How the Regulation of Cryptocurrency in China Will Impact the Industry

Apr 10, 2022

China’s cryptocurrency regulation has been a major mover of Bitcoin and other digital currency prices. This means that investors need to be aware of what’s going on in China. At the same time, China is just one market and doesn’t totally control the digital currency industry. 

China Has Effectively Banned Cryptocurrency 

China’s position on cryptocurrency is best described as non-support. There is no outright ban on individuals holding or using digital currencies. Instead, China has banned financial institutions from facilitating the use of cryptocurrency. 

ICO Ban 

China’s cryptocurrency regulation does not allow initial coin offerings (ICOs). China treats this as illegally raising public financing without authorization. Part of the rationale for this is the number of fake coin scams that have happened around the world. 

Prohibition on Trading Platforms 

Digital currency trading platforms cannot operate in China. Prohibited actions include settling trades, converting between different digital currencies and/or legal fiat tender, and setting prices. When the regulations were passed in 2017, trading platforms were directed to wind down their operations. China is also seeking to block its citizens from accessing offshore trading platforms. 

Non-Participation of Financial Institutions 

Financial institutions are also prohibited from providing direct or indirect support for digital currency activities. This includes holding coins and facilitating trades. It also includes allowing cash transactions related to the purchase or sale of digital currency. 

China’s Impact on the Cryptocurrency Markets 

China has clearly been a mover in the cryptocurrency markets. When it tightened regulations in 2017, it set off a price correction of 80%. Earlier this year, China made several announcements reaffirming its 2017 bans and laying out its plans to increase enforcement. digital currency markets promptly fell 2.5%. 

Some estimates place China as accounting for as much as 90% of cryptocurrency trading volume before the crackdowns. Even as it attempts to ban digital currency, Chinese investors are still estimated to make up 29% of the trading volume. These investors are using peer-to-peer networks or seeking offshore solutions to remain involved. In some cases, they’re paying a price premium of up to 8% to gain access to restricted markets. 

Cryptocurrency Can Thrive Without Chinese Investors 

The law of supply and demand does impact investing. This was made clear when prices fell in 2017 under the threat of a country with over a billion people being removed from the markets. Less potential investors mean that there are fewer bidders driving up prices. 

“We all know China is a market mover, but it’s still only one piece of a much larger puzzle. There is room in the market for digital assets to grow without involvement from China.”  

Sam Azad, Chief Compliance Officer at Fabriik 

Still, investments also have intrinsic value. This is easier to see in the stock market, where a company’s expected future profits determine prices. If lack of demand starts depressing the price of a company with an intrinsic value of $100 per share, other investors will come in seeking the chance to buy at a discount. This keeps the price from getting too low. As long as enough investors remain confident in the intrinsic value of digital currencies, the impact of Chinese investors exiting will be small. 

Other Countries Are Not the Same As China 

China holds a unique position in the global order. It has a highly centralized government that imposes strict regulations on its citizens in all areas of life. A decentralized cryptocurrency market that allows citizens to make transactions in relative obscurity, poses similar challenges to this type of government as open social media platforms. 

Other countries do see challenges with digital currency. There are fears of terrorist financing and money laundering. Countries also worry about protecting investors from scams or taking on too much risk. But, with increasingly widespread adoption by both individuals and large companies, total bans are unlikely. Instead, future regulation of the cryptocurrency markets is to be expected.  

“Cryptocurrency will likely go in the direction of the stock market, where additional regulations benefit investors and make investing in digital currency safer.”  

Sam Azad, Chief Compliance Officer at Fabriik 

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