Chinese cryptocurrency traders seek ways to circumvent ban

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Ray considers himself a maverick. As many Chinese people close their digital wallets after Beijing banned investing in cryptocurrencies, he is determined to continue.

Ray, who asked not to be identified by his last name, has already received notice from his cryptocurrency exchange that his account will be closed by the end of the year. But, he said: “I am now considering opening an account on a decentralized exchange.”

China’s campaign against cryptocurrencies led authorities to shut down bitcoin mining operations in May. This coincided with the rise of decentralized finance or DeFi, which allows users to trade with each other without any intermediary, such as a bank or broker, and makes it more difficult to block.

“I still regularly trade cryptos,” said a Chinese investor with an overseas bank account. “How can the authorities arrest me when the industry has grown out of centralized control? “

While the toughest enforcement against cryptocurrencies took place in September, China first banned crypto exchanges in 2017, and Chinese users have gradually moved to DeFi.

According to Chainalysis, a research firm, China’s share of global bitcoin transactions peaked at 15% in November 2019 and had fallen to 5% by June 2021.

In the 12 months leading up to June, mainland China was associated with $ 256 billion in cryptocurrency activity, the highest in Asia, and 49% of the total was traded through DeFi platforms. Uniswap, one of the major DeFi exchanges, is now the second largest exchange in East Asia in terms of trading volume, Chainalysis said.

As the latest restrictions deter new blood from entering the crypto markets, some existing cryptocurrency holders are turning to DeFi in order to continue trading, experts say.

“Most of the exchanges will stop because of the ban,” said Deng Jianpeng, director of the Finance, Science and Technology Research Center at Beijing Central University of Finance and Economics. “But there will always be people who try to find new avenues of investment, such as using a platform abroad or through decentralized exchanges.”

DeFi protocols do not have the same “know your customer” obligations as more tightly regulated conventional exchanges. Henri Arslanian, leader and partner of PwC crypto, said that while the use of DeFi “may be banned in China, it is very difficult to monitor in practice” due to the anonymity granted to its users.

Miha Grčar, head of global business development at Kraken, a major exchange, said DeFi is a “bit of a wild west in crypto.” He added that governments are considering how to regulate it, for example by requiring some form of user identification.

In an interview with the Financial Times, Gary Gensler, chairman of the United States Securities and Exchange Commission, warned that regulators wanted more authority over DeFi platforms.

“Many Chinese are now studying how to use DeFi, but there is also uncertainty about this as the US government seeks to tighten controls,” said Colin Wu, a freelance journalist who runs the popular Wu Blockchain Twitter channel.

Chainanlysis has discovered that countries like the United States, China, Vietnam, and the United Kingdom, with historically significant institutional investors armed with large crypto wallets, play an outsized role in DeFi.

Large owners of crypto assets are drawn to DeFi because it allows them to earn income from their coins. Users lend their crypto to DeFi protocols to provide liquidity pools for peer-to-peer lending. In return, investors receive a portion of the transaction fees or token rewards.

But Chinese investors cannot transfer DeFi protocol earnings to Chinese bank accounts. “The government is cutting the link between cryptocurrency and fiat currency,” said Zee Zheng, founder and CEO of SpaceChain, a company specializing in space applications of blockchain technology. Zheng, a Chinese entrepreneur, moved to Singapore four years ago.

For the wealthy Chinese, this is not a problem as long as they can transfer crypto gains to overseas bank accounts and bypass capital control limits.

Several articles on 51 Bitcoin Forum – one of the informal crypto blogs that have popped up since Chinese social media sites began censoring cryptocurrency content – recommend investors register a foreign company and apply for a business trading account. Another user provided a list of UK and US financial institutions that allow people based in China to open bank accounts in order to transfer the earnings of the crypto investment into fiat currency.

But for many, the extra steps required to invest in digital currencies are not worth it. Zheng said, “The government is not going after the 1% who trade on the sidelines. For them, it is enough that the restrictions are strict enough to stop the 99% of trading. ”

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