“China FUD”: Understanding China’s Recent Crypto Regulations

Jason Choi
6 min readJul 12, 2021

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This piece was originally published with Deribit Insights: https://insights.deribit.com/market-research/china-fud-understanding-chinas-recent-crypto-regulations/

On May 21st of this year, the Financial Stability and Development Committee in China issued a notice around financial stability, and specifically called for a crackdown on Bitcoin mining and exchange activity to prevent “individual risk spreading to wider society”.

Crypto markets reacted strongly, with Bitcoin falling from nearly $42,000 to the $36,800 range at the release of the notice.

While the language used is somewhat more firm then similar calls for regulation in the past (readers can reference our list of compiled actions or comments from Chinese regulatory bodies), the specifics around enforcement are lacking.

So, was the market reaction justified, or did the market overreact to your typical “China FUD”? Understanding this requires deeper contextual understanding around China’s approach to regulations of financial markets.

This essay seeks to offer a summary of the disparate pieces of regulation and action issued and taken by multiple Chinese regulatory bodies in recent history, and put these regulations into context for a western audience.

Regulatory Bodies in China’s Financial Markets

Prior to 2018, China’s financial regulatory system was constructed as a “one bank, three commissions” hierarchy, with the People’s Bank of China (PBOC) functioning as the central bank, the China Banking Regulatory Commission (CBRC), China Insurance Regulatory Commission (CIRC) and the China Securities Regulatory Commission as the three commissions. (Later on in 2018, in response to increasing risk-taking behavior from insurance companies, the CRBC and CIRC were combined into one entity, but that is beyond the scope of this article).

In 2017, an additional regulatory body was established by the name of Financial Stability and Development Committee (FSDC). The difference between FSDC and previous regulatory committees is its seniority — FSDC is directly under the State Council, the chief administrative authority of China, essentially overlooking the other committees aforementioned.

Tasked with the important task of supervising monetary policy, financial regulation and above all, preventing systemic financial risk, the FSDC is helmed by the Vice Premier of China, Liu He, who is notably more highly ranked than the heads of the other regulatory commissions and PBOC. There is no direct parallel in the US, as the SEC, CFTC, FinCEN, and the Federal Reserve are only granted legislative and regulatory power over their respective verticals.

While the May 21st notice itself lacked details regarding how enforcement would look like, it differs from previous similar calls for regulation in that it was signed off personally by Vice Premier Liu. This signalled that a crackdown was likely a high priority for China.

What Happened Afterwards?

What happened next came as a surprise to many, especially those who saw China as warming up to crypto and mining.

As recently as 2019, the Securities Regulatory Commission Vice Chairman Jiang Yang was reported to have called for official research into hydroelectricity, cryptocurrency mining and innovations in “financial blockchain”, even citing the need to push for researching early in order to gain an advantage on the international stage. Shortly prior to this, President Xi even stressed the importance of blockchain development on a national scale, highlighting use cases such as data sharing, business process optimization and cost optimization.

In mid 2021, China’s overall stance towards crypto in 2019 seems to have shifted, as following the release of the notice, a series of actions took place in rapid succession:

  • May 21st: Notice on mining and trading crackdown released
  • May 25th: Inner Mongolia announces measures to restrict Bitcoin mining
  • May 27th: Sichuan announces meeting to assess mining ban’s impact
  • June 5th: Crypto influencers on Weibo (Chinese Twitter) are suspended
  • June 9th: Searches for words such as “Huobi”, “OKEx” are no longer available on search engines such as Baidu and Weibo
  • June 11th: Yunan announces inspections for bitcoin mining farms
  • June 16th: Huobi reportedly limits access to leverage above 5x for some users
  • June 19th: Sichuan Provincial Development and Reform Commission and the Sichuan Energy Bureau issued joint notice ordering local electricity companies to “screen, clean up and terminate” mining operations within 3 days

These rapid actions culminated in what was likely the final and most severe regulatory action on June 21st, when the PBoC declared in a formal notice that “virtual currency trading activity disrupts the economy and the financial order, leading to illegal cross-border asset transfers, money laundering and increased risk of other criminal activities, severely damaging the financial health of the people.”

The notice called for a few things from all Chinese banks and payment processors:

  1. Verify identities of customers and not provide account opening, registration, exchange, clearing and settlement services for crypto users
  2. Identify cryptocurrency exchanges and OTC services and immediately cut off fiat funding channels
  3. Incorporate advanced processes to isolate key attributes of transactions related to cryptocurrency trading to improve financial surveillance

With a potential complete migration of the mining industry to outside of China, as well as a shutdown of on- and off-ramps ordered by the top regulatory authorities, it is now clear that this is a genuine and extensive crackdown.

Are Further Actions Coming?

While I do not presume to have any insight into how regulators are thinking currently, we can look to history for parallels.

The recent string of actions most resemble the 2017 ICO crackdown from China. To jog your memory, in 2017, seven agencies issued a join statement, effectively banning all ICOs in China and called for people who organized ICOs to make plans to return funds to investors. The notice also forbade cryptocurrency exchanges from facilitating any exchange functions. In the months after the release of the notice, many exchanges discontinued fiat to crypto conversions to avoid direct confrontation with regulators, and many moved their operations offshore.

In both 2017 and 2021, calls for regulations came as we reached what seemed to be peak mania (parabolic run up in most cryptoassets in 2017, dog coins and meme assets rallying in 2021). The sudden uptick in speculative behavior poses a significant concern for regulators whose chief priority is financial stability for the most populous country in the world, and likely accelerated related actions.

In 2017, the crackdown occurred not long before a leadership reshuffle in China; likewise, the current string of actions take place prior to July 1st, an extremely significant day for China given it will be the 100th anniversary of the Chinese Communist Party.

Impact

Based on the similar market conditions and timing of both crackdowns, some expect further regulatory actions to slow down after July 1st, and exchanges to continue to move offshore or reduce their reliance on Chinese users.

Exchanges such as Huobi, following the path of many tech giants in China, previously established an internal Communist Party Committee. However, it is not clear whether this grants any type of regulatory impunity. Given the crackdown on fiat on- or off-ramps and recent limitations imposed on leverage, exchanges such as Huobi where the predominant user base is likely based in China and where futures volumes drive over 50–60% of the total volume will likely take a hit in revenues in the short term. However, note that similar bans on banking crypto users have been imposed in 2014, prior to the surge in crypto trading activity in China in 2017, so the effectiveness of actual enforcement remains to be seen.

On the mining front, The Cambridge Center for Alternative Finance estimates that 65% of Bitcoin’s hashrate used to reside in China(1), and tha has already fallen significantly since the announcement of the mining crackdown. Some in the industry suspect that many existing China-based mining farms will attempt to relocate to locations such as Kazahkstan, which further decentralizes the Bitcoin network. However, relocation overseas is unlikely to happen overnight for most mining businesses due to differing local costs, temperature, transportation costs, and export tariffs.

Final thoughts

While developments like these might seem erratic and unpredictable for outsiders, it is helpful to remember that the primary aim of regulators is largely to preserve societal stability, and prevent the fallout from excessive speculation. China’s tone towards crypto has been more or less consistent since 2017 — with public encouragement of development of blockchain technology, and a cautious to hostile approach to any aspect of crypto that involves speculation (e.g. ICOs, exchanges).

Bitcoin and the wider crypto industry has survived and evolved amidst a decade worth of regulatory developments, and it will continue to do so.

(1) Note that the methodology only collects data from three pools and references their location based on IP addresses, which can be easily spoofed via popular virtual private networks (VPNs)

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Jason Choi

Investor @ Spartan Capital, a fundamentals driven crypto fund. Host of The Blockcrunch Podcast. Seeking radically honest and thoughtful feedback.