China and Cryptocurrency – Lexology

Syed Rahman of Rahman Ravelli considers the approach taken to cryptocurrency by Chinese regulators.

When Bitcoin’s value plummeted to around $30,000 last month, it happened as headlines were being published saying that China’s regulators – including the National Internet Finance Association of China, the China Banking Association, and the Payment and Clearing Association of China – had released a report allegedly banning cryptocurrency. The report, however, was in essence nothing more than a repeat of cryptocurrency bans that had been introduced in 2013 and then in 2017. This article is just a brief examination of how China’s regulators have approached cryptocurrency.

The Initial Ban

In 2013, China announced that it did not recognise cryptocurrencies as legal tender and that its banking system would not accept cryptocurrencies or provide relevant services.

In the first half of 2013, the Chinese government then defined bitcoin as a virtual commodity and said individuals were allowed to freely participate in its online trade. But later that same year, the People’s Bank of China (PBoC), the Ministry of Industry and Information Technology, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission came together to issue a “Notice on preventing Bitcoin risks.” This had the effect of banning banks and payment companies from providing bitcoin-related services. “Recently, crypto currency prices have skyrocketed and plummeted, and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order,” China said in a statement.

But although China had banned crypto exchanges and initial coin offerings (ICOs), it had not prohibited individuals from holding cryptocurrencies. The statement added that institutions must not provide trust, saving or pledging services relating to cryptocurrency, nor use it to price products of services. 

2017: The ICO Ban

In September 2017, Chinese regulators issued a decree during the ICO boom, declaring that all forms of ICOs were illegal in the country. In the announcement, China stated that using top cryptocurrencies like bitcoin and ether to conduct ICOs was unauthorised and an illegal form of public financing. The regulators ordered that all ICOs be discontinued, with funds to be returned to investors immediately. The ICO rules also banned cryptocurrency trading platforms from converting legal tender into cryptocurrencies and vice versa.

Shortly after the ICO ban, China went after crypto exchanges, prohibiting them from allowing traders to convert their cash to crypto and vice versa, and from conducting other crypto-related services. The restrictions prompted most of these trading platforms to shut down, with many moving offshore. By July 2018, 88 virtual currency trading platforms and 85 ICO platforms had withdrawn from the market, the PBoC said.

In June 2019, the PBoC issued a statement saying it would block access to all domestic and foreign cryptocurrency exchanges and ICO websites; aiming to clamp down on all cryptocurrency trading with a ban on foreign exchanges.

2021

On18 May 2021, three leading regular bodies in China (the National Internet Finance Association of China, the China Banking Association and the Payment and Clearing Association of China) issued a report that re-emphasised the cryptocurrency ban in the country.

For the most part, this report is just a repeat of the bans previously imposed. However, the report does also cover some services that were not previously mentioned in earlier bans. For example, it makes clear that institutions must not accept virtual currencies or use them as a means of payment and settlement. Nor can institutions provide exchange services between cryptocurrencies and the Chinese yuan or foreign currencies. Additionally, institutions are prohibited from providing cryptocurrency saving, trust or pledging services and issuing crypto-related financial products. And virtual currencies must not be used as investment targets by trust and fund products.

Compared with the previous ban, the 2021 report does not, in and of itself, impose any new restrictions. What it does do is greatly expand and clarify the scope of prohibited services. It also judges that “virtual currencies are not supported by any real value.