The Chinese Cryptocurrency Ecosystem

The Chinese crypto ecosystem can appear confusing to people used to working with companies based in the West. A robust understanding of government regulations, crypto holder practices, and stakeholders in the space are necessary to move nimbly in this market. After various experiences with Chinese businesses, we gathered relevant information. This guide seeks to advise firms that want to venture into this fascinating, if chaotic, crypto space.

The article includes:

• Crypto Trading & Mining in China — An overview of the Chinese crypto space history, including the latest restrictions on crypto transactions and mining activities.
• Trends in Chinese VCs — A list of the most active venture capitalists with headquarters in China and their areas of interest.
• How Crypto Exchanges Operates in China — The most popular exchanges and how they operate, as most are based outside of China.
• Key Communication Channels — How and where crypto information is shared in China, as well as an overview of most famous Chinese influencers.
• The Blockchain Service Network (BSN) — China’s new initiative and direction for blockchain development, with the goal to build a “Digital Silk Road”.
• Blockchain in Academia — Universities in China providing blockchain related courses and degrees.
• DeFi Ecosystem — How DeFi is gaining ground in the country and what projects are emerging.
• NFT Ecosystem — What the Chinese NFT ecosystem looks like and latest news.
• What’s on the Horizon? — The government’s plan for the next five years and approach to development in the near future, as well as the outlook of the overall ecosystem.

Source: Unsplash, Executium

Crypto Trading & Mining in China ― A History of Inhibitions

Chinese citizens embraced the concept of virtual value very quickly — earlier than many other populations. And, in spite of the love-hate relationship the Chinese government has with blockchain, Bitcoin immediately gained traction, boosting a thriving ecosystem of startups.

There is a high-propensity for speculation, which helped this rapid adoption. Young adults particularly (Millennials and part of Gen Z) believe crypto investments represent a gateway to higher social classes.

However, Chinese authorities, after a “wait-and-see” approach, started targeting the crypto industry to limit money laundering, fraud, and speculative trading. This turbulent history of bans and restrictions began in 2013, although it did not pick up until 2016. The fundraising event of One Foundation, the founding of the exchange Huobi, and mining hardware manufacturer Bitmain, are all linked to the start of government action. After these events, the government ‘prohibited banks and domestic exchanges from transactions involving [bitcoin]’.

Even as the price of bitcoin rose in 2016, the market was again hit the following year as initial coin offerings (ICOs) were banned ― a ‘ban [that] triggered an instant 6% decline in bitcoin prices’ and shut down many local exchanges. Finally, to fully clamp down on crypto trading, authorities forbid both crypto-to-fiat and crypto-to-crypto transactions. From then on, ‘all activity beyond interpersonal, over the counter transfers [became] illegal. Even writing about and promoting cryptocurrency isn’t allowed [anymore]’.

But, crypto holders’ hopes were not totally destroyed. In fact, as the Hong Kong based Bitcoin Association tweeted, ‘[f]or those new to bitcoin, it is customary for the People’s Bank of China to ban bitcoin at least once in a bull cycle’.

In 2021, the Chinese government’s hard-line policy was reinforced once more. Since May, it is illegal for any financial institution and payment company to take part in the crypto market, preventing them from any activity, including ‘registration, trading, clearing and settlement’. Conversion to and from cryptos is also banned. To complement these measures, an intense warning campaign was launched by the central bank, discouraging people from investing. This also went so far as to invite businesses to detect illegal crypto-related transactions. Even Alipay, the mobile payment giant run by Alibaba, attended the meeting.

The mining ecosystem was the second target of this “war”, despite being China’s most well-known link to the crypto space. China controlled 65% of Bitcoin’s hash power until 2020 — nine times that of the United States. Mining activities mainly arose in 2017, supported by the local, low-cost labour force and inexpensive electricity sources, making China the largest mining hub in the world. However, after recent crackdowns on cryptos and energy consumption, many mining farms are reconsidering their strategy.

This year, China’s Vice Premier, Liu He, announced the intention to close mining activities as part of sustainability solutions to meet 2060 carbon neutrality goals. This decision led to frantic “fire-sales” of equipment and a depreciation of mining facility value. According to various sources, these are down around 20, 30, or even 40%. Wired reports that miners are considering alternatives to contain losses.

• For those with hosting contracts, it is likely more convenient to sell their rigs instead of renewing the contracts, as the future is very uncertain.
• Other miners are planning to take the business elsewhere. Chinese and other Asian miners are mainly considering Kazakhstan, as it is a neighbouring, relatively-cold country, and already home to 6% of the world’s mining, with convenient coal energy.
• Due to economic or cultural reasons, some are planning to ‘wind down their large mining farms and continue their mining [in the country] in a more decentralized, inconspicuous fashion’, rather than large farms.

These recent measures appear to be the first step to closing the Chinese mining era. In fact, He’s promises have already been enforced by Inner Mongolia and Sichuan through bans. Discussion in Xinjiang and Yunnan do not bode well for the future of mining there, either.

Combined with the stringent bans outlined earlier, this does not paint a picture of a favourable and stable cryptocurrency ecosystem. Yet, only a few sources are confident that this fully spells the end of the Chinese crypto market. While the decentralised nature of the market makes it hard to understand where transactions happen, activity on platforms suggest that East Asia is still one of the most active markets. It ‘[accounted] for 31% of all cryptocurrency transacted’ between July 2019 and June 2020, ‘which is 77% more than Northern & Western Europe (NWE)’. Specifically, liquidity and the large trading population make the East-Asian region a key player in the crypto space.

Mining Farms and Pools in China

The Xinjiang region was the hottest area for mining, followed by Sichuan, Inner Mongolia, Yunnan, and Beijing. But, with the new government direction and crackdowns on mining in some of these regions, the ecosystem is, and will continue to, change.

Keeping track of major miners’ moves is the most promising way to understand what will come next. However, understanding who the largest China-based mining firms are is slightly tricky, as many companies do not publicise their mining activities. The web provides somewhat conflicting information on this subject. While the areas the farms are located is common knowledge, most papers do not mention them by name.

Bitmain, HashCow, BTC.TOP, and BIT Mining (BTCM) ― which just delivered part of its mining machines to Kazakhstan due to the suspension of its mining operations in Sichuan ― are the best known firms.

Other entities associated with crypto mining are Ebang and China Telecom. In fact, the communication giant was among the 21 mining farms of Inner Mongolia that is believed to be affected by these restrictions.

Farm facilities are also usually connected to mining pools to allow miners to share computational resources and make mining more efficient. The recent ban affected mining pools as well. Global Times affirms that pools like Huobi.pool, F2Pool, Poolin, Binance, and AntPool (Bitmain) have ‘experienced a 20 percent to 40 percent plunge in their real-time hash rates’ in the last weeks.

Source: Unsplash, Berenice Melis

Trends in Chinese VCs — Looking for Disruption

Globally, the United States leads blockchain and crypto financing, but China and nearby countries are narrowing the gap. While the Chinese government has tight control over the crypto market, it is very optimistic about the role of blockchain for the digital future of the country.

Today, capital earned by early crypto investors is being reinvested in smaller, local blockchain projects. The Chinese government is also an active investor in blockchain-based solutions, stressing interest in this technology several times. These moves gesture towards a goal to profit off this wave of innovation. In addition, major corporations like Alibaba, JD.com, and Tencent heavily invested in blockchain solutions.

However, before the Bitcoin crash of 2018, the Chinese financing environment was quite different. The country had a great number of blockchain and crypto investment funds, of both medium and small sizes, mainly investing in early-stage startups. But, as attested by 01Caijing, after the crash, the government embarked on a more standardised development path, in line with the increased regulatory stance that began to emerge post-2013. This lent to the total amount of financing dropping by more than 70% at the beginning of 2019. Almost 90% of local VCs fled the scene, due in large part to the crash, but also driven by uncertainty in the face of the revised government stance. Many established by crypto veterans shifted back to mining and trading, while other VCs opted to decrease investments or stand aside, storing value in cryptos instead.

Investments started up again from the second half of 2019, mainly thanks to Bitfinex’s funding, as the first major funding event after the crash. After this, Chinese VCs generally pursued more sustainable and diversified investment paths, which led to the more mature system we see today. Apart from equity, investment funds started looking at bitcoin mining and secondary trading, including swap or futures of the most used cryptos.

Nationwide, the Beijing, Shanghai, and Guangdong provinces stand out as the most active areas in terms of blockchain startups. Thanks to supportive local policies and early interest in the sector, as well as developed industrial networks and large talent pools, these areas continue to lead the industry. Recently, names such as Bitmain, Hyperchain, and Jixin Blockchain rose to the forefront, due to considerable investments in their funding rounds — $450M, $249M, and $100M, respectively.

Beijing and Shanghai are the most prolific headquarters. The following are the top Chinese VCs with a hub in the country:

• Sequoia Capital China, a VC focussed on seed stage, mid-stage, late-stage, and growth investments in FinTech, including blockchain-based initiatives, with innovative business models. For example, the VC participated in the Series A funding round for the crypto-lending startup, Babel Finance.
• BlockVC, a leading investing and advisory company for blockchain projects. It focuses specifically on infrastructure protocols, decentralised exchanges, escrow accounts/wallets/payments, stablecoins, derivative investments, and security token trading platforms.
• Sino Global Capital, a Beijing-based VC specialised in financial and blockchain services, both inside and outside the Chinese market, with a strong interest in DeFi, NFTs, and DAOs. Latest activities saw the VC highly involved in the Solana ecosystem through different projects — including Serum, Bonfida, and Parrot — and participating in this year’s Solana Lab private token sale.
• Fenbushi Capital is considered the most active blockchain-based VC in Asia. A ‘traditional venture capital firm’, it focuses mainly on early-stage startups and provides networking, recruiting, fundraising, and advising services in addition to capital. Its most recent investment was BitDAO’s private equity round this year.
• LD Capital, one of the earliest blockchain-focussed Asian VCs, operates internationally and invests in blockchain innovation projects in finance, games, publishing, and Internet of Things.
• Continue Capitals, perhaps better known in Chinese circles, this VC has a strong interest in the crypto space. Focusing on cryptos and private equity, the VC’s investments mainly cover public chain, general protocol, dApps, and industrial services. But, it also provides career guidance and industrial resources to early-stage talent.

The restrictions imposed by central authorities pushed many investment funds and accelerators outside Chinese borders, though — specifically to Hong Kong, Singapore, South Korea, Japan, and Macau. But, some maintained part of their businesses in mainland China. Kenetic Capital is likely the best known of the bunch, and just led a Series A round (raising $30M) for the startup behind China’s Blockchain Service Network (BSN). It is now based in Hong Kong, a flourishing ecosystem for crypto- and blockchain-related VCs, although there is also consideration for some restrictions: limiting crypto trading to professional investors.

Despite the emerging difficulties incentivising many to move abroad, many others remained in the country — millionaire investors, HODLers, and gamblers included.

Source: Unsplash, Maxim Hopman

How Crypto Exchanges Operate in China

Some exchanges fall into the group of crypto businesses that moved overseas, especially after the 2016 high-profile shutdown of BTCC, China’s first crypto exchange. However, a number of them maintained activities in mainland China.

Currently, the Chinese Great Firewall prevents popular crypto exchanges from popping up in internet searches, but there are loopholes to curb the censorship. VPNs enable people in China to access crypto exchanges, as well as over-the-counter (OTC) or peer-to-peer (P2P) platforms, which make up a sort of grey market.

Wealthy (due to high criteria required for users) crypto holders switched to OTC platforms, which offer options to buy and sell more privately. In fact, Chinese authorities have no means to match transactions on local payment platforms to transactions on crypto exchanges.

This is how OTC platforms allow users to bypass regulations. Crypto exchanges that run OTC platforms enable traders to post offers, ‘with the counterparty being the exchange themselves’. Once the price has been agreed upon, the value in Yuan is sent to a different payment platform and ‘locked up in an “escrow” account until cleared’. The buyer then receives the crypto, and the exchange is done.

Although suspicious transactions can be checked by banks and payment providers, for the most part, these sort of direct trades work. It is also still possible to buy stablecoins. This is confirmed by a rising exchange rate between Yuan and Tether stablecoin (USDT), as noted by CNBC. The former CEO of BTCC further explains that USDT is used by Chinese holders to move ‘into and out [of] Bitcoin’, making it ‘an underground currency’.

Huobi, OKEx, and Binance are likely the most popular exchanges in China, as well as all being developed in the country. However, Huobi recently announced an increase in derivatives restrictions due to government crackdowns — a decision that will have significant consequences. As Coindesk notes, ‘derivatives are among the key products defining the competition between the three exchanges in the Chinese market’. This might favour Binance, which, according to CCTV, will still provide users with the possibility to trade cryptos. Although the P2P platform is not downloadable in China, it is still the most used method to trade, relying on VPNs. OKEx falls after Binance for popularity, as the exchange is deemed unreliable by long-time crypto traders due to the unannounced suspension last year that lasted five weeks.

Despite some very conflicting opinions, Decentralised Exchanges (DEXs) are also attracting some attention in the light of these strict rules. We will probably not see a sudden shift to these solutions, but they are certainly worth keeping an eye on.

Source: Unsplash, Viktor Forgacs

Key Communication Channels

As time zones, culture, language, and relationships change between East-Asian and Western countries, the same happens in crypto communications and behaviours. Different trust concepts, user preferences, and business strategies made protocols and related products very “local”, while decentralised.

Chinese crypto holders prefer pragmatic, mobile-apps that enable interpersonal trust. In fact, trust is a key element in both Chinese culture and businesses, making investors prefer deals with known people or ‘someone they can interact with’. This is why the ‘senior officials from Asia-based exchanges like Binance, Huobi, and OKEx make themselves available in WeChat groups to answer customers’ questions’. Further, most Chinese ‘whales’ — people with large crypto holdings — manage their holding by themselves as to not rely on (and trust) third-parties.

Chinese user preferences for smartphones also spurred the development of ‘Superapps’. These apps provide all services via a mobile interface, despite the high-density of functions. This fostered an ecosystem that prioritised tech companies that capitalised on the ‘leap-frog’ effect. In the Chinese crypto space, Binance is a great example of this. The exchange blitzscaled — expanding its services to ‘more sophisticated options trading, to new staking services, mining pools and fiat over-the-counter applications’.

With regard to information flows and communication, WeChat is a clear winner, but after the latest bans, Telegram became very popular as well. Weibo is also a common social media platform used in the crypto niche. However, the recent position of Weibo against specific crypto-related accounts — and their subsequent suspension — encouraged many crypto enthusiasts to explore other options.

WeChat is the central hub of close-ended, trustable relationships that enable the interchange of information and crypto trading. Every connection within the WeChat microworld starts and ends in groups, moments, and embedded hyperlinks. These types of connections are viewed as somewhat binding, and might also be very exclusive, as crypto influencers have a habit of charging an entrance fee for their private groups. Therefore, leaving a WeChat group is generally seen as an uncomfortable process. However, this system can also be fairer than the Western playing field, as whales, professional institutions, and individual crypto enthusiasts generally all end up in the same WeChat groups.

On the other hand, to escape the pressing control of the central government, crypto holders in China started migrating to Telegram for its encrypted services, although it is officially banned in the country. Therefore, to access Telegram groups, users need VPNs, and thus extra-effort. This move places Chinese crypto actors in the epicentre of Western crypto-communication. According to rumours, the Chinese government is trying to further censor Telegram, looking for a solution to ‘ban the banned’, but how is still unclear.

While Westerners are used to seeing interactions and information sharing take place mainly on Twitter, Telegram, Medium, and Discord, in China, Weibo (Chinese Twitter) and Bihu (a crypto discussion forum similar to Medium) are more used. They have a decent number of interactions, but far less if compared to their Western counterparts.

Outside of community-driven and interactive sources, there are also several websites and newspapers that share updates and useful news about the sector, including Chinese government’s decisions.

• ChainB (铅笔) was defined by Fenbushi Capital as the ‘leading Chinese-language news source for the blockchain industry’.
• Chain News (链闻) provides ‘China’s fintech financial technology elites and decision makers with daily indispensable blockchain news, newsletters, in-depth analysis and comments‘.
• 01 Caijing (零壹财经) is a news website that provides research, news, and data analysis about financial, technological, and business developments in China.
• Jinse (金色财经) is a platform focussed on blockchain that conveys industry voices to share news and information, market data, and Chinese community developments. It also cooperates with media platforms, such as Hexun, Tencent, Sina, etc.
• Wu-talk (吴硕区块链), as described on their website, is ‘an industry media focusing on the encryption field, providing original, independent and reliable professional reports, focusing on mining, exchanges, regulatory policies, data analysis, etc., which has a certain influence among Chinese and English industry readers’.

In addition to the above sources, the English-language newsletter China Crypto News — of Colin Wu, XinHua Finance (新华财经), NBD (每经网), and Blockchain.News — is also notable.

WeChat, though, continues to have a monopoly on communications in general, and remains among the most popular information sharing platform. But, the government crackdowns on activities related to crypto are encouraging people to look elsewhere. All of this demonstrates a market split that persists between the Chinese and Western crypto communities. Some cultural bridges might emerge in the near future, though, as it appears Telegram’s time in China has come.

Influential Figures in the Chinese Crypto Space

Although tough to identify due to the “sensitive” topic and stance of the government, regional crypto influencers educate and advise their followers. In China, influencers are more commonly known as Key Opinion Leaders (KOLs), and mainly operate via WeChat and Weibo (now, also Telegram), but more influential individuals, with larger audiences, often have Twitter accounts as well.

1.Internationally followed KOLs

Justin Sun (Sun Yuchen), Changpeng Zhao, and He Yi are internationally followed influencers, active on both Western and Asian social media channels. Justin Sun, with almost 3M followers on Twitter, is the Co-Founder of TRON and CEO of BitTorrent. He is based in Singapore, and this year was declared second most influential person globally in the market by Crypto Head. On the other hand, Changpeng Zhao, the CEO, and He Yi, the CMO of Binance, are clearly largely followed in China, with almost 3M and 26K Twitter followers, respectively. However, the official Weibo account of Binance was among the suspended accounts in March of this year, citing local and community law violations.

Li Xiaolai, the Founder of the Beijing-based venture fund, BitFund, and LaoMao, considered the Top Chinese EOS influencer, are also among notable KOLs.

2. WeChat ICO Accounts

For updates and news about cryptos, Chinese investors often turn to WeChat ICO official accounts. Statistics show that “team accounts” are more common, and the information they provide is usually high-quality articles and analysis. They cover both the general ecosystem and specific cryptocurrencies.

• Digital Currency Trend Maniac (数字货币趋势狂人) — this account has around 1.2M followers — a large proportion of which are very active — and provides crypto and market trends analyses and operation strategies for projects.
• Mr. Yuan (币姥爷) — according to rumours, this account is run by very early-investors in the crypto space, and provides an overview of their success stories, as well as their future investments.
• Mr.Wang’s Diary of the Blockchain (王团长区块链日记) — a famous Chinese KOL account that records ‘Mr. Wang’s moves’ when investing.

3. Chinese KOLs

Earlier in 2021, several blockchain-related Weibo accounts were suspended. No official statements have been given on the specific reasons why Weibo targeted only 25 accounts (so far). Blockbeats, SuperBTC, and 8BTC are among the most popular accounts to be suspended. Although not confirmed, the measure seems to have affected many profiles with “Bitcoin” (比特币) in the username.

The journalist Colin Wu tweeted that this was ‘the harshest suspension of crypto in history. […]It includes China’s most famous DeFi leaders 超级君 [Super King] and many famous traders such as 小侠 [Xiao Xia].’ However, in a later tweet, he continues ‘[b]ut at present, it seems that accounts not involved in ads of exchanges have not been blocked’. Although not proper KOLs, Colin Wu, likely the most active Chinese journalist in the sector, and an industry insider who goes by just Molly, are both well-known and widely followed Chinese crypto reporters — definitely names to keep an eye on to keep up to date with the Chinese market.

Dovey Wan, Chinese crypto KOL and Founder of Primitive Crypto, argued that this ‘attack’ had deeper motives to limit the industry, as it hit not only crypto influencers, but also other industry stakeholders, such as internet celebrities, media, and meme accounts.

Some influencers decided to shift to more crypto-friendly platforms, like SuperBTC, which moved to Twitter. As a well-known feature in the crypto community, this decision might inspire others to follow.

And, as mentioned above, Telegram is also gaining popularity, and followed by more and more Chinese crypto enthusiasts. The shift to “Western” channels is proved by a spate of relatively new accounts on these platforms. To name a few, accounts like 土狗101 Shitcoin101, 8848 社区, Mao 小毛哥, and RealSatoshi, though not boasting the same amount of followers seen on other channels, are still quite active on a daily basis.

The Blockchain Service Network (BSN)

Blockchain is one of the priorities of the Chinese government, and in Q1 of 2020, the country launched the Blockchain Service Network (BSN) in collaboration with the Chinese state-owned telecom giant, China Mobile, UnionPay, and IT startup, Red Date.

The goal of this infrastructure is a platform that ‘enables enterprises to access, build and adopt blockchain technology into their commerce, be they domestic or international’. It offers several, convenient networking infrastructures for developers and entrepreneurs and has more than 120 public city nodes across China. Internationally, BSN has partnerships with lead protocols and consulting firms.

The first supported blockchains were FISCO-BCOS, XuperChain, and CITA, but now, it also integrates many other partners, including Solana, Polkadot, Oasis, Bityaun, Ethereum, NEO, Tezos, and ConsenSys. Further, an integration with Casper Network — a layer one PoS blockchain — was recently announced, enforcing BSN’s vision to build a “Digital Silk Road”.

The BSN offers two sets of blockchain services, one for developers within China and one for users outside the country, that are ‘physically separated’ from each other. ‘The global service is run from Amazon Web Services data centers in Hong Kong, California and Paris, while the national one only runs in data centers inside China’. The BSN offers cost benefits, as it is less expensive than accessing cloud services via traditional providers. But, to avoid the exchange of information that might upset the Chinese government, the system in China is managed through an Open Permissioned service. This is a ‘hybrid of permissioned and permissionless approaches’ that use a KYC (know your customer) process, which makes customer’s identities visible to BSN operators. The BSN’s highly controlled system allows Red Date to censor specific smart contracts or delete an entire blockchain — on the Chinese version — and obviously, cryptos are not allowed to keep it compliant with Chinese rules.

Deployed also in the light of the Chinese CBDC launch, the BSN infrastructure might establish China as a leading jurisdiction for blockchain. However, this will likely look different from blockchain development in other regions, given the lack of much of the speculative aspect of crypto.

Source: Unsplash, Patrick Sun

Chinese Enthusiasm is Shifting

Despite crypto activities being highly limited in China, blockchain remains a priority for the country. According to China’s National People’s Congress plan for the next five years, the country is committed to fostering the emerging tech sector, especially blockchain-based initiatives. The plan highlights areas supported by the Guidance Funds, which raised 5.65 trillion Yuan in 2020, and focuses on sustainable solutions to meet the carbon neutrality goal set for 2060. This goal is supported by the academic sector as well. Many universities in China provide blockchain-related courses to train the developers and entrepreneurs of tomorrow and opened blockchain research centers to drive China’s innovation forward.

Further, the contradiction between what Chinese citizens want and what they are allowed to do is fostering the growth of alternative ecosystems. As happened with cryptocurrencies, Decentralised Finance (DeFi) and Non-Fungible Tokens (NFTs) have attracted the attention of many, leading to interesting, if uncertain, developments.

Blockchain in Academia

The first university in China to introduce a course about blockchain (Blockchain and Digital Currency) was Zhejiang University (Hangzhou) in 2018. It is a leading university in Asia that offers courses related to Fintech through its School of Software Technology and International Business School. Its blockchain research centre also collaborates with ministerial and provincial institutions to support building blockchain development plans.

Over the years, several other Chinese universities followed the same path, acting as bridges between the international and Chinese FinTech markets. Those courses include both basic topics and advanced specialisations. The following are likely the best known academic institutions in China that provide and run blockchain-related courses and research.

• Central University of Finance and Economics in Beijing (FinTech department);
• Peking University in Beijing and Blockchain Research Centre;
• Tsinghua University PBCSF and Institute for FinTech Research (IFR);
• Chengdu University of Information Technology (CUIT)
• Fudan University in Shanghai and Shanghai Blockchain Engineering Technology Research Centre;
• Tongji University of Shanghai and Suzhou Tongji Blockchain Research Institute.

DeFi Ecosystem

While technologies are revolutionising the economic and financial sector globally, China is a step ahead in terms of digital payment infrastructure, due to the launch of its CBDC. Therefore, as part of their progress, enabling some technical aspects of DeFi appears to be the next natural step for the country. However, given the central role of the government in crypto markets, the future of DeFi will likely look very different in China than other countries. But, as the crypto reporter, Molly, tweeted in September 2020, DeFi enthusiasm in general is rising in China.

The famous exchange, Huobi, took part in the development of the DeFi Chinese network, in collaboration with the Shanghai College, enabling the first step into the space. According to the cryptos exchange, many Western DeFi projects are popular in the country, such as Uniswap, Compound, and MarkerDAO. However, a new landscape of applications is emerging, one that is 100% Made in China. Last year, the investment arm of Huobi participated in the funding round of dForce, one of the largest Chinese DeFi platforms. The same year, MCDEX — a DeFi project that aims to ‘provide financial services for Chinese customers who, until now, have had little access to global yield’ — launched its decentralised ETH perpetual contract. As ‘gateways to Web3.0 and dApps’, Hongbo Tang founded the aggregated layer DeBank that supports users in managing their portfolios. Embedded in ImToken — China’s largest crypto wallet — is Tokenlon, a decentralised exchange and payment settlement protocol built on 0X. The Loopring protocol was also built by Chinese developers and is emerging as a key player in solving Ethereum scaling problems.

A bridge between East and West is also being built by the Open DeFi initiative of Conflux Network. With the objective of increasing international cooperation and closing the gap between the Asian and Western markets, the consortium of DeFi protocols was approved and sustained by the Chinese government via the Shanghai Science and Technology Committee. The parties have ‘three major vectors like risk management, new liquidity strategies, and incubation and innovation’, and this year launched the Open DeFi DAO.

Although in its infancy, the DeFi ecosystem in China is evolving rapidly. James Gillingham, Co-Founder and CEO of the Singapore-based Finxflo, supports this view, especially in the light of the BSN (Blockchain Service Network). He added that the goal of China might be to create its own DeFi network and ecosystem, as Thailand did, absorbing the Western trends but maintaining capital control. As the nature of DeFi is against traditional, more controlled financial approaches, this will encourage the Chinese government to find methods to track and trace the amount of capital leaving the country, to try to centralise the industry. Further, Gillingham believes it is possible that China, through a more academic approach, will look for partnerships with DeFi stakeholders to implement an adoption strategy that will enable the government to influence advancements in space. Finally, despite Ethereum’s dominance, his predictions see Chinese protocols reaching the top 10 soon, as knowledge and enthusiasm are growing fast.

NFT Ecosystem

Chinese artists are interested in the potential of NFTs, despite uncertainty about whether they are in a different class than cryptos, or if the restrictions on cryptos will be applied to NFTs as well. Therefore, it is not fully understood if Chinese government will allow an art market built on permissionless blockchains, as NFT trading does bear some similarities to crypto trading. But, some Chinese stakeholders have tried to reassure people of the legality of NFTs. AntChain, the blockchain division of China’s fintech Ant Group, recently stressed that NFTs and cryptos are two distinct products. These statements were released after the company’s sale of NFTs on the Alipay platform caused confusion among customers and questions about the group’s activities. According to an AntChain spokesperson, ‘NFTs are not interchangeable, nor divisible, making them fundamentally different from cryptocurrencies such as bitcoin’. They also reiterated that the value of NFTs lies in the possibility to create unique signatures for digital assets.

Obviously, this uncertainty makes the NFT artists’ path harder in China. However, this market is gaining momentum in the country, with Beijing appearing to be the leader. In fact, this year, the capital hosted the first, in-person NFT gallery — ‘Virtual Niche, Have you ever seen memes in the mirror?’.

The exhibition took place between March 26 and April 4, 2021 at the UCCA Center of Contemporary Art, showing pieces by crypto artists such as Beeple and Rober Alice, as well as some famous Chinese names. Artists ranged from art academy professors to techno-art lovers, showing pieces such as ‘Matrix’ by Ellwood (a Chinese crypto artist).

NFTs started emerging in China already in 2018, around the hype of CryptoKitties. Chinese netizens were active creators of the blockchain-based felines, but the community’s interest in NFT art was dampened by central authority decisions.

According to Beijing-based attorney Shen Wenhao, NFTs have not been tested in Chinese courts yet, and impending laws or rulings might slow the fever in the near future. Further, a Decrypt article argues that the Chinese community is more interested in the speculative aspect of this market, making some digital artists dubious about the future development of this hype — as crypto artist Ting Song affirmed in the same interview. However, this trend has already flooded WeChat and Weibo groups.

Despite uncertainties, the Chinese art market is the third largest in the world, bolstering hopes for this industry. A new generation of digital creators are trying to emerge despite the blurred conditions. Fenbushi Capital recently led the angel round of financing for the decentralised crypto art platform BCA (BlockCreateArt), raising a total of $2 million. According to their blog, BCA groups together ‘creation, trading, collection, and culture & education outputs of crypto art’ trying to create ‘a complete, efficient and standardized cryptoArt NFT closed-loop ecosystem’. The CEO of BCA, Sun Bohan (孙博涵) was also the curator of ‘Virtual Niche’, running the exhibition in collaboration with Kusama Network (Polkadot’s ‘wild cousin’).

Although most of the arts hosted in the gallery are encrypted on Ethereum, Binance has an NFT project on BSC (Binance Smart Chain), as well. The news of Binance’s music-NFT project ‘Musical Beats’ resulted in a fierce dispute with Ethereum, as it was alleged to be a copycat of Ethereum’s EulerBeats (allegedly, like other projects the Decrypt’s article reports). The Chinese-developed company started its NFTs activity in 2019, gifting them on special occasions. Currently, some NFT arts are valued over $200M, according to Binance. A vast list of Chinese artists and arts can be found also on HECO chain and the NFTChina platform (Chinese version: NFT中国).

Overall, NFTs have an uncertain path in front of them. This digital art also has political implications in China, as many crypto artists see this as a means to exercise their freedom of expression. Moreover, the music industry can also gain from this technological development, as many Chinese artists do not profit from their music. This May, Fu Ying aka A Duo (阿朵), sold her single ‘Water Know’ as a NFT (for $47,000), as she posted on her Weibo account.

The uncertainty might mean the NFT industry will develop slower and have a different direction compared to other ecosystems. But, regulations will probably not be able to stop the market altogether. The goal of many hoping to drive the space forward now is to educate the public, as the second part of the Shanghai-based NFT exhibit demonstrated. In fact, the second exhibition in mid-April, hosted a forum — CRYPTOULTRA — during which current hot topics, markets, and trends were explained and discussed.

Source: Unsplace, William Olivieri

What’s on the Horizon?

It is deemed that the new directions for the country’s digital economy do not involve the crypto market, but only blockchain technology for other applications.

Yet, digital currencies appear to be on the Chinese agenda and in focus. The country started to test the digital Yuan in April 2021. And, while ironic considering the stringent controls, the government keeps an eye on the development of the crypto market too, through the release of monthly rankings for DLT initiatives.

Even while the Chinese government is fiercely trying to cut off cryptos, moves in the Chinese ecosystem continue to have a strong impact on the volatility of the digital coins, as demonstrated by the fall Bitcoin had after the latest ban was reinforced — a fall of around 30%. The focus now should be on the next moves of Chinese crypto stakeholders. What will become of the Chinese crypto era? How will restrictions change in the near future, and will they influence other countries’ positions? Only time will tell.