation of virtual currencies.”
The ties between the central bank and the internet-finance regulator were said to be close, given that a deputy PBoC governor, Pan Gongsheng, had been instated as head of the regulatory group when it had first been established back in 2016. Pan was not the most crypto-receptive of figures: he was said to have predicted the death of Bitcoin in December 2017, and was quoted by Chinese media that same month as saying that:
“If we had not shut down Bitcoin exchanges and cracked down on ICOs several months ago, if China still accounted for more than 80% of the world’s Bitcoin trading and ICO fundraising, everyone, what would happen today? Thinking of this question makes me scared.”
Returning to the leaked Bitcoin miner memo, Quartz reported that the internet-finance regulator subsequently ordered local authorities to wield all available means in their arsenal — including “measures linked to electricity prices, land use, tax, and environmental protection” — to pressure miners to cease their operations.
At a national level, the regulator is reported to have requested local authorities to submit a progress report by January 10, detailing the existing mining facilities in their jurisdictions, followed by monthly reports on the progress of miners’ “exits” on the 10th of each month.
A separate leaked document from the regulator’s regional Xinjiang office is alleged to have ordered authorities in western China to submit similar reports, citing near-identical concerns. Quartz’ enquiries with the Xinjiang office at the time confirmed the authenticity of the latter, regional document.
In parallel, Bloomberg reported on a “closed-door meeting” said to have been held by the PBoC at the end of December 2017, allegedly outlining a plan to direct a wider spectrum of local officials and national regulators to monitor — and even potentially restrict — high energy consumption associated with the mining industry.
Anonymous sources had told the media that Chinese officials were “concerned” that miners were “taking advantage” of cheap electricity sources in certain regions. Bloomberg noted, however, that Caixin news agency had refuted that the PBoC meeting had taken place, citing an undisclosed source.
On January 13, China’s Economic Observer (EEO) reported on the unfolding consequences and responses to the government’s “tightened” approach to mining.
Officials from the relevant authorities in China’s eastern provinces of Shandong and Jiangsu observed that the regulatory pressure had been uneven with respect to different geographic regions: they claimed not to have received any notices, and considered that the “clean-up” was focused on the country’s central and western regions.
Seemingly uneven pressure was consistent with news of a national effort to transfer power away from energy-rich but sparsely-populated regions to where it was needed most. Virtually all the lines in China’s new ultra-high-voltage transmission network — designed to redirect electricity from the oversupplied north and west to the east — were set to be completed that year.
Lauri Myllyvirta, a Beijing-based campaigner with Greenpeace, said she considered that Bitcoin mining in China at the time was “mainly an opportunistic way of making some money out of the failures and inefficiencies of the power system.”
EEO cited “a person familiar with the matter” as saying that this fact had not gone unnoticed, and that regulation of Bitcoin mining pools had in fact “entered the regulatory horizon as early as the September 2017 ICO policy.”
As a consequence of the intensified pressure, several mines in the southwestern Sichuan province — where mining activity is said to have been concentrated — had now entered a “period of downtime” pending regulatory clarification. The Leading Group of Internet Financial Risks Remediation is reported to have been undertaking an “inventory” of mining activities across the province.
EEO also noted that some large mining pools were beginning to relocate their operations overseas ; for small-medium sized pools, however, the cost of overseas transition was said to be “too difficult to bear,” as corroborated by one small mining pool owner.
On January 11, ViaBTC, reportedly the world’s fourth largest Bitcoin mining pool at the time, issueda statement that it would be increasing its cloud mining maintenance fee:
“Due to recent policy changes, some of our long-term hosting partners are facing a crisis of closure as mining resources in Mainland China become more scarce, leading to rocketing costs of our cloud mining operation.”
In parallel, “three independent sources” revealed that local authorities had frozen assets totalling over 600 million yuan in bank accounts that were found to be investing in crypto mining firms in the provinces of Hunan, Heilongjiang, Hebei, and Guangdong.
January–July 2018: Escalation of crypto trading ban to include “exchange-like” services
As it redoubled efforts to purge the economy of perceived risks, Beijing looked set to escalate its ban on crypto trading to include “market-making” platforms, the definition of which was not — at the outset — clearly delineated. As early as the previous September, reports had already indicatedthat the government would be looking to extend its ban beyond domestic exchanges and clamp down on Chinese mainland access to foreign exchange sites.
On January 15, Bloomberg cited undisclosed sources that claimed the authorities would indeed try to “block domestic access to homegrown and offshore platforms that enable centralized trading,” without defining exactly ”how policy makers [would] define such platforms.”
Despite September’s domestic exchange closures, analyses in January continued to include Bitcoin trading as a factor in capital outflows from China: an article January 6 suggested that the government’s capital-control measures — which included subjecting yuan conversions to a quota — only further incentivized crypto trades. Shanghai-based economist Qiu Difan noted that:
“Under [China’s] regulations on cross-border flows, the appeal of using Bitcoin to obtain foreign exchange and take capital out of the country will increase, especially for funds that may have been used in illegal operations such as money laundering.”
Thomas Glucksmann, head of marketing at Hong Kong-based over-the-counter (OTC) crypto trading desk Gatecoin, considered that “lackluster equity performance, a potential real-estate bubble, yuan weakness, and capital controls are all driving Chinese demand for Bitcoin.”
With an intensified crypto clampdown imminent, BTCC CEO Bobby Lee presciently noted that the government’s intent to reduce trading by shuttering crypto exchanges would be a Pyrrhic victory: “they can’t crack on Bitcoin itself,” he said. In response to restrictions, “the desire will just go underground, and when the desire goes underground, it’s out of control.”
This seemed to be corroborated by domestic traders: in the words of one anonymous Chinese crypto investor:
“I can do over-the-counter trades or I’ll go offshore… my wallet is my wallet. I’ve never registered my identification card.”
Over 15 domestic crypto exchanges had been shut by that time.
On January 17, the PBoC issued an internal circular to financial institutions, tightening the noose on any residual provision of banking or funding services to crypto-related activities:
“Every bank and branch must carry out self-inspection and rectification, starting from today. Service[s] for cryptocurrency trading [are] strictly prohibited. Effective measures should be adopted to prevent payment channels from being used for cryptocurrency settlement.”
The central bank added that “banks should enhance their daily transaction monitoring, and the timely shut down of payment channels as soon as they discover any suspected trading of cryptocurrencies.” A deadline for the disclosing the implementation of such measures was set for January 20.
On January 26, the semi-official National Internet Finance Association of China issued a risk alert to investors emphasizing that “offshore crypto-trading platforms pose the same hidden dangers of systemic risks, market manipulation, and money laundering.”
By February 5, the Financial News — an official PBoC-affiliated publication — stated that:
“To prevent financial risks, China will step up measures to remove any onshore or offshore platforms related to virtual currency trading or ICOs.”
The article acknowledged the limitations of the efficacy of the 2017 domestic crypto exchange ban, stating that:
“ICOs and virtual currency trading did not completely withdraw from China following the official ban after the closure of the domestic virtual currency exchanges, many people [have] turned to overseas platforms to continue participating in virtual currency transactions. Overseas transactions and regulatory evasion have resumed risks are still there, fuelled by illegal issuance, and even fraud and pyramid schemes.”
An interview with the PBoC confirmed the central bank was set to toughen its restrictions on domestic access to overseas platforms.
Donald Zhao, a Bitcoin trader who had left the stifling regulatory climate of Beijing for Tokyo in the wake of the September ban, commented:
“I think the new move literally means it would be even harder to circumvent the ban in China. People promoting related business programmes may be arrested.”
He added that using VPNs (virtual private networks) to trade crypto on formerly domestic crypto exchanges that had relocated offshore was at that time “common” among Chinese traders. This, despite the fact that Beijing had ordered China’s three telecoms companies to completely block citizens’ access to VPNs by February 2018.
China’s notorious Great Firewall — the country’s web surveillance and content-control system designed to prevent residents from accessing restricted sites — remained porous, despite the MIIT’s campaign to “clean-up” internet access services, making it illegal to operate a VPN service without government approval.
Beijing’s online sweep was immediately palpable; when “Bitcoin,” “virtual currency,” and “ICOs” were entered into Chinese search-engine Baidu and social media platform Weibo, no obvious paid sponsored content came up alongside the expected results.
On March 9, PBoC governor Zhou Xiaochuan broadcast once again the official stance towards crypto, frankly declaring that:
“We do not currently recognize Bitcoin and other digital currencies as a tool like paper money, coins, and credit cards for retail payments.”
He added that while the development of digital currency was a “technological inevitability,” and would ultimately diminish cash circulation, the central bank was not rushing to issue a national digital currency. He emphasized that the PBoC continued to marshal its efforts to “prevent substantial and irreparable damages” to the domestic economy.
Then, on March 19, the “unexpected” appointment of a new PBoC governor, Yi Gang — a figure who was reported to have made positive remarks about Bitcoin — led some to speculate that the central bank might be poised to soften its stance towards decentralized cryptocurrencies.
Back in 2013, Yi was said to have conceded that while Bitcoin could not be legally recognized by the central bank, “ordinary people [had] the freedom to participate.” He considered the coin to be “innovative and inspiring”, predicting it would remain a subject of public attention in the long term.
Yi — just as President Xi Jinping — was both pro-market and pro-market reform, having consistently emphasized the importance of market liberalization, and invited economists who could support his long-term plan to increase the flexibility of the Chinese market. Within weeks, the new governor had made the unprecedented move to officially open the gates of China’s $27 trillion payments market to foreign companies.
In the wake of Yi’s appointment, Cointelegraph reported on an opinion piece dating back to September 17, which had argued that the president’s restrictions on crypto exchanges had been little more than a political move to appease hardline Communist Party members ahead of the October 17 elections. Blogger Jon Creasy had proposed:
“My prediction is this; as soon as President Xi Jinping is re-elected — and he will be — conservative, free(er)-trade legislation will be put in place, and Bitcoin exchanges will be reinstated:
But for now, Mr. Xi must appeal to the people who keep him in power: the Communist Party. In my opinion, banning Bitcoin exchanges is nothing short of temporary glad-handing.”
By early May, once again the Chinese media was focused on the “overseas” afterlife of its domestic crypto exchange titans. The National Radio’s (CNR) “Voice of China” reported that investors had alleged that OKEx was continuing to “illegally” work in China with domestic clients.
As part of a radio series devoted to “revealing the secret behind digital currencies,” the channel interviewed an OKEx investor who claimed that OKEx was still operating in Beijing for “almost exclusively” Chinese users and that the exchange had moved its headquarters to Belize and the team to Hong Kong in name only.