Why China said no to crypto but yes to blockchain
While it remains technically legal to hold cryptocurrencies in China, trading them is illegal as the government does not want to be held liable for crypto investors who get scammed out of their money. On the other hand, blockchain, crypto’s underlying technology, is being applied widely.
Yet China’s crypto “bans” have long been a joke on Twitter — where much of the industry discussion takes place. China tries to ban it every year, people like to say. Restrictions have targeted different aspects of the industry during each phase of its development. New rules prohibited banks from transacting virtual currencies in 2013, and the last round of restrictions in 2021 targeted mining and trading services.
But even now there are still retail investors in China. They turn to over-the-counter dealers and decentralized exchanges to execute trades. While the bans haven’t gotten rid of crypto trading in China, they have set the bar of entry higher. Trading now requires a virtual private network (VPN) and a foreign passport, bank account, and phone number.
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Why Beijing doesn’t like crypto
The standard response to why China doesn’t like crypto is that it interferes with state control of the monetary system. After all, crypto’s founding story is about having a currency outside the control of the world’s central banks.
Moving money out of China is difficult, and the government wants to keep it that way. Since 2007, a foreign exchange quota of $50,000 annually per individual has been in place. Crypto once offered an easy avenue to move money out of the country, tax-free and with no laundering review.
But the main reason for the bans may be more prosaic. Authorities came down on crypto in the context of a purge of risky financial investment instruments which were leaving retail investors out of pocket.
China’s retail investors tend to be more willing to invest in high-risk projects with potentially high payoffs. They also often expect that the government will reimburse them when their investments don’t pay off.
Crypto took off in China in the context of other financial experimentation in online peer-to-peer (P2P) lending. The first Chinese P2P company, PPDAI (拍拍货), launched in 2007, while Bitcoin was launched in 2009. Over the next decade, new cryptocurrencies and platforms to trade them flourished in China, as did P2P services. Investors flocked to deposit their savings at peer-to-peer lending firms, which promised high returns, ranging from 8% to 12%. Some of these turned out to be Ponzi schemes, scamming people out of their investments.
In the eyes of the financial regulators, crypto was more of the same. Police seized billions of dollars worth of crypto when they cracked down on PlusToken in 2020. PlusToken taught investors to buy Bitcoin with fiat (i.e., regular currency) and store it in its wallet service. What turned out to be an exit scam had over 2 million investors, mainly from China and South Korea.
Crypto and corruption’s mixing didn’t help. While the central government wanted to crack down on mining and crypto, local officials used their power to protect mines when they got a cut for themselves. Just last year, police arrested the Party secretary of the city of Fuzhou, Xiào Yì 肖毅, for ensuring electricity supply for Bitcoin miners between 2017 and 2021.
Still, it remains technically legal to hold crypto, the government just doesn’t want to be left holding the bag for people who lose their money in dodgy dealings and ponzi schemes.
The tech is fine, financialization is not
The government may not like crypto, but it has always supported the development and application of the blockchain technology behind it.
The applications that the government has thrown its weight behind are about better-managed backends. Accounting in China still largely involves a tedious process of paper and glue sticks. Digital fapiao (legal receipts), powered by blockchain, allow the authorities to cut down on false invoicing and maintain logs for tax purposes. A pilot trialing digital fapiao started in Shanghai last year.
Another area where China has rolled out blockchain technology is in its courts. Maintaining a court blockchain requires far fewer resources than a centralized database. Evidence submitted by both parties are kept on the court blockchain and recognized by the court. The court no longer needs to ensure there is centralized access to evidence storage. Courts in Shanghai have already begun to use blockchain platforms to store evidence submitted by both parties.
For customs, too, the government is hoping that blockchain can be used to cut down on paper-based processing for clearance, and has launched pilots. Certifications for food safety, quarantine, and other legal documents issued on the chain mean that players across supply chains can exchange data with government agencies securely. Still, widespread adoption of these applications is a way off.
Blockchain and the digital yuan
China’s central bank began researching digital currency as far back as 2014. With its central bank digital currency, the eCNY, it wants to replace cash in circulation with a digital version. It has begun rolling out pilots in major cities and encouraging people to spend from digital wallets. So far, the digital yuan represents 0.13 percent of the currency in circulation.
While the digital yuan is sometimes reported as relying on blockchain technology, it is not technically a blockchain — it operates on a different ledger technology. (Blockchain is just one type of digital ledger which may create a digital asset.)
The digital yuan behaves similarly to a permissioned blockchain. This means there is a control layer not accessible to the public which only users with permissions can access. A consortium or central authority can change the rules at will or enforce new controls without prior disclosures to users. For most crypto projects, users have the leeway to contest changes.
With the digital yuan, the government can potentially obtain far more control over its currency. It can real-name verify cash. Once it is widely used, regulators can monitor money flows. The data generated can give far more visibility into the economy and what people are consuming. Essentially, it gives the government far more flexibility with its monetary policy.
The takeaway
While crypto frustrates key policy aims, blockchain and digital ledgers help regulators. No surprise, then, that China has said no to crypto but yes to blockchain.
