Taming the Chinese Dragon: Movement and Communication attacked; regulation vows to cripple industry

Part 2 of China’s regulatory history with cryptocurrency exchanges and communication channels.

Exchanges & ICOs Wiped Clean

The PBoC began 2017 by initiating regulatory checks on Bitcoin trading platforms in January to survey operations to ensure they were in compliance with regulatory protocols, backing their earlier opinion that Bitcoin or any form of virtual currency was not considered as currency. Huobi, OkCoin and BTCC, three prominent Chinese crypto-exchanges, responded to this market risk-assessment by escalating their fees to 0.2 percent and they added that this would deter “market manipulation and extreme volatility”.

Beijing was not done with their vice-grip on crypto-exchanges just yet. As the year veered to a close, Initial Coin Offerings [ICOs] and cryptocurrency exchanges were targeted in two separate pieces of regulation in September 2017, two months prior to the Bitcoin bull run.

Several government regulators joined forces to confer ICOs as illegal as it issued digital tokens that did not align with the country’s central bank.

A translated PBoC statement read:

“Tokens or “virtual currency” used in token financing are not issued by monetary authorities, do not have monetary attributes such as legal and mandatory, do not have legal status equivalent to currency, and cannot and should not be circulated as money in the market. use.”

Less than a week later, cryptocurrency exchanges were dealt with the same fate as the tokenization market. The Ministry of Industry and Information Technology [MIIT], the state agency overseeing technology and communication industries stated the crypto-exchange websites would be closed, applications would be delisted from online app-stores, and licenses revoked.

Exchanges operating in the country would be prohibited from allowing Chinese citizens from converting their yuan to virtual currencies, and no counterparty services would be permitted. The agencies even advised the public to report violations of their order.

Following a September 15 meeting of crypto-exchanges with the Beijing Internet Finance Risk Working Group, which ordered the former to halt trading and refund investors’ funds, the disbanding of the Chinese crypto-exchange market began. BTCC shut down days later with the users’ BTC, LTC, and ETH refunded. OKCOIN and Huobi followed suit, closing operations by the end of the month.

Rebranding and relocation were the immediate responses by Chinese exchanges, moving to regulatory lax countries or masking operations in accordance with the regulatory rules.

Price Effect:

Source: Trading View

With Bitcoin, well and truly a noteworthy financial asset during the aforementioned period, a crackdown by Chinese authorities like this would have mauled the market. The market did decline, briefly, and was soon forgotten because of the events of December 2017. Despite the price dropping by over 30 percent in the first week of September alone, the one-month low was not touched.

By the close of the month, the price of the coin was back over $4,300, and by the end of October, the price increased by a massive 40 percent. As the market reached the $200 billion market cap by November, it was clear that the Chinese regulatory crackdown did not dent growth, in fact, some claim that the price rose because of the migration of exchanges to environments with lax oversight.

On December 17, the futures exchange giants launched BTC futures which spurred a massive bull-run, anchoring a Bitcoin rise to the range of $20,000 as the market rose above $500 billion. Many proponents have opined that the precursor to the bull-run was the Chinese crackdown, while maintaining that the BTC futures introduction was the main reason for the price rally.

China Hushes Crypto-Whisper

The first inkling of the Bitcoin mining industry being the subject to regulation emerged in January 2018. As per a leaked PBoC document, Bitcoin miners would be instructed to exit the Chinese market as they are rekindling the “speculation of virtual currencies”. Alongside the blatant subversion of the authority of the Chinese government, the excessive energy consumption was also cited as the reason for the mining crackdown.

Miners sensing a regulatory attack on their operations began to withdraw from China and sought new production havens. However, due to electricity expenses, large-scale mining pools could not be materialized and hence only small and medium-sized miners shifted bases.

With crypto-trading platforms operating on a covert basis, either through underground channels or by skirting the regulatory details, capital flowed out of China via the global cryptocurrency market, which drew the PBoC and other regulatory bodies to act. On January 17, the central bank disseminated a circular that ordered banking services to cease operations with crypto-companies. The document stated:

“Effective measures should be adopted to prevent payment channels from being used for cryptocurrency settlement.”

Offshore platforms that stepped-up services following the September crackdown were mentioned in a February 5 PBoC notice, which stated that the central bank will begin to “remove any onshore or offshore platforms” that deal in digital assets or ICOs.

March saw the first known attack on crypto-communications, with the government shutting down multiples exchanges’ WeChat accounts. With crypto-activities being subject to scrutiny, the government engaged in crypto-analysis. In May, the MIIT and the China Electronic Information Industry Development [CCID] stated that they would publish independent analysis of projects in the crypto and blockchain-space on a monthly basis. The government even engaged in checking fraudulent or misleading cryptocurrencies, via an MIIT led study.

WeChat censorship re-emerged in August, with several public accounts blocked citing the violation of the messaging giant’s services. An official stated that these accounts were engaged in cryptocurrency and ICO related activities. From internal communication to external reportage, crypto-news outlets also faced the music with the Communist Party’s media outlet, ironically named, the People’s Daily, referring to such crypto-centric outlets as latching on the “barbaric growth,” of the “speculative wave of cryptocurrencies.”

Alipay, the country’s prime payment application even blocked accounts if it found crypto-related activities taking place via its network.

Censorship was also seen on offline platforms with crypto-related events shown the door, quite literally, in the Chaoyang district of Beijing. The government cited “protection of public property rights,” as the reason for banning crypto-events in smalls, offices and even hotels from marketing purposes.

Price Effect:

Source: Trading View

China’s mining and offshore platforms attack did not deter the cryptocurrency markets during the beginning of the year as the Bitcoin bulls charged. The market enjoyed a high of over $700 billion while Bitcoin was trading upwards of $13,000, for the most part. As the markets began to descend come the close of January, it is unclear how much of a role the Chinese regulations had, however, the September communication outlaw sparked a significant market movement.

The cryptocurrency markets fell off what looks like a price cliff in the first week of September, with some pointing to the Goldman Sachs crypto-trading desk rumors being ripped apart by CFO Martin Chavez, being one of the main reasons. However, analysts also pointed to the communications’ crackdown, both offline and online, by the Chinese government as the reason for the nearly $40 billion decline.

Bitcoin was trading well over $7,300 on September 5, its highest price in over the month, prior to the fall. The king coin dropped by over 14 percent to under $6,300 in the next few days with the level sustaining till mid-November when the Bitcoin Cash [BCH] hard fork induced bears tore down the market.

Coupled with the Goldman Sachs rumor, the China communication crackdown did look to have a considerable effect on the market, especially in light of the fact that the price of Bitcoin has yet not managed to reach the August 2018 levels. However, it should be noted that the market was in freefall well before the WeChat censorship began, with the market declining by over $500 billion compared to their January 2018 high.

Part 3 will conclude with an overview of the regulation as well as an assessment of how things currently stand.

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