0/ Recently there has been alot of FUD about a China crackdown. The noise has been exacerbated by fake news and inaccurate reporting by various media sources. Map that with crypto volatility and the Western distrust of the PRC government and you get some crazy price action.
1/ The reality is more nuanced. The government supports blockchain technology development as highlighted by President's Xi's speech on Oct 24. Since that speech, they have passed a cryptocurrency law which will be effective on Jan 1 2020.
2/ The NDRC quietly removed cryptocurrency mining from a blacklist of restricted industrial activities recently reversing a decision they took during the wave of crackdown in late 2017. Officials in Guangzhou recently announced a 1 Bn Yuan fund to invest in blockchain projects.
3/ Every major Chinese corporate is now looking to leverage blockchain in their business which is reminscent of the internet adoption wave back in the early 2000s. This behavior seems more akin to ingratiating themselves to the great leader than a real belief in the technology.
4/ The Chinese internet giants like Alibaba and Tencent have been experimenting with private blockchains for years and have several live implementations, but they won't go anywhere near cryptocurrency given the government mandate.
5/ While these developments are welcome, they also quickly sparked a speculative fervor with many of the Chinese crypto assets posting strong gains. Major projects such as Tron, Neo, Ontology, Bytom and Vechain rose 40-150% in the immediate aftermath of President’s Xi’s speech.
6/ Within days, the Chinese government called for a clampdown on all speculative cryptocurrency trading activity. Some observers have speculated that the latest crackdown has to do with the imminent launch of the DCEP, China’s national digital currency.
7/ While this may be a consideration, it is likely not the main reason. There are two more important reasons: 1) protecting retail investors from fraudulent schemes; 2) enforcing its capital controls as digital assets have the ability to circumvent existing restrictions.
8/ Since the start of the 2017 ICO bubble Chinese retail investors have been the target of various crypto scams and ponzi schemes. At the height of the bubble, it is estimated that up to half of the crypto projects in China were scams.
9/ This situation is not isolated to China, but is particularly prevalent in China due to the lack of investment products in China and the ease with which money can be transmitted via Alipay and Wechat Pay.
10/ The most egregious of these frauds is Plus Token which debuted in June 2018 with a profit-sharing cryptocurrency wallet reportedly entitling users to monthly interest of 6-18 percent on all deposited cryptocurrency. They amassed over $3 bn of BTC before disappearing.
11/ Law enforcement were able to arrest 6 of the suspects involved with Plus Token in Vanatu on 29 June 2019. They were detained and extradited back to China to face trial.
12/ The government’s vigilant approach towards cryptocurrency speculation is hence understandable. In the past, China has faced similar speculative episodes with structured financial products and P2P lending that targeted retail investors.
13/ When retail investors invariably lost their hard-earned money, it resulted in social unrest and the government had to step in. Viewed in this light, there is nothing sinister or worrying about this round of crackdown, nor is this the first time it has happened in China.
14/ What of the exchanges? Amid the crackdown during the past week, most of the Tier 1-2 exchanges were operating normally and there were no issues with fund withdrawals in most cases. If you are wondering why these "raids" happen with regularity, here is a perspective for you.
15/ Even in the traditional regulated asset management industry, the CSRC conducts regular inspections. Only a few years ago, fund managers in China were also viewed as crooks by the regulators (until proven innocent) due to their past transgressions.
16/ In my view, if crypto evolves into a real asset class (many signs point to that), China will eventually embrace it and crypto exchanges will be legitimised. It may take years but it will happen. Hong Kong will likely be the testing ground for it and this is already underway.
