Written by: Anderson Sima, Executive Editor of Foresight News
The old site of the Reisd Institute is hidden on Dongchangzhi Road. The restored auditorium retains a Gothic style, with weathered stone walls facing the 320-meter-high White Magnolia Square.
On October 17, the Shanghai Blockchain Week, held for ten consecutive years, moved from the W Hotel on the Bund to this venue. At 9:20 AM, the crowd waiting outside rushed into the auditorium, attracted by a 'divine' figure—Vitalik Buterin, co-founder of Ethereum.
As the host's speech ended, Vitalik's face appeared on the big screen, and the audience cheered, their flashes lighting up as they expressed curiosity about the 30-year-old genius and billionaire.
The audience took photos of Vitalik during the speech. Source: Wanxiang Blockchain Laboratory
But an inconspicuous detail is that since 2019, this spiritual leader of the blockchain field has not set foot in mainland China, even though it was once the most important hub for Ethereum (currently the largest blockchain ecosystem in the world).
When Vitalik's figure no longer appears on the streets of Shanghai and Beijing, the corresponding reality is that the blockchain ecosystem in mainland China is declining. "This is a regrettable fact," said Zhang Yuanjie, co-founder of Conflux, to Foresight News.
Wild growth and comprehensive prohibition.
Beginning with the global financial crisis in 2008, a year later, the mysterious Satoshi Nakamoto released the Bitcoin white paper, and since then, blockchain and cryptocurrencies have gradually grown into an innovative industry in the field of financial technology.
In simple terms, blockchain can refer to a network database that uses a distributed ledger method, while tokens are the subsidiary economic system that maintains the security of this ledger and its operating rules, which is the globally hotly discussed cryptocurrency. In China, it is often referred to as virtual currency, and some regions use digital currency to refer to it.
Stimulated by the wealth effect, the wildly growing Bitcoin has experienced three bull markets, and its total market value has reached 1.3 trillion USD, equivalent to Meta, led by Zuckerberg.
It is worth noting that at the peak of the previous three bull markets, the mainland government chose to cool down 'virtual currencies'.
In December 2013, the central bank and five ministries issued a notice (Notice on Preventing Bitcoin Risks) that defined Bitcoin for the first time, stating that Bitcoin does not have the same legal status as currency and cannot and should not circulate as currency in the market.
By 2017, during the ICO frenzy, on September 4, seven departments, including the People's Bank of China, the Central Cyberspace Affairs Commission, the Ministry of Industry and Information Technology, the State Administration for Industry and Commerce, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission, issued a notice (Announcement on Preventing Risks of Token Issuance Financing), prohibiting illegal token issuance and financing activities, stating that ICOs are essentially unauthorized illegal public fundraising activities, suspected of illegal sale of token vouchers, illegal issuance of securities, illegal fundraising, financial fraud, pyramid schemes, and other illegal activities.
After two rounds of stringent regulation, the ICO boom of virtual currencies began to cool down, and the first batch of domestic cryptocurrency exchanges started to clear out or withdraw from mainland China, officially marking the end of the era of directly purchasing cryptocurrencies with RMB.
However, apart from ICOs, cryptocurrency mining and exchange businesses continue to thrive in mainland China, once occupying half of the global market. Industry insiders, including Ethereum founder Vitalik and Binance founder Zhao Changpeng, were active in the Chinese market.
By 2021, cryptocurrencies welcomed a new round of bull markets, and the Chinese government's regulatory intensity against cryptocurrencies escalated to an unprecedented level. In September, the National Development and Reform Commission and other departments issued a notice on rectifying virtual currency 'mining' activities, requiring local authorities to comprehensively eliminate virtual currency mining operations.
At the same time, the People's Bank of China and several departments jointly issued a document (Notice on Further Preventing and Dealing with Risks of Virtual Currency Trading Speculation), which for the first time stipulated that foreign virtual exchanges providing relevant virtual currency services would also be held legally accountable; personal cryptocurrency speculation violates public order and good customs, and related civil legal acts are invalid.
Since then, the virtual currency-related industry has fully exited mainland China.
At that time, the three largest cryptocurrency trading platforms in the world, Binance, Huobi, and OKEx, quickly announced a suspension of user registration from mainland China in 2021 and began to gradually clear existing users.
Many small local exchanges have chosen to shut down their operations, unable to survive in the high-pressure regulatory environment. Apart from Huobi, which primarily focuses on clearing, other offshore exchanges have closed their offices in Beijing and Shanghai, eventually relocating to Singapore and Dubai.
In terms of mining, China was once a major source of global Bitcoin mining power, with hydropower mining farms in Yunnan, Guizhou, and Sichuan, and thermal power mining farms in Xinjiang and Inner Mongolia accounting for over 60% of global Bitcoin mining power.
With the large-scale crackdown on Bitcoin mining in 2021, miners have moved their equipment to places like Kazakhstan, the United States, and Canada. Leading upstream mining machine manufacturers Bitmain and Canaan Creative have also fully shifted their business focus overseas, thereby completing the withdrawal of China's crypto mining.
Financial original sin: illegal fundraising and money laundering.
The severe regulatory measures taken by the Chinese government against cryptocurrencies are rooted in the financial characteristics they possess, which mostly involve regulatory prohibitions in mainland China.
From past regulatory documents, it can be seen that the People's Bank of China and other regulatory authorities believe that the rise of cryptocurrency speculation activities can cause market turmoil and give rise to illegal activities such as gambling, illegal fundraising, fraud, and pyramid schemes. By strictly prohibiting virtual currency trading activities, the Chinese government aims to protect the stability of the domestic financial market and prevent the spread of systemic risks.
Following P2P, virtual currencies have also become a major area for illegal fundraising. According to CCTV News, in May 2018, a virtual currency wallet called Plus Token, claimed to be jointly created by former Google employees and employees of a multinational company, quietly appeared online. Under the guise of blockchain technology, Plus Token used high returns as bait, sweeping across more than 100 countries and regions worldwide in just over a year, with over 2 million participants and involving 40 billion RMB. In June 2019, the platform officially went bankrupt.
In addition, the Chinese government has long been concerned that cryptocurrencies are being used for money laundering, tax evasion, and other illegal financial activities. The anonymity and decentralized characteristics of cryptocurrencies make them an important tool for criminals to evade regulation. In various cases of financial violations and crimes, the tools for money laundering are mostly related to cryptocurrencies.
Taking the largest money laundering case in the UK that occurred in April this year as an example, according to Caixin reports, a Chinese woman was found guilty of money laundering by a UK court, involving at least 61,000 Bitcoins, reportedly sourced from a 43 billion RMB fraud case in Tianjin. This woman is suspected of assisting the mastermind of the Tianjin fraud case, Qian Zhimin, in converting a large amount of Bitcoin into tangible assets.
Money laundering directly threatens the state's capital control rights. Zhang Yuanjie, co-founder of Conflux, told Foresight News, "With the popularity of cryptocurrencies, some investors may use their cross-border liquidity to move funds overseas. The government worries that this will weaken the state's control over capital flows and lead to domestic asset loss. Therefore, restricting virtual currency trading is also seen as an important means to prevent capital outflow."
At the same time, due to the extreme speculation inherent in the cryptocurrency market, price fluctuations are severe, attracting a large number of speculators to participate. The Chinese government believes that such speculative behavior not only harms the interests of ordinary investors but may also lead to chaos in the financial market. Therefore, regulatory authorities require strict prohibition of virtual currency speculation to prevent the market from being disrupted by excessive speculative behavior.
Professor Li Guoquan from Singapore University of Social Sciences told Foresight News: "The Chinese government chooses to suppress 'speculation' and other chaotic phenomena when the wild grass grows. This is an extremely important part of protecting investors, and I completely agree with this."
Fear of cryptocurrencies leads to a comprehensive contraction.
Under the current high-pressure regulation, multiple experts and scholars told Foresight News that there is now a stereotype of 'fear of cryptocurrencies' in domestic blockchain discussions.
Xiao Sa, a senior partner at Beijing Dacheng Law Firm, told Foresight News that between 2017 and 2022, China experienced a period where ICOs flourished, scams disguised as cryptocurrencies, metaverses, NFTs, digital collectibles, etc., led to subsequent regulatory authorities taking a strict and tough stance and measures against cryptocurrencies. Therefore, the phenomenon of 'fear of cryptocurrencies' indeed exists and has obstructed the development of blockchain technology in China.
While strongly cracking down on virtual currencies, the Chinese government is vigorously supporting the development of alliance chains, hoping to promote the application of blockchain technology in finance, supply chain, and government affairs. However, the reality is not optimistic, as the development of alliance chains has not met expectations.
Professor Deng Jianpeng from the Law School of Central University of Finance and Economics and Director of the Financial Technology Law Research Center told Foresight News, "Due to strict requirements in the field of financial regulation in China, there are policy obstacles to developing public chains domestically. The reason is that public chains often need to issue tokens as economic incentives. Therefore, alliance chains or private chains that do not involve tokens are the preferred choice in China, but the innovation ecology of alliance and private chains is relatively limited, and transparency becomes a problem."
Despite China having numerous alliance chain projects, such as Baidu's Super Chain, Ant Group's Ant Chain, and Tencent's blockchain technology service platform, the actual application of these projects is extremely limited. China ranks among the top globally in the number of blockchain-related patent applications, but it shows weakness in specific applications. Many enterprises merely use blockchain as a marketing gimmick rather than a genuine technological solution.
One of the main reasons hindering the development of alliance chains is their high degree of centralization, which contradicts the core decentralized idea of blockchain. Additionally, alliance chain technology still faces many challenges in handling data privacy, security, and system interoperability issues. This leads many companies to take a wait-and-see attitude towards adopting alliance chain technology, resulting in low penetration and actual application rates in the market.
As China tightens its regulation of the blockchain and cryptocurrency industry, the focus of global blockchain industry financing and communication is also shifting. More and more Chinese companies are beginning to look overseas for capital support and business development in places like Singapore, Hong Kong, the United States, and the Middle East, while China is gradually fading from the central position in this field.
According to the Q3 2024 cryptocurrency industry investment and financing report released by crypto asset management company Galaxy, the cryptocurrency industry secured $2.4 billion in funding in Q3, with U.S.-based companies attracting 56% of all venture capital, the UK 11%, Singapore 7%, and Hong Kong 4%. Investment and financing from mainland China can almost be ignored.
What follows is a decrease in startups and a sharp reduction in talent in the industry. Although blockchain technology was once popular in universities, as regulatory scrutiny has tightened and job opportunities have diminished, more and more students are taking a wait-and-see attitude towards the blockchain industry.
Bright, the president of the Fudan University Blockchain Association, told Foresight News, "From the perspective of national universities, only top-tier cities' universities have blockchain-related associations, and among core members, very few ultimately choose the blockchain industry." He used the Fudan Blockchain Association as an example, stating that each year, the number of graduates willing to accept offers from the blockchain industry may not exceed ten.
Where do we go from here?
On September 28, the 2024 Tsinghua Wudaokou Chief Economist Forum was held in Beijing. Former Vice Minister of Finance Zhu Guangyao mentioned cryptocurrencies in his speech and rarely emphasized the need to pay attention to their research.
"It does indeed have negative impacts, and we must fully recognize its risks and harm to the capital market, but we must study the latest changes and policy adjustments internationally because it is a crucial aspect of the development of the digital economy," Zhu Guangyao reflected on the development of cryptocurrencies. For more than a decade, the U.S. has believed that cryptocurrencies have a huge destructive power against international anti-money laundering and international anti-terrorism financing.
Zhu Guangyao used the United States and Trump as examples to illustrate different cryptocurrency regulatory policies. He stated, "The dramatic fluctuations in cryptocurrency values have a huge impact on international financial markets, but this year, there has been a significant evolution in U.S. policy. Trump's campaign platform clearly included cryptocurrency, and he openly stated, 'We must embrace cryptocurrency, or China will replace us.' The U.S. Securities and Exchange Commission also approved the listing of 11 Bitcoin ETFs on the stock and futures markets. Meanwhile, in emerging market countries and BRICS nations, Russia, South Africa, Brazil, and India have also taken action."
Professor Deng Jianpeng from Central University of Finance and Economics holds a similar view. He told Foresight News: "There are indeed many illegal and criminal phenomena in the field of virtual currencies, but I don't think this is a major reason hindering the development of blockchain in China. I believe domestic regulators can further deepen their understanding of blockchain and refer to the current level of acceptance of blockchain and even blockchain finance internationally, then consider adjusting their policies appropriately, rather than simply fearing cryptocurrencies."
"Virtual currencies in the mainland involve many illegal and criminal behaviors, or serve as tools for certain illegal and criminal activities. Similarly, in the United States, Hong Kong, Europe, and the Middle East, there are also related illegal and criminal activities. However, there are various tools for committing crimes. For example, cash in US dollars is the largest monetary tool used for money laundering and drug trafficking worldwide, but we cannot prohibit the circulation of US dollars for this reason. Therefore, we need to re-examine and rethink cryptocurrencies from multiple perspectives," he added.
Xiao Sa, a senior partner at Beijing Dacheng Law Firm, also stated that the biggest challenge for the development of the domestic blockchain ecosystem is compliance issues. Under the current effective regulatory documents, such as the September 4 notice and September 24 notification, there are compliance issues in the construction of the cryptocurrency ecosystem. Consequently, the development space for related projects like DeFi and RWA is very limited.
For blockchain practitioners in mainland China, is it possible that the longstanding high-pressure regulation could change in the future? The interviewees all indicated that it is very difficult in the short term. "I think it will be difficult to see this change in at least the next five years," said Deng Jianpeng.
Postscript
The Luohu Port in Shenzhen is about an hour's drive from Times Square in Causeway Bay, Hong Kong, with a 70-minute subway ride. On the streets of Causeway Bay, numerous virtual currency OTC physical stores amazed Deng Jianpeng, who was there for an inspection. He stated, "Hong Kong has taken a brave step, but it needs to advance the development of Web3 based on controlling risks related to cryptocurrencies."
After Hong Kong chose to embrace virtual currencies vigorously, many entrepreneurs and companies returned to nearby Shenzhen, where transportation is convenient, and labor and living costs are much lower than in connected Hong Kong.
Zhang Yuanjie, co-founder of Conflux, told Foresight News that the returning small teams are scattered throughout Shenzhen, silently participating in the global blockchain ecosystem. He stated, "The office location may change, but Chinese people will never disappear from this industry."
