China's Cryptocurrency: What you need to know

In 2017, China banned cryptocurrency exchanges and the relationship since then has been a rocky one. So, why has China cracked down on cryptocurrency and how is the cryptocurrency community reacting.

What’s happening with Cryptocurrency and China?

More recently, China’s concern over the lack of regulation, particularly around money laundering and fraud, in the growing crypto economy has lead the country to ban financial institutions and payments companies from facilitating cryptocurrency transactions. Cryptocurrency exchanges in China can no longer offer trading, clearing or settlement services to their customers. This has led some OTC (over the counter) trading platforms, like Huobi, to remove some of the leverages investment products and futures contracts it offered. Huobi has also stopped hosting crypto mining services on the Chinese mainland.

However, it is worth noting that while cryptocurrency exchanges and initial coin offerings have both been directly targeted in the crackdown, individuals have not explicitly been banned from holding or trading cryptocurrencies.

What does this mean for the Chinese crypto community?

The decentralised features of cryptocurrencies may make it challenging for the Chinese government to enforce the ban, as the peer-to-peer transactions and OTC trades are difficult to trace. Once the buyer and seller agree on a price over the OTC platform, the buyer accesses a separate payment platform via a VPN (Virtual Private Network) to send the yuan.

Meanwhile, the seller puts the cryptocurrency in an escrow account on the platform, and when the payment clears the cryptocurrency is transferred to the buyer. Regulators cannot connect the two transactions.

This helps explain why, despite previous bans, it’s widely believed that Chinese citizens and companies have remained a major part of the cryptocurrency trading volume. Before China first banned cryptocurrency exchanges in 2017, Chinese traders were estimated to make up 80% of the cryptocurrency trading volume and own 7% of the world’s Bitcoin. Nevertheless, years later, Chinese-based cryptocurrency exchanges are still among the largest in the world.

China and blockchain technology

Given China’s attempt to clamp down on cryptocurrencies, investors may not expect any crypto projects to flourish in the region. However, not all cryptocurrencies are created equal. Even if the Chinese government doesn’t value the majority of cryptocurrencies, they will leverage blockchain technology.

Currently, the Chinese government is rolling out their own blockchain-based digital yuan. Being both programmable and traceable, it gives the CCP more oversight and control of its domestic economy. This clearly shows that the Chinese government believes in blockchain technology, however they likely want it to be closely controlled and regulated. Therefore, the CCP may adopt other blockchain projects, so long as they can be regulated.

What is NEO?

NEO is a cryptocurrency that was designed to be regulator friendly, giving it the potential to emerge as the leading cryptocurrency in China. Much like the cryptocurrency Ethereum, NEO is a platform built to automate the management of digital assets through smart contracts, as part of a distributed smart economy. Users can buy, sell, and exchange digital assets.

How does NEO work?

Compared to projects like Bitcoin and Ethereum, NEO is far more centralised. This allows users to have their own verifiable digital identity, with a unique digital avatar. As the digital identity is verifiable, users can choose to only transact with other verified users. This lets users tokenize real-world assets on the blockchain, as ownership of their digital assets can be protected off-chain with traditional legal systems.

With a vision of being regulatory compliant and providing users with a verifiable digital identity, NEO offers a unique value proposition to both governments and their citizens. If the technology is integrated with Chinese government systems and industry leaders within China as an all-inclusive solution, it will likely spread the adoption of NEO amongst Chinese citizens and even across the world.

What’s the future for cryptocurrency in China?

China is taking measures to curtail the adoption of decentralised cryptocurrencies within China. It’s likely they will maintain their closed financial system and continue to support their own centralised digital yuan.

Considering that the Chinese exchanges were some of the largest by transaction volume globally, and that traders applied vast amounts of leverage, we could expect the demand for decentralised cryptocurrencies to reduce dramatically and push prices down in the short term should this happen.

However, we may see a significant part of that underlying capital to move into more regulatory friendly projects like NEO, especially if the Chinese cryptocurrency exchanges facilitate the exchange between the digital yuan and government-approved digital assets.

So whether we see our returns denominated in either yuan or dollars, it remains an exciting time for crypto.

Thanks for visiting Canstar, Australia’s biggest financial comparison site*

This article was reviewed by our Content Producer Marissa Hayden before it was updated, as part of our fact-checking process.

Lee Perry

Head of Growth, Cointree

Lee Perry is Head of Growth for Cointree cryptocurrency exchange. Lee has close to 10 years of marketing experience and holds a Bachelor of Communications from the Swinburne University of Technology. His past roles include working for Australia Post, Sensis, Fulfilio, and WiseTech Global.

In this article