Chinese users of Binance and FTX exchanges reveal holes in Beijing’s crypto ban

(Bloomberg) – Nineteen months after China banned crypto, more signs have emerged that its citizens are continuing to buy and sell digital assets.

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These insights into their trading activities support suspicions that some of China’s 1.4 billion people are flouting the ban imposed in September 2021 while seeking alternatives to investments such as real estate and stocks.

A shadowy role for Chinese demand is adding to the difficulty of analyzing the outlook for digital asset markets, which have partially revived this year after a 2022 crash marked by bankruptcies like that of crypto exchange FTX.

There is even speculation that the mainland’s ban could be eased — although there’s no sign of it — after Hong Kong swung to a pro-crypto stance to solicit investment, a move that garnered tacit support from Beijing.

Evidence of the ongoing Chinese appetite for tokens comes from a variety of sources, including FTX’s creditor profile, citizens who said they use crypto platforms, and accounts from industry insiders of workarounds for Beijing’s ban.

Difficult to “eliminate”

“Essentially, bans don’t work,” said Caroline Malcolm, global head of public policy at Chainalysis, which specializes in tracking digital asset transactions. “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 entirely.”

US bankruptcy filings for FTX, which collapsed in November last year, show that Chinese users made up 8% of the exchange’s customers. FTX advisors have totaled more than 9 million client accounts, while claims from creditors total at least $11.6 billion.

Jack Ding, a partner at crypto regulation law firm Duan & Duan, said he represents six Chinese creditors with FTX claims totaling $10 million. They are part of a committee for overseas FTX clients, he said.

In theory, crypto trading is banned for Chinese people both at home and abroad, but it’s “difficult to enforce,” Ding said. It often comes down to compliance systems at exchanges and whether they filter out Chinese passport holders, he added.

Beijing cracked down on digital assets over concerns about money laundering, currency outflows and the environmental impact of bitcoin mining. Exchanges like Binance, OKX and FTX had tapped into risk-taking investors in China, once the world’s largest bitcoin trading market, to spur growth.

compliance challenge

Crypto platforms are now attempting to block Chinese Internet Protocol addresses, but virtual private networks can fend off such attempts by masking locations.

Interviews with Chinese investors point to the compliance challenge. Four said they traded on digital asset platform Binance, and a fifth said it also used OKX after Beijing’s ban. Binance is the largest crypto exchange, while OKX ranks second, CoinGecko data on 24-hour volume shows.

The five spoke in part out of frustration at current or previous suspensions of their accounts. Four reported living in mainland China and having passed the know-your-customer procedure with Chinese identity.

OKX declined to comment on the issue. A Binance spokesperson said the company does not operate in mainland China and does not have any technology, including servers or data, there.

“Big Firewall”

“Following the September 2021 ban, the Binance platform, including the website and mobile application, was blocked behind the Great Firewall,” the Binance spokesman said, referring to the system China uses to separate its internet from the rest of the world to separate world.

A sixth Chinese investor, David Jin, said he lives in Silicon Valley and has had $8 million worth of crypto frozen on Binance since July at the behest of police in central Chongqing, China. Police were investigating tokens allegedly linked to illegal online casinos, Jin added, while denying involvement.

A Chongqing police officer in charge of the case, surnamed Mu, did not respond to numerous requests for comment.

Binance spokesperson said the company has a policy of cooperating with lawful requests for information and legal requests from authorities related to investigations, prosecutions, forfeiture actions and suspicious activities.

Binance reserves the right to deny law enforcement requests that fail legal scrutiny, serve no legal purpose, or where the investigative approach is flawed, the spokesperson added.

become a Dominican

In March, Bloomberg News reported that another major crypto exchange, Huobi Global, is allowing Chinese users to apply for a “digital identity” with the tiny island nation of Dominica. Once on board, their app profile shows them as Dominican citizens, according to people familiar with the matter, who have asked not to be identified when discussing sensitive matters.

Huobi has said it does not operate in China and that Chinese internet protocol addresses are “strictly prohibited” from accessing the platform and that new customers are coming “from anywhere except China”.

“Huobi exited the Chinese market and blocked Chinese users from signing up or logging in,” the company said.

The People’s Bank of China, which announced the ban on digital assets in September 2021 when it said all crypto-related transactions were illegal, did not immediately respond to requests for comment on signs Chinese citizens continue to trade virtual assets.

Since the ban, Chinese regulators have not announced any sanctions against an offshore exchange for registering mainland users.

Chainalysis’ Malcolm said the ban was either ineffective or loosely enforced. The average monthly value of crypto flowing into China has roughly halved in 2022 from a year earlier, but still remained substantial at $17 billion, according to the firm estimates.

If the crypto sector were somehow legalized in China in the future, “it would likely lead to an increase in demand for cryptocurrencies,” Malcolm said.

–With support from Sidhartha Shukla and Yujing Liu.

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©2023 Bloomberg LP


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