China celebrates its new year – a good opportunity to take a look at the Chinese crypto market. By Olga Filatova (Hong Kong)
One of the most attractive markets for business of all spheres, especially crypto, is China. But it is also a mysterious one. First, objective factors are that the People’s Republic of China is home to 1.4 billion people, more than 40 percent of whom are considered middle class who can afford excess consumption.
There are also some subjective reasons. Chinese need to bypass the official procedures to withdraw money from the country. Chinese also love to gamble, which, in fact, is the core of many manipulations of the crypto market.
According to a new report from analyst firm Messari, China remains the most active region in the cryptocurrency industry. Chinese miners control 65% of Bitcoin’s hashrate. China’s aggregate hash rate dwarfs other major market players such as the United States (7.24%), Russia (6.9%) and Venezuela (0.43%).
Asia accounts for 43% of all global cryptocurrency transactions, the total value of which is about $ 296 billion. East Asia accounts for the majority of this amount, while the share of the markets of Eastern Europe and Latin America is 12% and 7%, respectively.
Crypto vs. Capital Controls
Unauthorized capital outflows from China through cryptocurrencies reached $ 17.5 billion in 2020, according to a report from PeckShield. Compared to 2019, the indicator increased by 51%. According to researchers, the withdrawal of capital from the country using cryptocurrencies over the past three years amounted to more than 1.5% of China’s gold and foreign exchange reserves in the amount of $ 3 trillion. According to PeckShield, in 2020 the largest amount of bitcoins was withdrawn from China in March – over 172,115 BTC.
The maximum capital outflow in a month in the amount of $ 2.5 billion was recorded in December, when the price of the first cryptocurrency reached an annual maximum. The researchers noted that the real amounts of unauthorized withdrawals of capital through digital assets exceed those given in the report because they took into account the movement of funds only from several large exchanges.
Some people even think that it is the Chinese who influence the bitcoin rate and control most of it. Vladimir Signorelli, head of Bretton Woods Research in Long Valley, New Jersey says: “When Bitcoin rises, the RMB is rising right along with it.” As an example, the Euro has a 74% to 75% correlation with Bitcoin, while the Russian ruble only has a 25% correlation.
The Jack Ma Effect
Some experts have suggested that Bitcoin’s growth in 2020 was affected by the “Jack Ma effect”. They mean the conflict between the founder of Alibaba and the government of the country, which led to a number of financial sanctions against him. Chinese with big money once again clearly saw that at any moment the government can come to you and take everything away, so they bought cryptocurrency to save some of the capital in alternative assets.
The Chinese government is struggling with the flow of money out of their control. In the fall of 2017, they closed all cryptocurrency exchanges and banned ICOs. The activities of miners are also hampered by the authorities, but there is no direct ban on the extraction of digital money.
The interesting fact is that storing bitcoins and other cryptocurrencies, or even buying or selling them in China, is not illegal. The Chinese government encouraged the development and application of blockchain technology but empathizes that blockchain technology must serve the real economy.
DeFi in China
What about Decentralized Finance in China? As it is obvious from the above, the Chinese communists want control, so this concept is not being well received by them. The Communist government would much rather turn it into CeFi – Centralized Finance. It has been looking into centralized protocols and is actively supporting the development of centralized finance product, e.g. by the HUOBI exchange. In general, China has lagged a little behind in DeFi, because most of the DeFi projects are based on Ethereum. This is changing, as we are already seeing Rootstock, Binance and Tron entering the DeFi space. So far none of them have really reached the required level and did not make it into the top 10 DeFi pools. However, China has a huge number of skilled developers and is always fast in adapting new technologies. This usually leads to fast implementation, so we can expect to see more Chinese DeFi products in the near future.
The Digital Yuan
Despite the large number of anti-crypto regulations, China was one of the first to introduce a digital currency – the Digital Yuan. It is a digital equivalent of the official currency that runs on the blockchain. In April 2020, it became available in test mode in several regions of China. In February, it was tested in Beijing. Just a few days ago, the Agricultural Bank of China launched a special hardware wallet for it, which can be used even without a cell signal and Internet access.
A centralized coin controlled by the government is of course the opposite of what Bitcoin stands for. So in the New Year of the Metal Ox we will continue so see two competing developments. On the one hand side there are many creative entrepreneurs who spearhead this new technology of freedom, on the other side there is the communist government which wants to control and abuse it. Despite this strong tension, I am sure that the Chinese market of digital currencies and fintech will only grow and China will stay a leader in the field of cryptocurrencies and blockchain technology.
Olga Filatova, originally from St. Petersburg, Russia, has been living in Hong Kong since 2018. She is the CEO of InvestRelations Asia, a consulting company which helps businesses to enter the Chinese market. She is a Forbes Contributor, the President of the Investor Relations Club and a speaker at many Russian and international conferences.