Chinese cryptocurrency traders look for ways around ban

Ray considers himself to be a maverick. While many Chinese are shutting down their digital wallets after Beijing banned investing in cryptocurrencies, he is determined to keep going.

Ray, who asked not to be identified by his surname, has already received notice from his cryptocurrency exchange that his account will be shut by the end of the year. But, he said: “I’m now looking at opening an account on a decentralised exchange.”

China’s campaign against cryptocurrencies led to the authorities shutting down bitcoin mining operations in May. That has coincided with the rise of decentralised finance or DeFi, which allows users to trade with each other without any intermediary, such as a bank or broker, and makes it harder to block.

“I still regularly trade crypto,” said one Chinese investor with an overseas bank account. “How can authorities stop me when the industry has developed to evade centralised control?”

While the most severe enforcement against cryptocurrencies came in September, China first banned crypto exchanges in 2017 and Chinese users have been gradually moving towards DeFi.

According to Chainalysis, a research firm, China’s share of global bitcoin transactions peaked in November 2019 at 15 per cent, and had fallen to 5 per cent in June 2021.

In the 12 months to June, mainland China was associated with $256bn of cryptocurrency activity, the highest in Asia, and 49 per cent of the total was traded through DeFi platforms. Uniswap, one of the leading DeFi exchanges, is now the second biggest exchange in East Asia by transaction volume, said Chainalysis.

While the latest restrictions are deterring new blood from entering the crypto markets, some existing cryptocurrency holders are turning to DeFi in order to continue to trade, according to experts.

“Most trading will stop because of the ban,” said Deng Jianpeng, director of the Finance, Science and Technology Research Centre at the Beijing-based Central University of Finance and Economics. “But there will always be some people who will try to find new investment routes, like using an overseas platform or through decentralised exchanges.”

DeFi protocols do not have the same “know your customer” obligations as the more tightly regulated conventional exchanges. Henri Arslanian, PwC crypto leader and partner, said that while using DeFi “may be banned in China, it is very difficult to monitor in practice” because of the anonymity afforded to its users.

Miha Grčar, head of global business development at Kraken, a large exchange, said DeFi is a “bit of a wild west in crypto”. He added that governments are thinking about how to regulate it, for example by demanding some form of user identification.

In an interview with the Financial Times, Gary Gensler, chair of the US Securities and Exchange Commission, warned that regulators want to have more authority over DeFi platforms.

“Many Chinese are now studying how to use DeFi, but there is uncertainty about this too, with the US government looking to tighten controls,” said Colin Wu, an independent journalist who runs the popular Twitter channel Wu Blockchain.

Chainalysis found that countries including the US, China, Vietnam and the UK, with historically large institutional investors armed with large crypto wallets, play an outsized role in DeFi.

Large crypto asset owners are drawn to DeFi because it allows them to earn revenue from their coins. Users lend their crypto to DeFi protocols to provide liquidity pools for peer-to-peer lending to occur. In return, investors receive part of the transaction fee or token rewards.

But Chinese investors cannot transfer gains from DeFi protocols into Chinese bank accounts. “The government is cutting the link between cryptocurrency and fiat currency,” said Zee Zheng, founder and CEO of SpaceChain, a company focused on space applications for blockchain technology. Zheng, a Chinese entrepreneur, moved to crypto-friendly Singapore four years ago.

For wealthy Chinese, this is not a concern so long as they can transfer crypto gains into overseas bank accounts and skirt capital control limits.

Several posts on 51 Bitcoin Forum — one of the informal crypto blogs that have cropped up since Chinese social media sites started censoring content about cryptocurrencies — recommends that investors register an overseas company and apply for a company trading account. Another user provided a list of UK and US financial institutions that permit China-based individuals to open bank accounts in order to transfer gains from crypto investing into fiat currency.

But for many the extra steps required to invest in digital currencies are not worth the hassle. Zheng said: “The government is not going after the one per cent who are trading at the fringes. For them, it is sufficient that the restrictions are strict enough to stop the 99 per cent trading.”