China has been cracking down on cryptocurrency trading and mining for several years, but the world’s second-largest economy may need to reconsider its stance on crypto following the election of a pro-crypto president in the U.S. 

In September, Zhu Guangyao, China’s former vice minister of finance, said at a forum in Beijing that crypto is a “crucial aspect” of the development of the digital economy.

“There are indeed negative impacts, and we must fully understand the risks and potential harm to capital markets,” Zhu said. “However, we must also study international changes and policy adjustments, because cryptocurrency is a crucial aspect of the digital economy’s growth.” 

Zhu compared U.S. and Trump-era cryptocurrency regulatory policies, explaining that the volatile nature of cryptocurrency values can have a massive impact on international financial markets, but this year, the U.S. has “undergone a significant policy shift.” 

Deng Jianpeng, a law professor at the Central University of Finance and Economics, shared a similar view, saying: “There are indeed many instances of illegal activities within the virtual currency space, but I don’t think that’s the primary reason hindering blockchain development in China. I believe regulators should deepen their understanding of blockchain and, by observing international trends, adjust their policies to be more supportive of the technology, instead of just avoiding the topic altogether.”

Behind the regulatory crackdown on cryptocurrencies lies a financial risk that has long concerned Chinese regulators — the potential for cryptocurrencies to fuel illegal activities.

Government reports show that the People’s Bank of China, the central bank, believed that crypto speculation could destabilize the market and foster illegal activities such as gambling, fundraising fraud and pyramid schemes. By strictly prohibiting crypto transactions, the Chinese government sought to protect domestic financial stability and prevent systemic risks.

Following the peer-to-peer lending crisis, cryptocurrencies became another hotspot for illegal fundraising. For example, Chinese state media CCTV has warned the public about a Ponzi scheme orchestrated by Plus Token, which lured investors with high returns and swept up participants from over 100 countries, involving 40 billion yuan ($5.5 billion). In June 2019, the platform vanished.

The Chinese government has also warned that cryptocurrencies enable money laundering and tax evasion. In April 2023, a Chinese woman was convicted in the UK’s largest money laundering case, involving at least 61,000 bitcoin connected to a 43 billion yuan ($5.9 billion) fraud scheme in Tianjin, a city in Northern China.

The authorities are concerned that such financial crime poses a direct threat to the country’s capital controls. “As cryptocurrencies become more popular, some investors may use their cross-border liquidity to transfer funds overseas, which the government fears could undermine control over capital flows, leading to capital flight,” said Zhang Yuanjie, co-founder of Conflux.

With tighter blockchain and crypto regulations in China, global blockchain financing is also shifting. Chinese companies are increasingly seeking capital and opportunities abroad, particularly in Singapore, Hong Kong, the U.S., and the Middle East, as China loses prominence in the field.

According to Galaxy Digital’s report, the global crypto industry raised $2.4 billion in the third quarter this year. Companies based in the U.S. attracted 56% of the venture capital, while the UK, Singapore, and Hong Kong accounted for 11%, 7%, and 4%, respectively. Investment in mainland China was negligible.

While the government cracked down on crypto trading, it has strongly supported consortium chains, hoping to drive blockchain technology in sectors such as finance, supply chain and government services. However, the results appear lackluster, with consortium chain development falling short of expectations.

Under the current regulatory pressure, experts pointed out that China’s blockchain industry is now characterized by a “fear of discussing crypto” stereotype.

From 2017 and 2022, China went through a period marked by rampant ICOs, fraudulent activities under the guise of cryptocurrency, metaverse, NFTs, and digital collectibles, according to Xiao Sa, a senior partner at Beijing Dacheng Law Firm. 

“This led the government to adopt a stringent stance on cryptocurrencies, creating an environment where people are reluctant to talk about crypto, which has, in turn, hindered the development of blockchain technology in China,” said Xiao.   

Deng from the Central University of Finance and Economics said that the development of public blockchains in China faces significant policy barriers due to stringent financial regulations. 

“Public chains often need tokens for economic incentives, while the country prefers consortium or private chains, which are more restrictive and lack the innovation ecosystem,” Deng added.

This guest post was written by Anderson Sima, Executive Editor of Foresight News. The views expressed in it do not necessarily reflect the views of The Block, its owners or its affiliates.

Disclaimer: The Block is an independent media outlet that delivers news, research, and data. As of November 2023, Foresight Ventures is a majority investor of The Block. Foresight Ventures invests in other companies in the crypto space. Crypto exchange Bitget is an anchor LP for Foresight Ventures. The Block continues to operate independently to deliver objective, impactful, and timely information about the crypto industry. Here are our current financial disclosures.

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