"The office location may change, but Chinese people will never disappear from this industry."
Written by: Anderson Sima, Executive Editor of Foresight News.
The old site of the Leida Institute of Technology is hidden on Dongchangzhi Road, with the renovated auditorium retaining its Gothic style, and the weathered stone walls facing the 320-meter-tall White Magnolia Square.
On October 17, the Shanghai Blockchain Week, which has been held for ten consecutive years, moved from the W Hotel on the Bund to this venue. At 9:20 AM, people who were chatting outside spontaneously squeezed into the auditorium, attracted by a 'divine' figure—Ethereum co-founder Vitalik Buterin.
As the host's opening remarks concluded, Vitalik's face appeared on the big screen, and the audience erupted in cheers, curious about this 30-year-old genius and billionaire.
Audience taking photos of Vitalik during the speech. Source: Wanxiang Blockchain Laboratory.
However, an inconspicuous detail is that since 2019, this spiritual leader of the blockchain field has not stepped into mainland China again, even though it was once the most important hub for Ethereum (currently the world's largest blockchain ecosystem).
When Vitalik's figure no longer appears on the streets of Shanghai and Beijing, the corresponding situation is that the blockchain ecosystem in mainland China is heading towards decline. "This is a regrettable fact," Conflux co-founder Zhang Yuanjie told Foresight News.
Barbaric growth and comprehensive prohibition.
Starting with the global financial crisis in 2008, a year later, the mysterious Satoshi Nakamoto published 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 distributed ledger technology, and tokens are the auxiliary economic system that maintains the security of this ledger and the rules of operation, which is the globally discussed cryptocurrency. In domestic contexts, it is often referred to as virtual currency, and in some regions, it is referred to as digital currency.
Stimulated by the wealth effect, the barbaric growth of Bitcoin has experienced three bull markets, with a total market value now standing at $1.3 trillion, equivalent to Meta, the internet platform led by Zuckerberg.
It is worth noting that at the peaks of the previous three bull markets, the mainland government chose to cool down the 'virtual currency' market.
In December 2013, the central bank and five ministries issued a notice (on preventing Bitcoin risks), which 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 craze, on September 4, the People's Bank of China, the Central Cybersecurity and Informatization Committee, 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 (on preventing the risks of token issuance and financing), prohibiting illegal token issuance and financing activities, stating that ICOs are essentially unauthorized public financing activities, suspected of illegal sale of token vouchers, illegal issuance of securities, illegal fundraising, financial fraud, and pyramid schemes.
After two rounds of strict regulation, the ICO boom of virtual currencies began to cool down, and the first batch of domestic cryptocurrency exchanges started to withdraw or exit mainland China, officially ending the era of purchasing cryptocurrencies directly with RMB.
However, aside 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, the cryptocurrency market ushered in a new bull market, and the Chinese government's regulatory efforts on cryptocurrencies intensified, reaching an all-time high. In September, the National Development and Reform Commission and other departments issued a notice regarding the rectification of virtual currency "mining" activities, requiring all regions to comprehensively clear virtual currency mining activities.
In the same period, the People's Bank of China and other 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 overseas virtual trading platforms providing related virtual currency services would also be held accountable according to the law; personal speculation in cryptocurrencies violates public order and good customs, and related civil legal acts are invalid.
Since then, the virtual currency-related industry has begun to completely exit mainland China.
At that time, the three largest cryptocurrency trading platforms in the world, Binance, Huobi, and OKEx, quickly announced in 2021 that they would suspend user registrations from mainland China and began to gradually withdraw existing users.
Many small local exchanges chose to shut down directly, unable to survive in the high-pressure regulatory environment. In addition to Huobi, which primarily focused on withdrawing, other offshore exchanges closed their offices in Beijing and Shanghai, eventually settling in Singapore and Dubai.
In terms of mining, China was once a major source of global Bitcoin mining power, with hydropower mines represented by Yunnan, Guizhou, and Sichuan, and thermal power mines represented by Xinjiang and Inner Mongolia accounting for more than 60% of the global Bitcoin mining power.
With the large-scale crackdown on Bitcoin mining in 2021, miners have relocated their equipment to Kazakhstan, the U.S., Canada, and other places. Major upstream mining machine producers like Bitmain and Canaan have also fully shifted their business focus overseas, completing the withdrawal of China's cryptocurrency mining.
Financial Original Sin: Illegal Fundraising and Money Laundering
The severe regulatory measures taken by the Chinese government against cryptocurrencies stem from their financial characteristics, which often involve regulatory gray areas in mainland China.
From past regulatory documents, it can be seen that the People's Bank of China and other regulatory bodies believe that the rise of cryptocurrency speculation activities will cause market turbulence 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 disaster area for illegal fundraising. According to reports from CCTV, in May 2018, a virtual currency wallet called Plus Token, allegedly created by former Google employees and employees of a multinational company, quietly appeared online. Using blockchain technology as a guise, Plus Token lured investors with high returns and swept through more than 100 countries and regions globally in just over a year, involving more than 2 million participants and an amount of 40 billion yuan. In June 2019, the platform officially collapsed.
In addition, the Chinese government has long been concerned that cryptocurrencies may be used for money laundering, tax evasion, and other illegal financial activities. The anonymity and decentralization of cryptocurrencies make them important tools for criminals to evade regulation. In cases of financial illegal activities across various regions, the money laundering tools are mostly related to cryptocurrencies.
For example, in the largest money laundering case that occurred in the UK in April of this year, according to Caixin reports, a Chinese woman was found guilty of money laundering by a British court, involving at least 61,000 Bitcoins, which are said to have originated from a fraud case in Tianjin amounting to 43 billion yuan. The woman was accused of helping the mastermind behind the Tianjin fraud case, Qian Zhimin, convert a large amount of Bitcoin into tangible assets.
Moreover, money laundering directly threatens the state's capital control rights. Conflux co-founder Zhang Yuanjie told Foresight News, "With the popularity of cryptocurrencies, some investors may utilize their cross-border liquidity to transfer funds overseas. The government worries this may weaken its control over capital flows, leading to domestic asset losses. 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 and significant price fluctuations, a large number of speculators have been attracted to participate. The Chinese government believes that this kind of speculation not only harms the interests of ordinary investors but may also lead to turmoil in financial markets. Therefore, regulatory agencies have mandated the strict prohibition of virtual currency speculation to prevent the market from being disrupted by excessive speculative behavior.
Professor Li Guoquan from Singapore's Social Sciences University told Foresight News: "The Chinese government chooses to suppress chaos like 'speculation' when the wild grass is rampant, which is an extremely important part of protecting investors, and I fully agree with this."
Talking about cryptocurrencies is met with fear and overall shrinkage.
Under the current high-pressure regulation, many experts and scholars have told Foresight News that a stereotype of 'fear of discussing cryptocurrencies' has emerged in the domestic blockchain sector.
Xiao Sa, a senior partner at Beijing Dacheng Law Firm, told Foresight News that between 2017 and 2022, China experienced a period of rampant ICOs and fraudulent activities disguised as cryptocurrencies, metaverses, NFTs, and digital collectibles, leading to a subsequent strict regulatory attitude and measures against cryptocurrencies. This phenomenon of 'fear of discussing cryptocurrencies' indeed exists and has hindered the development of blockchain technology in the country.
While strongly cracking down on virtual currencies, the Chinese government has vigorously supported the development of alliance chains, hoping to promote the application of blockchain technology in finance, supply chains, and government affairs. However, the reality is not optimistic, as the development of alliance chains has not achieved expected results.
Deng Jianpeng, a professor at the Law School of the Central University of Finance and Economics and director of the Financial Technology Law Research Center, told Foresight News, "Due to the strict requirements in the financial regulatory field, there are policy barriers to the development of public chains in the country. The reason is that public chains often need to issue tokens to provide economic incentives. Therefore, alliance chains or private chains that do not involve tokens are the top choice in the country, but the innovation ecosystem of alliance and private chains is relatively limited, and transparency is also a problem."
Despite China hosting 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 remains extremely limited. China ranks among the top in the world in patent applications in the blockchain field, but its specific applications seem weak. 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 concept of decentralization in blockchain. Additionally, alliance chain technology still faces numerous challenges in handling data privacy, security, and system interoperability issues. This has led many enterprises to adopt a wait-and-see attitude toward alliance chain technology, resulting in low popularity and actual application rates in the market.
As China's regulation of the blockchain and cryptocurrency industry gradually tightens, the focus of global blockchain industry financing and communication is also shifting. More and more Chinese companies are starting to look overseas, seeking capital support and business development in places like Singapore, Hong Kong, the U.S., and the Middle East, while China is gradually fading from the center of this field.
According to the 2024 Q3 cryptocurrency industry investment report released by Galaxy, the crypto industry received a total of $2.4 billion in financing in Q3, with companies based in the United States attracting 56% of all venture capital funds, the UK accounting for 11%, Singapore 7%, and Hong Kong 4%. The investment and financing from mainland China can be almost ignored.
Following this, there has been a reduction in startups and a sharp decrease in talent in the industry. Although blockchain technology was once popular in universities, with the tightening of industry regulations and a decrease in job opportunities, more and more students are beginning to take a cautious stance toward the blockchain industry.
Bright is the president of the Fudan University Blockchain Association. He told Foresight News, "Looking at national universities, only top cities have universities with blockchain-related associations, and the core members who ultimately choose the blockchain industry are very few." He cited the Fudan Blockchain Association as an example, stating that each year, there may be no more than 10 graduates willing to accept offers from the blockchain industry.
Where to go from here?
On September 28, 2024, the Tsinghua Wudaokou Chief Economist Forum was held in Beijing. Zhu Guangyao, the former vice minister of finance, mentioned cryptocurrencies in his speech and rarely called for their research to be taken seriously.
"It does have negative effects, and we must fully recognize its risks and harm to the capital market. However, we must study the latest changes in international policies, as this is a crucial aspect for the development of the digital economy." Zhu Guangyao reviewed the development of cryptocurrencies, noting that for over a decade, the U.S. has viewed cryptocurrencies as having a significant destructive effect on international anti-money laundering and anti-terrorism financing.
Zhu Guangyao used the United States and Trump as examples to illustrate different regulatory policies for cryptocurrencies. He stated, "The violent fluctuations in the value of cryptocurrencies have a huge impact on international financial markets, but this year, the policies in the United States have undergone significant changes. Trump's campaign platform clearly included cryptocurrencies, and he openly stated, 'We must embrace cryptocurrencies, or China will replace us.' The U.S. Securities and Exchange Commission also approved the listing of 11 Bitcoin ETFs in the stock market and futures market. In emerging markets and BRICS countries, Russia, South Africa, Brazil, and India have also taken action."
Deng Jianpeng, a professor at the Central University of Finance and Economics, holds a similar view. He told Foresight News: "There are indeed many illegal activities in the field of virtual currency. However, I believe this has become a significant reason hindering the development of blockchain in the country. I feel that the main reason for the obstacles to development in the country is that regulators can further deepen their understanding of blockchain and the current level of acceptance of blockchain and even blockchain finance internationally, and then consider the need for appropriate policy adjustments rather than simply fearing cryptocurrencies."
"Many places in mainland China involve illegal criminal activities related to virtual currencies or serve as tools for certain illegal activities. Similarly, in the U.S., Hong Kong, Europe, and places like Dubai in the Middle East, there are also illegal and criminal activities related to this. However, the tools for committing crimes are diverse. For example, the largest currency used for money laundering and drug trafficking in the world is cash in U.S. dollars, but we cannot ban the circulation of dollars for this reason. Therefore, we need to reassess and rethink cryptocurrencies from multiple angles," he added.
Xiao Sa, a senior partner at Beijing Dacheng Law Firm, also stated that the biggest challenge for the development of China's blockchain ecosystem is compliance issues. With normative documents like the (9.4 announcement) and (9.24 notice) still in effect, there are compliance issues in the construction of the cryptocurrency ecosystem. As a result, the development space for related projects like DeFi and RWA is very limited.
For blockchain practitioners in mainland China, is it possible that the consistent high-pressure regulation will change in the future? The interviewees all indicated that it is very unlikely in the short term. "I think it will be difficult to see this change at least in the next five years," Deng Jianpeng stated.
Postscript
The Luohu Port in Shenzhen is about an hour's drive from Times Square in Causeway Bay, Hong Kong, and 70 minutes by subway. On the streets of Causeway Bay, numerous virtual currency OTC physical stores amazed Deng Jianpeng, who came to investigate. "Hong Kong has taken a brave step, but it needs to promote the development of Web3 based on controlling the risks related to cryptocurrencies," he stated.
After Hong Kong chose to embrace virtual currencies, many entrepreneurs and companies returned to nearby Shenzhen, which offers convenient transportation and has much lower labor and living costs compared to Hong Kong.
Conflux co-founder Zhang Yuanjie told Foresight News that the returning small teams are scattered across Shenzhen, quietly participating in the global blockchain ecosystem. He stated, "The office location may change, but Chinese people will never disappear from this industry."
