Cryptocurrency traders in China find ways to get around state regulators despite tighter scrutiny
Industry observers say Chinese traders’ access to exchanges and fiat-to-crypto platforms almost impossible to stamp out
Industry observers are certain that Chinese investors will always find ways to circumvent increasingly tightening controls over cryptocurrency trading by mainland authorities, making it practically impossible to ever impose a complete shutdown on trading.
The Shanghai Securities Times, a newspaper affiliated with the country’s financial and markets regulators, on August 23 reported that the authorities are stepping up their monitoring by blocking access to 124 offshore crypto-exchanges that provide trading services to Chinese investors.
Despite multiple attempts by Beijing to shut down all local exchange platforms since September 2017, cryptocurrency trading had continued to prosper, with many Chinese exchanges attempting to skirt the ban by reincarnating themselves under different domain names.
By moving their servers outside China and registering their legal entities offshore, competition among exchanges for Chinese punters was becoming intense, before that latest report.
Some experts in the field suggest that over the short term, trading interest among novice cryptocurrency operators could be dampened, temporarily, by the news.
Longer term it remains doubtful, however, if access to foreign exchange platforms could ever be fully eradicated.
“The latest warning and potentially increased monitoring of foreign platforms is targeted at a batch of smaller exchanges that had claimed to be foreign entities, but are in fact operating in China claiming they have outsourced their operations to a Chinese company,” said Terence Tsang, chief operating officer of TideBit, which runs a centralised cryptocurrency exchanges in Hong Kong and Taiwan.
“Those exchanges whose website landing pages are in Chinese have drawn particular scrutiny by regulators.”
Several days following the report, combined trading volume on seven exchanges popular among Chinese tradersdropped 33 per cent to US$2.5 billion, comparedwith volume of US$3.73 billion recorded on August 16, the week before the warning.
But industry players said technically, as long as a trading platform’s servers remain outside China, and transactions are conducted peer-to-peer and remain decentralised, it would be a huge challenge for the regulators to completely block access.
To begin trading, many retail traders would first convert yuan into “tether”, a stable coin whose performance is considered much less volatile than bitcoin.
Many still consider tether controversial too, even though its creators say is backed by one US dollar for each token issued.
Chinese traders often utilise what sources call “client to client” trades.
Much like an online merchant would sell their goods on an e-commerce website, two individuals who have both completed a “know-your-customer” procedure with an exchange would swap “fiat” currencies, or legal tender of a government, to tether.
The exchange plays the role of an overseer of such trades, and stands ready to adjudicate in cases of failed trades, or transactions that are not honoured.
Several sources told South China Morning Post that the money will usually be transferred through bank accounts, or third party online payment networks, between these two individuals.
Once tether is received, then the trader can start trading crypto-to-crypto on any exchanges, with the execution done through virtual private networks (VPNs).
“Chinese regulators definitely have the technical ability to shut down VPNs,” said one source close to an exchange.
“However, traditionally it takes numerous conversations with different stakeholders to reach a consensus on configuring a firewall, which lengthens the process.”
There are no current or even foreseeable restrictions on using VPNs in China, providing a potential loophole for traders to access exchange platforms, the source said.
According to the Shanghai Securities Times report, regulators are working with third-party payment operators to stop processing transactions suspected to be associated with cryptocurrencies.
Although both Tencent and Alibaba Group’s affiliate Ant Financial have both said they would restrict or ban accounts or block transactions linked with cryptocurrency trades, many industry players remain sceptical on whether, or how, such payment transactions can be easily identified. Alibaba is the owner of the South China Morning Post.