Crypto in China: another instrument of control?

It’s no secret that China is where the main cryptocurrency mining capacities are concentrated. Of the six largest pools, which control a total of 80% of the bitcoin hash rate, five are located in China. This state of affairs could not be left without attention for a long time – primarily from the state, not to mention ordinary users of cryptocurrencies. Why is monitoring the activities of the crypto industry so important for the state apparatus? How is the Chinese government trying to bring it under control? These questions are discussed in our new article.

Why does Beijing need control over cryptocurrency flows?

The peculiarity of the financial system of the PRC is that the government of the country is actively fighting the outflow of capital abroad. The first place in terms of economic development in the world stimulated the rapid growth of the welfare of Chinese citizens. True, they are not ready to invest free funds within the country – most of the investors are interested in foreign assets. This is due not only to the diversification of investments, but also to the desire to avoid control over personal capital by domestic regulators.

The impetus for investors to turn towards cryptocurrencies – as a tool for withdrawing funds to foreign markets – was the tightening of China’s monetary policy in 2017. Then laws were passed regulating the exchange of yuan for dollars and obliging to provide confirming information about the purpose of the exchange and about the sources of origin of their money. During this period, the maximum allowed amount of currency for purchase by citizens during the year is $50,000. Individuals without presenting documents have the right to exchange yuan for dollars in the equivalent of $3,000 in a bank.

Thanks to their anonymity and lack of control over regulatory monitoring, cryptocurrencies have become an excellent means of avoiding taxes and concealing income. After the start of the trade war with the United States, economic growth slowed down, and the PRC government began to take a number of measures to stimulate the purchasing power of citizens in order to revive the country’s economy. Against this background, the outflow of capital abroad reduced the effectiveness of the measures taken, so Beijing took the path of establishing state control over the cryptocurrency sphere.

History of crypto regulation in China

What steps has the state taken to bring the “crypto-economy” out of the shadows?

• In the fall of 2017, the People’s Bank of China (PBOC) banned fundraising through ICOs. The official reason for the decision was the behavior of citizens – allegedly in this way they began to circumvent restrictions on the withdrawal of currency abroad. And the authorities are not able to control the volume of such money laundering. Another explanation for the ban was the presence of signs of financial pyramids in most ICOs. According to government data, more than 80% of ICOs did not survive to the stage of implementation of the final idea, and there were simply no guarantees of a return on invested funds.
• The next step was a ban on any exchange operations with cryptocurrencies in the territory of China. This led to the fact that the largest cryptocurrency exchanges in China were forced to change their registration to other jurisdictions: Huobi – to Singapore, OKcoin – to Japan, etc. During this period, over-the-counter P2P trading through groups in instant messengers became widespread. Those wishing to buy or sell cryptocurrency simply exchanged assets in person.
• Now the Chinese authorities are planning the most powerful blow to the shadow crypto economy. According to available information, the issue of banning mining in the country is on the agenda. The State Committee for Development and Reforms presented for public discussion a list of sectors of the national economy divided into two parts: the first need additional state incentives, and the rest, on the contrary, harm the development of the national economy. Cryptocurrency mining unexpectedly fell into the second category. This is a preliminary list and is subject to change based on public comment. However, the crypto community is already internally prepared for the worst-case scenario.

Cryptoyuan

An interesting point is that China in every possible way prevents only the uncontrolled use of cryptocurrencies, and the development of a national digital currency based on blockchain technology has been going on since 2014. The crypto-yuan project is being developed by the Digital Currency Research Institute of the People’s Bank of China. The head of the Central Bank of China, Zhou Xiaochuan, identified such areas of application of the national Chinese cryptocurrency: conducting non-cash transactions in retail trade and making cross-border payments between various financial institutions of the world.

And here are the facts regarding the plans for the crypto-yuan that have already received official confirmation:

• It is planned to release a stablecoin similar to Libra, developed by Facebook. The proposed name of the state cryptocurrency is DC/EP. Translated from English, this abbreviation means “digital currency for electronic payments.”
• The transaction processing speed has been tested and is 300,000 operations per second.
• Control over the crypto-yuan blockchain remains in the hands of the state.
• Financial institutions will be able to independently issue a new cryptocurrency, transferring a certain amount of fiat or other assets as collateral.
• According to the patent information, the cryptoyuan will support a two-tier emission architecture: both through the blockchain through the Central Bank, and by third-party licensed issuers.
• Obtaining a license requires having a reserve account with the People’s Bank of China.
• Transfers are supported – both with the help of standard banking means, and through QR codes, NFC and Bluetooth technologies.
• The People’s Bank of China will ensure the liquidity of the national cryptocurrency.
• On April 15 this year, a wide testing of a mobile application for crypto-yuan payments was launched with the participation of clients of the Agricultural Bank of China.
• After 4 days, pilot testing of the crypto-yuan was launched in a number of the largest cities in China: Chengdu, Shenzhen, Suzhou, etc. Among the test participants are such giants as Alibaba Group, Tencent, Union Pay, Didi Chuxing, Huawei, etc.
• At the end of June, the People’s Bank announced the completion of the development of the server part of the crypto-yuan infrastructure.
• A full-fledged launch of the “Chinese” bitcoin is expected in 2021.

Apparently, the state is fully prepared for the legal regulation of the cryptocurrency market. This is evidenced by the adoption of legislative acts regarding the circulation of crypto assets and the creation of various bodies for control / integration into the state economy related to this process:

• In October 2019, the People’s Bank of China established a state agency for the certification of commercial products using blockchain technology.
• In November 2019, the creation of the National Blockchain Committee was announced.
• In April 2020, the Chinese government formed a special body – the Blockchain and Distributed Database Technology (DLT) Standardization Committee.
• At the end of the same month, a national blockchain (BSN network) was launched to standardize and simplify the development and implementation of products based on the technology of the same name. According to official data, most financial institutions in China are already using applications in their proprietary solutions that act according to the mentioned principles.

What awaits us in the end?

By 2022 (just in time for the Olympics), China plans to turn the capital of the country into the world center of the blockchain industry. Cryptoyuan should become a source of driving force for the Chinese crypto-economy, a fuel that can set in motion the engine of this innovative financial system – naturally, under the control of the state.

Of course, other world economic superpowers do not like this state of affairs. Therefore, they are forced to allocate funds for the development of similar projects. After all, the ordinary yuan is not yet able to compete with the US dollar in the global financial market, but the crypto yuan will be quite capable of such a rivalry.