Two of the largest crypto exchanges said they have stopped registering new users from mainland China on the back of ban.
Shenzhen, China – Moves by Chinese authorities to close regulatory loopholes around cryptocurrency trading and mining late last week essentially banned all such activities in China overnight. And many crypto holders are still scrambling to deal with the fallout.
For many companies that made big bets on crypto over the past several years – particularly companies in the tech industry – options may be limited for cashing in their holdings.
The directive from the People’s Bank of China declared all virtual currency-related business activities illegal, cutting the country off from overseas crypto exchanges. That could potentially lead to punishment for investors who deal with exchanges abroad.
“What is a little unclear is when the timeline for the literal cut-off date is,” said Winston Ma, an adjunct professor at New York University and expert in global financial regulation.
“When is that magic date for no more transactions, no more crypto holdings?” he asked Al Jazeera in a video call.
Ma said that technically last Friday – the day the notice was issued – could be considered the effective date, but even that hasn’t been specified.
“Especially listed companies, they have far more compliance obligations than retail investors, so you can imagine they have to think about what the right way is to comply with this regulation,” Ma said.
Nearly a week later, that lack of clarity remains.
“This is a space I continue to watch as we do not really know what is going to take place,” Kevin Desouza, professor of business, technology and strategy at Queensland University of Technology, told Al Jazeera in an e-mailed response to questions. “There are too many variables in play right now to say with any certainty what the options are.”
This uncertainty has led to constant calls, emails and messages from confused clients to people like El Lee, chief operating officer of Singapore-based digital asset payment company Digital Treasures Management.
“Honestly no one saw this coming,” Lee told Al Jazeera in a video call regarding the swiftness of the actions, not necessarily that it was unknown regulations would eventually tighten. “I think the key thing this time is that it outlaws anything dealing with virtual currency.”
For anyone trying to change crypto into Chinese yuan, that would be “relatively impossible”, said Lee, under the new regulations. Other options may exist for switching a cryptocurrency like Bitcoin over to stablecoin on a decentralised exchange and later exchanging it for fiat currency outside of China, he said.
Lee also noted that there are still questions about how the regulations will address past issues that arose where intermediaries engaged in trades and potentially committed fraudulent activities – and whether those activities could be punished retroactively.
“The question on that is whether the law applies backward, because the new ruling came after those activities,” Lee said.
“Does it apply to those speculative cases or is it just forward-looking? There’s no way to tell whether it is retrospective.”
Down with Bitcoin
Since 2017, crypto traders and miners in China – wary of the tightening regulatory noose – have been relocating abroad.
But this year, nails for the crypto industry’s coffin in China have been multiplying fast.
Bitcoin miners landed firmly in the crosshairs of authorities starting this spring. Miners run banks of powerful computers in a race to verify transactions in exchange for new Bitcoins. Their “rigs” consume vast amounts of electricity.
From May through June, crypto mining bans spread from Inner Mongolia, to Yunnan, to Sichuan in what authorities said was an effort to meet energy efficiency targets, although most of the energy used was either not grid-connected or excess supply not sold to the grids.
Not surprisingly, sales of cryptocurrency mining equipment have taken a hit. And this week, Alibaba Group announced a ban on all sales of such equipment along with any other hardware and software used in mining and trading on its global wholesale platform starting on October 8.
The pending death of the industry in China is also on display in Shenzhen’s famous Huaqiangbei market, where virtually any electronic equipment or component can be found within a few city blocks.
A year ago, two floors of SEG Plaza were primarily populated by vendors of crypto mining equipment and software. Now, the few that are left are mainly scattered about the fourth floor, crowded out by stalls with printers, walkie-talkies, used computers and other gadgets.
“The regulations have definitely hit our business,” a crypto mining machine salesman who declined to provide his name said. “There’s not much we can do about it, and [we] can’t sell here now, but we’re still selling overseas.”
The salesman estimated that only around 40 percent of the crypto machine shops were still operating in the building and said most of his exports are going to Russia at the moment.
Lee said the megatrend he’s been seeing in recent months is that crypto-related companies have been shifting out of China or are already out. Miners are looking for new locations where they are welcome, and crypto-related trading businesses are setting up shop in places with crypto-friendly regulatory regimes.
For miners that means places like Kazakhstan, Uzbekistan and even Texas in the United States, and for crypto trading businesses, big moves have been made into Southeast Asia.
“Singapore is one of the hotbeds for that right now,” Lee said of those transitions, which will likely pick up pace the more coronavirus pandemic restrictions loosen.
Up with blockchain
Questions linger over how the government’s crypto crackdowns will impact innovation in areas like blockchain, as well as flexibility in financial flows for China’s tech industry, which has been increasingly squeezed by authorities in Beijing.
Beijing in recent months has become more and more set on establishing China’s digital yuan currency as the top dog, with all other cryptocurrencies seen as problematic due to national concerns about cross-border capital flow and potential tax evasion.
“It does not impact innovation at the global level,” Desouza said. “However, these actions will set the Chinese firms back. But, the central government is betting on their centrally controlled digital currency strategy to be far superior to the current bottom-up emergent approach. The simple issues of scale at which the digital currency will be deployed gives them an edge.”
China’s moves can partly be read in relation to bifurcation between the US and China in the evolving struggle for tech supremacy, according to Ma, as well as something of a bifurcation within China itself.
While now shunning cryptocurrencies due to potential financial stability risks, China is still going all in when it comes to heavily promoting blockchain-related technologies that are critical to the future digital economy.
Ma points to a speech given by Chinese President Xi Jinping on the same day the cryptocurrency and mining notice was issued. Xi’s speech emphasised science and technology innovation.
“To me, it means the government is very focused on real technology innovation instead of financial trading-driven innovation,” he said. “So, if going forward, you see the US side focused on the trading side of crypto, and the China side focused on the technology side of blockchain, that’s a very interesting bifurcation.”