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Chinese crypto investors had a tumultuous November. It started when Mingxing “Star” Xu, founder and CEO of the popular exchange OKEx, was taken away by Chinese police, resulting in weeks of withdrawal suspension and panic. Then came a rumor that Leon Li, Huobi’s founder, might have been taken away as well. Huobi has vehemently denied the accusations and even sued one of the Chinese reporters for libel in the aftermath.
Huobi founder Leon Li
Still, the fact that Li, as well as his C Level executives, who would normally address big issues via WeChat or by issuing a company statement, have remained silent. It makes one wonder whether their reticence is a choice or by force.
Unlike the OK Group, Huobi is considered a dear friend of the Chinese government. Li himself is a graduate of the prestigious Tsinghua University and has been waving China’s “blockchain-not-crypto” flag since day one. So, why, all of a sudden, did the Chinese government sharpen its knife and target these exchanges that have been dancing safely in the grey zone?
This week’s da bing explores these questions and teases out the very real boundaries that exchanges have to live within.
Let’s start with China’s ICO ban on September 4, 2017 when the seven government departments, including the People’s Bank of China (PBOC), ordered that crypto trading be halted. The law explicitly forbids trading between fiat and crypto—but it was not so strict on crypto to crypto.
Consequently, after the crackdown receded somewhat, many exchanges found a new profit model: OTC trading desks coupled with crypto-to-crypto trading. That’s precisely how Binance rose up the ladder in late 2017: instead of focusing on a fiat-to-crypto on ramp, it embraced crypto-to-crypto trading.
Why is the government so sensitive when it comes to fiat and crypto trading? Easy—capital control. Many developing countries that have enjoyed economic booms have to grapple with the thorny task of ensuring that economic gains stay in country. If they aren’t careful that capital would freely flow to foreign countries, triggering a plunge in the value of their currency.
A negative example of this phenomenon is Argentina, a country that suffered from a massive exodus of capital to the United States, and years of currency depreciation and economic chaos.
To avoid this, the Chinese government scrutinizes, both politically and economically, the inflow and outflow of capital. It has enacted laws that forbid both citizens and businesses from sending and investing money abroad. A high profile example is the scandal around Wanda, a conglomerate that bought numerous foreign assets from its pile of cash gained from China’s real estate market.
So how does crypto come into play? Well, unsurprisingly, crypto provides the easiest way for people to launder money abroad—especially with stablecoins such as USDT. One can simply buy USDT from OTC trading desks or lock in gains in the form of USDT, which avoids both price volatility and regulatory scrutiny. Indeed, recent data from Chainanalysis shows that Tether overtook Bitcoin to become the most-received digital asset by East Asian addresses.
The Chinese government was never anti-crypto per se—it is against those who would use crypto to mess up its monetary policy.
Following this same capital-control logic helps us understand more why mining has been a legitimate industry in China. Mining is essentially miners exporting hashrate in exchange for dollars. It’s literally bringing foreign currency to China and therefore contributing to the government’s grand capital control schema. Why crack down on such an industry?
Unlike the OK Group, Huobi is considered a dear friend of the Chinese government. Li himself is a graduate of the prestigious Tsinghua University and has been waving China’s “blockchain-not-crypto” flag since day one. So, why, all of a sudden, did the Chinese government sharpen its knife and target these exchanges that have been dancing safely in the grey zone?
This week’s da bing explores these questions and teases out the very real boundaries that exchanges have to live within.
Let’s start with China’s ICO ban on September 4, 2017 when the seven government departments, including the People’s Bank of China (PBOC), ordered that crypto trading be halted. The law explicitly forbids trading between fiat and crypto—but it was not so strict on crypto to crypto.
Consequently, after the crackdown receded somewhat, many exchanges found a new profit model: OTC trading desks coupled with crypto-to-crypto trading. That’s precisely how Binance rose up the ladder in late 2017: instead of focusing on a fiat-to-crypto on ramp, it embraced crypto-to-crypto trading.
Why is the government so sensitive when it comes to fiat and crypto trading? Easy—capital control. Many developing countries that have enjoyed economic booms have to grapple with the thorny task of ensuring that economic gains stay in country. If they aren’t careful that capital would freely flow to foreign countries, triggering a plunge in the value of their currency.
A negative example of this phenomenon is Argentina, a country that suffered from a massive exodus of capital to the United States, and years of currency depreciation and economic chaos.
To avoid this, the Chinese government scrutinizes, both politically and economically, the inflow and outflow of capital. It has enacted laws that forbid both citizens and businesses from sending and investing money abroad. A high profile example is the scandal around Wanda, a conglomerate that bought numerous foreign assets from its pile of cash gained from China’s real estate market.
So how does crypto come into play? Well, unsurprisingly, crypto provides the easiest way for people to launder money abroad—especially with stablecoins such as USDT. One can simply buy USDT from OTC trading desks or lock in gains in the form of USDT, which avoids both price volatility and regulatory scrutiny. Indeed, recent data from Chainanalysis shows that Tether overtook Bitcoin to become the most-received digital asset by East Asian addresses.
The Chinese government was never anti-crypto per se—it is against those who would use crypto to mess up its monetary policy.
Following this same capital-control logic helps us understand more why mining has been a legitimate industry in China. Mining is essentially miners exporting hashrate in exchange for dollars. It’s literally bringing foreign currency to China and therefore contributing to the government’s grand capital control schema. Why crack down on such an industry?
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