- Chinese residents continue trading on Binance and FTX exchanges despite the country’s crypto ban.
- Interviews with Chinese investors reveal that compliance challenges make it hard to enforce the theoretical crypto ban of crypto exchnages in China.
- Chinese investors have found ways of going around the crypto ban.
Chinese residents are reportedly defying the crypto ban imposed by the government and continuing to engage in cryptocurrency trading. According to a Bloomberg report, despite the prohibition implemented in September 2021, some of China’s 1.4 billion citizens are seeking alternative investment opportunities, such as digital assets, to diversify their portfolios away from traditional assets like property and property stocks.
The persistence of Chinese individuals in the crypto market complicates the overall outlook for digital assets, which have experienced a partial recovery this year following a turbulent 2022 that saw bankruptcies, including that of the FTX crypto exchange.
There are speculations that mainland China could potentially relax its ban on cryptocurrencies, mainly after Hong Kong adopted a pro-crypto stance to attract investment. This move received tacit support from Beijing.
Several sources indicate the ongoing interest in digital tokens among Chinese residents. These sources include the creditor profile of FTX, accounts from citizens who have used cryptocurrency platforms, and insights shared by industry insiders on circumventing the Chinese ban.
Bans Don’t Work – Caroline Malcolm
Caroline Malcolm, the global head of public policy at Chainalysis, a firm specializing in tracking digital asset transactions, commented on the ineffectiveness of bans, stating:
“Essentially, bans don’t work. The decentralized nature of cryptocurrencies and the fact that they can be transferred peer-to-peer and traded on global exchanges make it difficult for any government to eliminate them.”
Bankruptcy filings for FTX in the United States reveal that Chinese users accounted for 8% of the exchange’s customer base. FTX’s total number of customer accounts exceeds 9 million, while creditor claims amount to at least $11.6 billion.
Jack Ding, a partner at Duan & Duan Law Firm specializing in crypto regulations, represents six Chinese creditors with a combined $10 million in FTX claims. He emphasized the challenges of enforcing the ban, particularly about compliance systems implemented by exchanges and their ability to identify and filter out Chinese users.
China’s crackdown on digital assets stemmed from concerns about money laundering, capital outflows, and the environmental impact of Bitcoin mining. Previously, exchanges like Binance, OKX, and FTX had attracted risk-taking Chinese investors, who were once a dominant force in the global Bitcoin trading market.
Crypto platforms have attempted to block Chinese IP addresses, but virtual private networks (VPNs) have undermined these efforts by masking users’ locations.
Compliance Challenges
Chinese investors interviewed for this report shed light on the compliance challenges they face. Four confirmed trading on the Binance platform, while one also mentioned using OKX after the ban was enforced.
Binance is currently the largest crypto exchange in the world, with OKX ranking second based on 24-hour volume data from CoinGecko. These investors expressed frustration over account suspensions and disclosed their successful completion of know-your-customer (KYC) procedures using Chinese identification, indicating their residence in mainland China.
Binance clarified that its platform, including its website and mobile application, has been blocked in China behind the “Great Firewall,” the system used by the Chinese government to isolate its internet from the rest of the world.
However, one Chinese investor residing in Silicon Valley, David Jin, claimed that $8 million of his crypto assets on Binance had been frozen since July after being linked to alleged illegal online casinos by police in Chongqing.
Binance’s spokesperson stated that the company cooperates with lawful information requests and legal inquiries, provided they pass legal scrutiny and serve a legitimate purpose.
Bloomberg also reveals that Huobi Global, another major crypto exchange, allowed Chinese users to apply for a “digital identity” with the Caribbean nation of Dominica, effectively masking their Chinese citizenship on the app.
Huobi has emphasized that it does not operate in China, and Chinese IP addresses are strictly prohibited from accessing its platform.
According to Malcolm from Chainalysis, the ban on cryptocurrencies in China has proven ineffective or loosely enforced. She stated:
“The average monthly value of crypto flowing to China did approximately decrease by half in 2022 compared to the previous year, but it remained substantial, estimated at around $17 billion.”
Looking ahead, Malcolm added:
“If, in some way, the crypto sector were to be legalized in China in the future, it would probably result in a significant increase in demand for cryptocurrencies.”
While compliance remains a challenge for crypto platforms in China, how the government will respond to the ongoing interest in digital assets among Chinese residents remains to be seen.
