"The office location may change, but the Chinese will never disappear from this industry."

Written by: Anderson Sima, Executive Editor of Foresight News

Hidden on Dongchangzhi Road is the old site of the Leishide Institute of Technology, where the renovated auditorium retains its Gothic style, with its mottled stone walls facing the 320-meter-high White Magnolia Square.

On October 17, the Shanghai Blockchain Week, held for ten consecutive years, moved from the W Hotel on the Bund to this location. At 9:20 AM, the crowd outside began to converge into the auditorium, drawn by a "god-like" figure—Ethereum co-founder Vitalik Buterin.

As the host concluded his speech, Vitalik's face appeared on the big screen, and the audience erupted in cheers, with flashes lighting up as people expressed their curiosity about the 30-year-old genius and billionaire.

Audience taking photos of Vitalik during the speech. Source: Wanxiang Blockchain Lab

But an inconspicuous detail is that since 2019, this spiritual leader of the blockchain field has not set foot in mainland China, even though it was once the most important hub for Ethereum (currently the largest blockchain ecosystem in the world).

As Vitalik's figure no longer appears on the streets of Shanghai and Beijing, the corresponding reality is that the blockchain ecosystem in mainland China is heading towards decline. "This is a regrettable fact," Zhang Yuanjie, co-founder of Conflux, told Foresight News.

Wild Growth and Total Ban

Starting with the global financial crisis in 2008, a year later, the mysterious Satoshi Nakamoto released the Bitcoin white paper, and since then, blockchain and cryptocurrency have gradually grown into an innovative industry in the fintech sector.

In simple terms, blockchain refers to a network database that uses distributed ledger technology, while tokens are the auxiliary economic systems that maintain the security of this ledger and its operational rules, which is what the world is currently discussing as cryptocurrency. In China, it is often referred to as virtual currency, and in some regions, it is called digital currency.

Stimulated by the wealth effect, the wildly growing Bitcoin has experienced three bull markets, with a total market capitalization reaching $1.3 trillion, equivalent to the internet platform Meta led by Zuckerberg.

It is worth noting that at the peaks of the previous three bull markets, the mainland government chose to cool down "virtual currency."

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 be circulated as currency in the market.

By 2017, during the ICO frenzy, on September 4, the People's Bank of China, the Central Cyberspace Affairs Commission, 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 a notice on "Preventing Risks of Token Issuance Financing," prohibiting illegal token issuance and financing activities, stating that ICOs are essentially unauthorized illegal public financing activities, suspected of 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 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 welcomed a new bull market, and the Chinese government upgraded its regulatory efforts on cryptocurrencies to an unprecedented level. In September, the National Development and Reform Commission and other departments issued a notice to rectify virtual currency "mining" activities, requiring localities to comprehensively clear virtual currency mining activities.

At the same time, the People's Bank of China and other departments jointly issued a notice on "Further Preventing and Handling 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 legally accountable; individual speculation in cryptocurrencies violates public order and good customs, rendering related civil legal actions invalid.

Since then, the virtual currency-related industry began to withdraw completely from 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 clear existing users.

Many small local exchanges chose to shut down directly, unable to survive in the high-pressure regulatory environment. Apart from Huobi, which primarily focused on clearing, other offshore exchanges closed their offices in Beijing and Shanghai, eventually relocating to Singapore and Dubai.

In terms of mining, China was once a major source of global Bitcoin mining power, with hydropower mining farms represented by Yunnan, Guizhou, and Sichuan, and thermal power mining farms represented by Xinjiang and Inner Mongolia, collectively accounting for over 60% of global Bitcoin mining power.

With the large-scale crackdown on Bitcoin mining in 2021, miners began relocating their equipment to Kazakhstan, the United States, Canada, and other places. Leading upstream mining machine manufacturers Bitmain and Canaan Creative also shifted their business focus entirely overseas, completing the withdrawal of China's cryptocurrency mining industry.

Financial Original Sin: Illegal Fundraising and Money Laundering

The Chinese government's strict regulatory measures on cryptocurrencies stem from their financial characteristics, which often involve regulatory taboos 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 can cause market turmoil and breed 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 lending, virtual currencies also became a major area for illegal fundraising. According to reports from CCTV, in May 2018, a virtual currency wallet called Plus Token, claimed to be created by former Google employees and employees of a multinational company, quietly appeared online. Under the guise of blockchain technology, Plus Token lured participants with high returns, sweeping through over 100 countries and regions in just over a year, with more than 2 million participants and involving an amount of 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 important tools for criminals to evade regulation. In various cases of financial crimes across the country, the tools for money laundering are mostly related to cryptocurrencies.

For example, in the largest money laundering case in the UK this April, according to Caixin reports, a Chinese woman was found guilty of money laundering by a UK court, involving at least 61,000 Bitcoins, reportedly sourced from a 43 billion yuan fraud case in Tianjin. The woman was accused of helping the mastermind of the Tianjin fraud case, 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 use their cross-border liquidity to transfer funds overseas. The government is concerned that this could weaken the country's control over capital flows, leading to the outflow of domestic assets. 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, with severe price fluctuations, it has attracted a large number of speculators. The Chinese government believes that such speculative behavior not only harms the interests of ordinary investors but may also lead to chaos in the financial market. Therefore, regulatory agencies require strict prohibition of virtual currency speculation to prevent the market from being disrupted by excessive speculative behavior.

Li Guoquan, a professor at Singapore University of Social Sciences, told Foresight News, "The Chinese government chooses to suppress 'speculation' and other chaotic phenomena when the wild grass is rampant, which is extremely important for protecting investors. I fully agree with this."

Fear of "coins," Comprehensive Shrinkage

Under the current high-pressure regulation, many experts and scholars told Foresight News that there is now a stereotype of "fear of coins" in the domestic blockchain sector.

Xiao Sa, a senior partner at Beijing Dacheng Law Firm, told Foresight News that from 2017 to 2022, China experienced a period of rampant ICOs, scams under the guise of cryptocurrencies, metaverse, NFTs, and digital collectibles, leading to subsequent strict regulatory attitudes and measures towards cryptocurrencies. Therefore, the phenomenon of "fear of coins" does indeed exist 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 consortium 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 consortium chains has not achieved the expected results.

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 the country. The reason is that public chains often need to issue tokens as economic incentives. Therefore, consortium chains or private chains that do not involve tokens are the first choice in the country, but the innovation ecosystem of consortium chains and private chains is relatively limited, and transparency is also a problem."

Although China has many consortium 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 is extremely limited. China ranks among the top in the world in terms of blockchain patent applications, but it appears weak in specific applications. Many enterprises merely use blockchain as a marketing gimmick rather than a genuine technological solution.

One of the main reasons hindering the development of consortium chains is their high degree of centralization, which contradicts the core concept of blockchain's decentralization. Additionally, consortium chain technology still faces many challenges in handling data privacy, security, and system interoperability issues. This has led many enterprises to adopt a wait-and-see attitude towards the use of consortium chain technology, resulting in low penetration and actual application rates in the market.

As China 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 places like Singapore, Hong Kong, the United States, and the Middle East, while China gradually fades from the central position in this field.

According to the third-quarter cryptocurrency industry investment and financing report released by cryptocurrency asset management company Galaxy, the crypto industry received a total of $2.4 billion in financing in Q3, with companies headquartered in the United States attracting 56% of all venture capital funds, the UK accounting for 11%, Singapore for 7%, and Hong Kong for 4%. The investment and financing in mainland China can almost be ignored.

Following this, there has been a decrease in startups and a sharp decline in talent in the industry. Although blockchain technology was once popular in universities, with the tightening of industry regulations and the reduction of job opportunities, more and more students are beginning to adopt a wait-and-see attitude towards the blockchain industry.

Bright is the president of the Fudan University Blockchain Association. He told Foresight News, "Among universities nationwide, only those in top-tier cities have blockchain-related associations, and the number of core members who ultimately choose the blockchain industry is very few." He cited the Fudan Blockchain Association as an example, stating that each year, the number of graduates willing to accept job offers in the blockchain industry may not exceed 10.

Where to go from here?

On September 28, the 2024 Tsinghua Wudaokou Chief Economist Forum was held in Beijing. Former Vice Minister of Finance Zhu Guangyao mentioned cryptocurrencies in his speech and unusually emphasized the need to pay attention to their research.

"It indeed has negative impacts, and we must fully recognize its risks and harms to the capital market, but we must study the latest international changes and policy adjustments, as it is a crucial aspect of the development of the digital economy." Zhu Guangyao reviewed the development of cryptocurrencies, noting that for more than a decade, the United States has believed that cryptocurrencies have a tremendous destructive power against international anti-money laundering and international counter-terrorism financing.

Zhu Guangyao used the United States and Trump as examples to introduce different cryptocurrency regulatory policies. He stated, "The extreme volatility of cryptocurrency values has a huge impact on international financial markets, but this year, there has been a significant evolution in U.S. policy. Trump's campaign platform explicitly included cryptocurrencies, and he publicly stated, 'We must embrace cryptocurrencies, or China will replace us.' The U.S. Securities and Exchange Commission has also approved the listing of 11 Bitcoin ETFs on the stock and futures markets. Meanwhile, in emerging market countries and BRICS nations, 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 virtual currency field, but I believe this has become an important reason hindering the development of blockchain in the country. I think the main reason for the obstacles to domestic development is that regulators can further deepen their understanding of blockchain and the current international acceptance of blockchain and even blockchain finance, and then consider the need for appropriate policy adjustments, rather than simply fearing cryptocurrencies."

"Virtual currencies in mainland China are involved in various illegal activities or have become tools for certain illegal acts. Similarly, in the United States, Hong Kong, Europe, and the Middle East, including Dubai, there are also related illegal activities. However, the tools for crime are diverse; for example, the largest currency tool used for money laundering and drug trafficking in the world is cash in U.S. dollars, but we cannot therefore prohibit the circulation of the dollar. So, we need to re-examine and rethink cryptocurrencies from multiple perspectives," 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. With normative documents such as the "9.4 Announcement" and "9.24 Notice" still in effect, there are compliance problems in building the cryptocurrency ecosystem, which limits the development space for related projects like DeFi and RWA.

For blockchain practitioners in mainland China, is there a possibility that the consistent high-pressure regulation will 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 in at least the next five years," Deng Jianpeng said.

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, the numerous virtual currency OTC physical stores amazed Deng Jianpeng, who was there for an inspection. "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 said.

After Hong Kong chose to embrace virtual currencies vigorously, many entrepreneurs and companies returned to 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 stated, "The office location may change, but the Chinese will never disappear from this industry."

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