Shanghai Special: Crypto crackdown fallout and what happens next
The summer of regulatory action has now become a global phenomenon. Lawmakers and politicians are waving their fingers and making threats toward the industrys leading virtual asset service providers a term in Hangzhou and the upcoming Shanghai International Blockchain Week in September.
Regulator influence on the decline
The original crackdown that banned ICOs and exchanges in 2017 caught the crypto industry at a vulnerable time. The majority of worldwide trading volume at the time originated from China or happened on Chinese exchanges, and the large ones were registered and based within the mainland. This left them at the mercy of authorities and taught the industry a valuable lesson about managing geographic risk.
After that, key industry players such as Binance, Huobi and OKEx began setting up in places like Hong Kong and Singapore, where regulators were more open-minded. Subsequently, these exchanges are now slightly removed from the jurisdiction of the Chinese government, provided they arent too conspicuous when recruiting Chinese users.
As more and more of the industry shifts overseas, the impact of regulators is lessened. Unfortunately, miners who were keen to take advantage of low-cost energy from Chinas abundant hydropower and coal-powered plants were not as quick to decentralize. That left them in a precarious position, sparking a wave of panic after China cracked down on miners earlier this year. The good news for investors is that miners have now responded by also relocating abroad, reducing the need for any future negative regulation against the mining industry.
Reading the tea leaves with regulators
Retail trading is still a major uncertainty, as large, predominantly Chinese exchanges like Huobi and OKEx make up around 20% of global volumes, according to FTX’s volume monitor. Binance makes up over 50% of global volume and likely has a large percentage of Chinese users as well.
While users cant directly buy cryptocurrency with fiat on these platforms, P2P transactions still make it easy for savvy users to purchase on platforms like Binance, using Chinese bank accounts and commercial payment apps to transact between the yuan and stablecoins.
To this point, the government hasnt been successful in slowing this volume, even though bank accounts are occasionally frozen for transacting in P2P markets. The sheer volume of digital transactions makes this tough to monitor, but its possible that the government isnt that interested in eliminating these channels entirely. Completely shutting down exchanges and retail investors might be possible, but it would risk leaving China frozen out, without a horse in the race something China is reluctant to do.
Wang believes that exchanges that have large volumes coming from China will continue to adapt, telling Magazine: We think they are likely to follow the global trend towards stricter compliance, and as weve seen, they have already looked at limiting leverage and reducing the scope of products available for new users. Wang is referencing what occured earlier this year when exchanges like Huobi limited users’ access to futures, a popular but high-risk product that is often more akin to gambling than to investing.
Ma remains less convinced of the short-term future:
Chinas securities and banking regulators have yet to release new regulations on cryptocurrency trading. The uncertainty could mean real, long-term downward pressure on cryptocurrency prices.
Ma is not alone in worrying about what comes next. Many people in the Chinese community, including early entrepreneur Bobby Lee, have voiced similar concerns, especially after seeing regulatorstake aim at so many companies and individuals in China’s private tech sector this summer.
Should more action be taken against retail traders, many Chinese users might worry about their ability to cash out in the future, leading to more fear in the markets. The question then becomes whether or not scandals, scams and social unrest stemming from speculative investments could force the government to take action. The best bet for cryptocurrency holders is an increase in sustainable development that is more focused on technology. Surging prices on meme tokens like Dogecoin and Shiba Inu might be attractive to short-term traders, but they increase the likelihood that the government will put pressure on retail users and the exchanges that service them.
One Chinese proverb to take wisdom from is the idea of killing the chicken to scare the monkey.
In this story, a man slaughters a chicken to teach his prized dancing monkey a lesson. By comparison, Chinas regulators wont balk at squashing a corporation if it means that others will fall into line.
The international crypto community should hope that Chinas leading projects are able to navigate these new policies unscathed and continue building a healthy blockchain ecosystem. Chinese entrepreneurship has consistently produced the largest exchanges and major mining companies like Bitmain and Canaan, not to mention many leading venture captalists and investors who have helped to shape the industry. The next move from regulators might be an important one, as we may find out whether the top players become the chicken or the monkey.
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Author: Ben Yorke
