Will China Reaffirm Its Opposition to Digital Assets?
China has consistently expressed its disapproval of cryptocurrencies. In a recent comprehensive economic statement, the country reaffirmed its intention to maintain a strong stance against the emergence of digital assets.
Pan Gongsheng, the governor of the People’s Bank of China, reiterated China’s opposition to cryptocurrency activities in remarks made on October 21, 2023. This unwavering stance is not likely to change any time in the near future.
These remarks come amidst increasing regulatory actions against cryptocurrency companies, which have intensified and are expected to continue throughout 2024. Chinese regulators have specifically targeted exchanges and miners, declaring them illegal and outlawing domestic cryptocurrency exchanges since 2017.
Mainland Chinese Investors Excluded from Hong Kong Bitcoin ETFs
Mainland Chinese investors will also be barred from purchasing newly approved Bitcoin and Ether exchange-traded funds (ETFs) in Hong Kong, as mainland restrictions on cryptocurrency transactions remain stringent.
Despite major Chinese asset managers launching spot Bitcoin and Ether ETFs through their Hong Kong subsidiaries, Chinese nationals will not have access to these investment products due to longstanding prohibitions.
During an April 24 webinar, Bloomberg data analyst Jack Wang emphasized this exclusion and referred to a September 2021 decree from the Chinese State Council that prohibits financial institutions from facilitating any cryptocurrency transactions. Wang firmly stated that mainland Chinese citizens won’t be able to participate in these ETFs and that brokers have rejected attempts to engage with futures-based crypto ETFs in Hong Kong.
Wang further explained that the introduction of these ETFs in Hong Kong is unlikely to change the regulatory landscape in mainland China or attract mainland investors to the cryptocurrency market. He expressed a pessimistic outlook for regulatory changes in the near future.
Thomas Zhu, head of digital assets at China Asset Management, stated that future participation by mainland investors would depend on “forthcoming regulatory modifications” being enacted.
Bloomberg analyst James Seyffart highlighted the disparity in market sizes, noting that Bitcoin ETFs in the U.S. hold more assets than all ETFs in Hong Kong combined. With the U.S. ETF market valued at over $9 trillion compared to Hong Kong’s approximately $50 billion, the impact of these new spot crypto ETFs may be limited in the broader context. Seyffart’s comments underscore the significant differences in market dynamics and investor access between the regions.
Major Crackdown on Shadow Banking in China
In addition to the recent statements by the Central Bank governor and the ETFs saga, China has taken further measures to oppose cryptocurrency. Authorities recently dismantled an underground banking operation involved in illegal foreign currency exchanges worth at least 2.14 billion yuan ($295.8 million). The shadow bank leveraged cryptocurrencies such as Bitcoin for these transactions.
The crackdown occurred in Jilin province, and six individuals connected to the illicit operation were detained by the police. The local police report, released on May 12th through official media channels, revealed that the suspects facilitated cross-border currency transfers by exploiting the decentralized and anonymous nature of Bitcoin transactions.
The criminal group conducted over-the-counter cryptocurrency transactions and manipulated domestic accounts to receive and transfer funds. Their operations supported various businesses, including import-export trade companies, cross-border e-commerce platforms, and purchasing agents based in South Korea. This case highlights the ongoing issues with shadow banking systems and reinforces China’s continuous efforts to tighten money controls, which have inadvertently driven some individuals towards cryptocurrencies as a means to circumvent these regulations.
Persistent Crypto Activity Among Investors
Despite the recent actions against cryptocurrencies, Chinese investors continue to use digital assets through peer-to-peer transactions or foreign platforms. While China’s stricter position aims to reduce financial risks and combat illicit activities, investor enthusiasm remains intact.
Nevertheless, there is a glimmer of hope for a possible shift in the status quo. In September of last year, a Chinese court recognized cryptocurrencies as legitimate property, which raised expectations for regulatory changes. The acknowledgment came through an editorial from China Court Daily, a reputable publication, emphasizing the unique economic characteristics and global acceptance of cryptocurrencies. The editorial argued that since these digital assets are recognized and traded worldwide, they deserve legal protection in China.
The world has been closely watching China’s approach to cryptocurrencies due to its influential role in the global market. However, significant improvements in regulations and acceptance of digital assets may take time to materialize.