How much longer will there be a crypto ban in China?
Recent signs point to a policy shift toward the crypto economy in China.
Recently there have been growing signs of a policy to move closer to the crypto economy in China. How should we interpret new NFT marketplaces and crypto tax plans in China?
Just as China does not want to give up the benefits of programmable money, it also does not want to fall behind the West in other Web3 sectors. Especially because it can only suppress the demand of its own people so much in the long term and is dependent on economic growth.
This would help explain why China repeatedly allows a certain openness to crypto applications. For example, on January 1 of this year China opened a state-controlled NFT marketplace. The state's own "blockchain" is used for this, called the Cultural Protection Chain. The market regulator from the Chinese province of Hainan advocates for an innovation-friendly regulatory approach to NFTs by pointing to its potential.
The rebranding of NFTs
The term NFTs is avoided, and instead people talk about "digital collectibles." Because of the crypto ban, they can logically only be bought with the renminbi currency.
This has, of course, nothing to do with an open and decentralized blockchain system. In the form of a private blockchain solution, state-owned companies have full control. The same goes for China’s intensive Metaverse efforts, which are likely to be based mainly on the XR dimension and not on the principles of an open digital economy.
Crypto: more of a gray area than a throughline
Aside from a new openness to NFTs, interest in fungible cryptocurrencies does not seem to disappear from China. The fact that bitcoin mining is effectively illegal in China and that crypto exchanges are not allowed to operate there does not stop people from participating in the crypto economy. Many Chinese still trade on foreign crypto exchanges, a fact underscored by the FTX collapse. Research showed that the two largest client groups of the failed exchange originated from mainland China.
Bitcoin mining also still takes place in China. Despite the ban and the outflow of miners to the U.S., Kazakhstan, and Russia, China remains one of the biggest Bitcoin mining countries. The most recent figures from the previous year suggest that a double-digit share of hashrate could still come from mainland China.
Bitcoin nostalgia and full wallets in China
Although China is an autocracy, many Chinese people don’t seem willing to let the state curb their economic freedoms. It’s unclear how strictly authorities are actually enforcing the sector. It seems citizens are largely left alone as long as volumes don’t get out of hand. Owning Bitcoin isn’t necessarily banned for individuals.
There would still be many Bitcoin millionaires, i.e., Bitcoin whales, in China. After all, China was the driving force behind Bitcoin’s early emergence before its crypto ban. From Bitcoin mining to crypto trading, China was ahead of the U.S. and Europe. Accordingly, there should be strong interest among the population to rejoin the crypto economy fully in the future.
Fraud, loss of control, and capital flight
The reasons for China’s crypto ban are no secret. Growing outflows of renminbi to infrastructure not controlled by the state were the main reason for the Communist Party to ban it. Moreover, during the ICO hype in 2017 there were numerous frauds and Ponzi schemes, so they found a legitimate reason to crack down hard on crypto under the banner of consumer protection.
Given increased supervision and the rollout of the e-yuan (CBDC), these arguments are becoming less effective. As long as the state controls citizens’ wallets, and therefore can regulate outflows, the above concerns lose their threat potential to the state.
Banning crypto is costly
In the future, economically, it will probably be more expensive for the Chinese state to keep banning cryptocurrencies than to create a tightly regulated framework for legitimate crypto trading. After all, China wants to become the top economic power. That can only happen if it can play a leading role in digital value creation.
The new tax rules for crypto also argue for a gradual opening. For example, crypto income should be subject to 20 percent income tax. Just the fact that crypto taxes are being levied is a positive sign of an opening.
How do we move forward?
Token yes, blockchain no. That’s how you could describe China’s latest clashes with the crypto economy. The digital renminbi, China’s central bank digital currency, is not built on blockchain, but on a centralized database structure. This principle, which only uses individual blockchain features like cryptography, will likely remain in place for the foreseeable future.
But the trough of anti-crypto policy is probably already reached. Better state control options increase the likelihood of easing. Gradual openings of the crypto market could occur through special economic zones like Hong Kong.
Crypto ban: how long can it be sustained?
Right now, pressure on the government isn’t too high. In a bear market, demand for cryptocurrencies is limited. If a new crypto wave with commercially successful applications launches in the U.S. and Europe, it will be very hard for the Communist Party to keep its people isolated from development and to ignore their demand for cryptos.
Either China succeeds in building a robust closed crypto industry, just as it built Alibaba or Tencent equivalents to Web2 platforms like Amazon and Google, or it will have to open the domestic market to foreign and open blockchains. The government’s actions during the next crypto rally should reveal a lot about how serious it is about the crypto ban.
