Written by: Anderson Sima, Executive Editor of Foresight News
On Dongchangzhi Road lies the former site of the Leishide Institute of Technology, with the renovated auditorium retaining its Gothic style, and the weathered stone walls facing the 320-meter-high 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. As soon as it reached 9:20 AM, the crowd outside began to pour into the auditorium, attracted by a 'divine' figure—Vitalik Buterin, co-founder of Ethereum.
After the host's speech ended, Vitalik's face appeared on the big screen, and the audience cheered with flashes of lights, curious about this 30-year-old genius and billionaire.
Listeners captured photos of Vitalik during the speech. Source: Wanxiang Blockchain Lab
But a subtle detail is that since 2019, this spiritual leader in the blockchain field has not set foot in mainland China, even though it was once the most important hub for Ethereum (currently the world's largest blockchain ecosystem).
When Vitalik's figure no longer appeared 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.
Wild growth and comprehensive prohibition
Starting from the global financial crisis in 2008, a year later, the mysterious person Satoshi Nakamoto released the Bitcoin white paper, and since then, blockchain and cryptocurrencies have gradually grown into an innovative industry in the fintech field.
In simple terms, blockchain refers to a network database that adopts distributed ledger technology, and tokens are the accompanying economic system that maintains the security and operating rules of this ledger, which is the globally discussed cryptocurrency. Domestically, it is often referred to as virtual currency, and some regions use digital currency to describe it.
Stimulated by the wealth effect, the wildly growing Bitcoin has experienced three bull markets, with a total market value currently standing at $1.3 trillion, equivalent to Meta, the internet platform 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 (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 should not be circulated as currency in the market.
By 2017, when the ICO frenzy was at its peak, on September 4, the People's Bank of China, the Central Internet Information Office, 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 jointly issued (Announcement on Preventing Risks of Token Issuance Financing), prohibiting illegal token issuance and financing activities, stating that ICOs are essentially unauthorized illegal public financing behaviors that involve illegal sale of token vouchers, illegal issuance of securities, illegal fundraising, financial fraud, pyramid schemes, and other illegal activities.
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, marking the official end of the era of directly purchasing cryptocurrencies with RMB.
However, apart from ICOs, cryptocurrency mining and exchange businesses continued to thrive in mainland China, once accounting for half of the global market. Industry insiders like Vitalik, co-founder of Ethereum, and Zhao Changpeng, founder of Binance, were also active in the Chinese market.
By 2021, cryptocurrencies welcomed a new round of bull markets, and the Chinese government subsequently upgraded its regulatory measures towards cryptocurrencies, reaching an all-time high. In September, the National Development and Reform Commission and other departments issued a notice to rectify 'mining' activities related to virtual currencies, demanding comprehensive elimination of virtual currency mining activities.
At the same time, the People's Bank of China and other departments jointly issued a document (Notice on Further Preventing and Handling the Risks of Virtual Currency Trading Speculation), which for the first time stipulated that overseas virtual exchanges providing relevant virtual currency services would also be held accountable under the law; personal trading of virtual currencies against public order and good customs renders related civil legal actions invalid.
Since then, industries related to virtual currencies have begun to completely exit mainland China.
At that time, the three largest cryptocurrency trading platforms in the world—Binance, Huobi, and OKEx—quickly announced a suspension of user registrations from mainland China in 2021 and began to gradually wind down existing users.
Many small local exchanges have chosen to shut down their businesses, unable to survive in the high-pressure regulatory environment. Besides Huobi, which primarily focuses on winding down, other offshore exchanges have closed their offices in Beijing and Shanghai, ultimately 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 over 60% of global Bitcoin computing power.
With the large-scale crackdown on Bitcoin mining in 2021, miners have moved their equipment to Kazakhstan, the United States, Canada, and other places. Upstream mining machine leaders Bitmain and Canaan Creative have also fully shifted their business focus overseas, completing the exit of China's crypto mining industry.
Financial sins: illegal fundraising and money laundering
Behind the Chinese government's harsh regulatory measures on cryptocurrencies is the financial nature itself in mainland China, most of which involves regulatory forbidden zones.
From past regulatory documents, it can be seen that the People's Bank of China and other regulatory departments believe that the rise of cryptocurrency speculation activities can cause market turmoil and breed illegal activities like gambling, illegal fundraising, fraud, and pyramid schemes. By strictly prohibiting trading activities of virtual currencies, the Chinese government aims to protect the stability of the domestic financial market and prevent systemic risks from spreading.
Following P2P, virtual currencies have also become a heavy disaster area for illegal fundraising. According to CCTV News, in May 2018, a virtual wallet called Plus Token, claimed to be jointly created by former Google employees and employees of a multinational company, quietly appeared online, using blockchain technology as a guise. Plus Token lured participants with high returns and swept through more than 100 countries and regions in just over a year, with over 2 million participants and involving 40 billion yuan. In June 2019, the platform officially went offline.
Additionally, the Chinese government has long been concerned that cryptocurrencies could be used for money laundering, tax evasion, and other illegal financial activities. The anonymity and decentralization of cryptocurrencies make them an important tool for criminals to evade regulation. In cases of financial crimes in various regions, the money laundering tools are basically related to cryptocurrencies.
Taking the largest money laundering case in the UK this April 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 linked to a scam case involving 43 billion yuan in Tianjin. She allegedly helped the mastermind of the Tianjin scam, Qian Zhimin, convert 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 utilize their cross-border liquidity to transfer funds overseas. The government worries this will weaken the country's control over capital flows, leading to the outflow of domestic assets. Therefore, limiting cryptocurrency trading is also seen as an important means to prevent capital outflow.'
At the same time, due to the extreme speculation in the cryptocurrency market, with dramatic price fluctuations, it has attracted a large number of speculators to participate. The Chinese government believes that this speculative behavior not only harms the interests of ordinary investors but may also trigger chaos in the financial market. Therefore, regulatory agencies require strict prohibition of virtual currency speculation to prevent the market from being disturbed by excessive speculative behavior.
Professor Li Guoquan from Singapore Management University told Foresight News: 'The Chinese government's choice is to suppress chaos such as 'speculation' when the weeds are growing wildly, which is extremely important for protecting investors, and I fully agree with this.'
Fear of 'currency' discussions, comprehensive shrinkage
Under the current high-pressure regulation, many experts and scholars told Foresight News that there is now a stereotype in domestic blockchain that 'discussions about currency cause fear'.
Xiao Sa, a senior partner at Beijing Dacheng Law Firm, told Foresight News that from 2017 to 2022, China experienced a period where ICOs flourished, with scams and illegal fundraising disguised as cryptocurrencies, metaverse, NFTs, and digital collectibles, leading to a subsequent strict regulatory attitude and measures towards cryptocurrencies, which resulted in the phenomenon of 'fear of discussions about currency' indeed existing and hindering the development of blockchain technology in the country.
While strongly suppressing 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, government affairs, and other fields. However, the reality is not optimistic, and the development of alliance chains has not met expectations.
Deng Jianpeng, a professor at the Law School of Central University of Finance and Economics and director of the Fintech Law Research Center, told Foresight News, 'Due to strict requirements in the financial regulatory field, there are policy obstacles to the development of public chains in China. 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 preferred choice domestically; however, the innovative ecosystem of alliance chains 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 landing applications of these projects are extremely limited. China ranks among the top globally in terms of blockchain patent applications, yet it appears to be weak in practical applications. Many enterprises merely regard 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 idea of blockchain's decentralization. In addition, alliance chain technology still faces numerous challenges in handling data privacy, security, and system interoperability. This has led many enterprises 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 gradually tightens its regulation of the blockchain and cryptocurrency industry, the focus of financing and communication in the global blockchain industry is also shifting. More and more Chinese enterprises are beginning to look overseas, seeking capital support and business development in Singapore, Hong Kong, the United States, the Middle East, and other places, while China is gradually fading from the central position in this field.
According to the 2024 Q3 investment report released by the cryptocurrency asset management company Galaxy, the crypto industry raised a total of $2.4 billion in Q3, with companies headquartered in the United States attracting 56% of all venture capital funds, the UK 11%, Singapore 7%, and Hong Kong 4%. The investment and financing in mainland China can almost be ignored.
Following closely is the reduction of startups and a sharp decrease in talent. Although blockchain technology once thrived in universities, as regulatory scrutiny tightened and job opportunities dwindled, more and more students began to take a wait-and-see attitude towards the blockchain industry.
Bright, president of the Fudan University Blockchain Association, told Foresight News, 'Looking at universities nationwide, only top-tier cities' universities have 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; each year, the number of graduates willing to accept offers from the blockchain industry may not exceed 10.
Where to go from here?
On September 28, 2024, the Tsinghua Wudaokou Chief Economist Forum was held in Beijing. Former Vice Minister of Finance Zhu Guangyao mentioned cryptocurrencies in his speech and unusually stressed the need to pay attention to their research.
'It indeed has 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 for the development of the digital economy.' Zhu Guangyao reflected on the development of cryptocurrencies, saying that for more than a decade, the United States has regarded cryptocurrencies as having a huge destructive power against international anti-money laundering and international anti-terrorism financing.
Zhu Guangyao cited the United States and Trump as examples to introduce different regulatory policies for cryptocurrencies. 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 US policy. Trump's campaign platform explicitly included cryptocurrencies, and he publicly stated, 'We must embrace cryptocurrencies, or China will replace us.' The US Securities and Exchange Commission also approved 11 Bitcoin ETFs for listing on the stock and futures markets. 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, telling Foresight News, 'There are indeed many illegal activities in the field of virtual currencies, but I think this is not an important reason hindering the development of blockchain in the country. I believe that domestic regulators can further deepen their understanding of blockchain and refer to the current level of acceptance of blockchain and blockchain finance internationally, and then consider appropriately adjusting their policy perspective, rather than simply fearing discussions about currency.'
'There are many places in mainland China where virtual currencies are involved in illegal activities or have become tools for certain illegal activities. Similarly, in the United States, Hong Kong, Europe, and Dubai in the Middle East, there are also related illegal activities. However, there are many types of tools for crime. For example, cash in US dollars is the largest currency tool used for money laundering and drug trafficking in the world, but we cannot therefore prohibit the circulation of US dollars. 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 to the development of the domestic blockchain ecosystem is compliance issues. Under the current validity of normative documents such as (Announcement on September 4) and (Notice on September 24), there are compliance issues in the construction of the cryptocurrency ecosystem, which limits the development space for related projects like DeFi and RWA.
For blockchain practitioners in mainland China, will the longstanding high-pressure regulation possibly change in the future? The interviewees all indicated that it is very difficult in the short term. 'I think it will be quite hard to see this change within at least the next 5 years,' said Deng Jianpeng.
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 astonished Deng Jianpeng, who was there for inspection. 'Hong Kong has taken a brave step, but it needs to advance the development of Web3 based on controlling the risks related to cryptocurrencies,' he said.
After Hong Kong chose to embrace virtual currencies vigorously, many entrepreneurs and companies returned to the 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, quietly participating in the global blockchain ecosystem. He said, 'The location of offices may change, but the Chinese will never disappear from this industry.'
