China’s 1.379 billion citizens are adept at finding cracks in the system. Since Deng’s economic liberalization, the country has seen no lack of courageous individuals willing to experiment with market alternatives. And let’s not forget, this is the nation that invented paper money over a thousand years ago. Seven months after China’s crypto ban, there are at least as many ways the Chinese have found to circumvent state will.
During China’s 20th Century growth phase, millions were pulled out of rural poverty, creating a de novo middle class of investors almost overnight – a ravenous source of global consumption and investment. China’s stock market is dominated by individual investors, who make up close to 85 percent of traders. Fast forward to the first eight months of 2017 when, according to figures from the Beijing Internet Finance Association, Chinese ICOs raised USD 1.16 billion. Still small fry when compared to the wider Chinese economy, where first-half IPO raises totalled USD 22 billion.
For many and much-discussed reasons (notable among them, China’s net outflows hitting USD 725 billion in 2016), last September, China banned trading and fundraising via ICO, followed by a ban of “exchange-like services”, in January and supplemented with a ban of foreign exchanges in February. And, since early March, regulators have been moving to block overseas-registered cryptocurrency exchanges' Chinese social media accounts and have ordered the insanely popular WeChat to shut its crypto groups.
But despite the ban and radio silence, plenty of evidence suggests that investors have simply been pushed to look for alternative ways to invest in ICOs. There’s been a lot of underground, modified ICO activity in China, said Jack Lu, founder and CEO of Wanchain, speaking at Hong Kong’s Token 2049 conference last week: “It may have increased tenfold since the ban.”
Armed with entrepreneurial, wager-loving spirit, well-informed — no little thanks to the government’s thoughtful designation of 2015 as the Year of Blockchain (it included the technology in its National Five-Year Plan the following year) — and fuelled by a legion of miners, determined Chinese entrepreneurs and investors have discovered some nifty ways to bypass prohibition and participate in the crypto markets. Here are a few.
1. Free Tokens.
Despite concerns that they could also be in violation of securities law, giving away coins for free, also know as airdrops, has gained popularity as an alternative, if controversial, way to distribute cryptocurrency to a wide base of people without running afoul of regulators. It's a method companies such as Beauty Ecosystem Coin (BEC) have employed to get around the ICO ban.
Similarly, Huobi was giving its tokens away as a free gift to users that purchased service fee packages on its platform. Over the course of 14 days, this resulted in some USD 300 million in pre-paid service fees, which its Hong Kong branch, Huobi Pro, was able to collect in advance.
2. Initial Mining Offerings
Another variation on the ICO is an initial mining offering, whereby investors contribute to mining new cryptocurrencies. Lianke coins, for instance, were offered to users by Chinese startup Xunleiin in return for their idle bandwidth, with the coins then traded for services provided by the company, such as games and live broadcasting.
“With the gradual phasing out of ICO projects nationwide, Initial Miner Offerings, represented by the token Lianke issued by Xunlei, has emerged as a potentially risky model that warrants vigilance,” China’s NIFA said in a statement in January. It added that Xunlei was effectively substituting Lianke “for the duty to pay back project contributors with legal tender, making it essentially a financing activity and a form of disguised ICO.”
Through an “export for domestic sale” model, intermediaries offer stakes in cryptocurrency projects to Chinese investors. These are often obtained at a preferential price and recommended through social media platforms used by domestic investors. Hence, the recent clampdown on Tencent’s QQ messenger app and WeChat.
The key to the entire process is intermediaries that invest on behalf of domestic investors. But there can be byzantine, multiple layers of intermediaries. Not only individuals but also media and crypto exchanges.
Over-the-counter (OTC) is security trading in some context other than on a formal exchange, offering less transparency and less stringent regulation.
Following the clampdown, Chinese traders took to the streets and acquired bitcoin through over-the-counter OTC dealers. The first week of February shows a small jump in volume according to Localbitcoins statistics obtained by bitcoin.com, but the following week trade volume quadrupled. Since then, China has seen consistent Localbitcoins trade volumes and all-time highs. Additionally, many of the mainland exchanges moved to areas like Singapore, Hong Kong, and South Korea offering OTC services.
Although OTC networks’ prices are typically 10-20 percent higher than those on crypto exchanges, they link individual buyers to sellers and can be much like shopping on Ebay, with token offers from multiple vendors and buyers simply linking their bank accounts or using popular mobile payment methods like Tencent’s WeChat Pay and Alipay. OTC platforms often caution buyers about mentioning “ICO” in bank transfers.
5. Fund pooling
According to industry insiders, many platforms are still operating fund pools through related entities.
Fund pools aggregate proceeds from the sale of peer-to-peer (P2P) products into a single account, rather than strictly matching each investment with a specific loan. Using Know-Your-Customer (KYC) data from an overseas contact, funds are pooled to invest in that persons’ name.
Considered private investor lists, whitelists are considered, effectively, not an ICO and rather a blockchain investment project, which requires a lot less document verification.
Invitations with links to register cluster on WeChat and other social media groups. Typically, interested parties register on the platform with a phone number, receive an invitation code and a link which they send to others and if anyone registers with the code, both parties receive a fixed share of the whitelist quota, and so on down the list.
7. Redomiciling and Listing Overseas
Chinese companies are still launching ICOs. Many Chinese startups have relocated to Europe or other parts of Asia where ICOs remain legal.
Many of China’s top exchanges and other crypto businesses have relocated to places with more tolerant policies, although generally still within Asia — Hong Kong, Japan, South Korea, and Singapore.
Three months after the government ordered China’s cryptocurrency exchanges to shut down their businesses, three of the largest rebranded, relocated to Hong Kong, launching cryptocurrency trading platforms and over-the-counter (OTC) markets. OKCoin, BTCC China, and Huobi, the three leading cryptocurrency exchanges in the Chinese market which had accounted for nearly 90 percent of the country’s daily trading volume, rebranded as OKEx, BTCC, and Huobi Pro. They didn’t have to wait long to see daily volumes from Chinese investors, circumventing Chinese trading restrictions, grow exponentially.
OKCoin.cn, previously the biggest RMB to Bitcoin exchange platform in China, has already completed the assets withdrawal of customers to comply with China’s cryptocurrency regulations. It’s now transformed into a blockchain technology research company, which is currently working on blockchain projects with several financial enterprises.
Operating independently of its parent, OKEx is an international company specializing in blockchain technology and digital asset development and applications. Based in Belize, its main operation hub is in Hong Kong and its flagship platform OKEx.com, focusing on digital asset-only exchange, also provides fiat-to-cryptocurrency, cryptocurrency-to-cryptocurrency and derivatives trading services to global customers.
Huobi too has also continued to thrive, finding new ways to grow its business, and has more than doubled its staff to over 400 since September. Signs of tighter regulations in Hong Kong don't faze Huobi’s CEO, who said, “Whatever the policy may be, we will comply with the rules and are here to stay.” Huobi is proceeding with an aggressive expansion plan: Over the past few months, the exchange has opened additional offices in Singapore, South Korea and the U.S.
But safe havens are proving harder to find. This is something Binance CEO, Zhao Changpeng is all too aware of. On Friday, the news emerged that he is moving the company to the Mediterranean, after regulatory pressure from first Beijing, then Hong Kong and now Tokyo. In an interview in Hong Kong, he announced that the company has set up an office in Malta to negotiate with local banks (Binance already has offices in Singapore, Japan and Taiwan).
In addition to finding regulatory clarity, the move would also enable Binance to begin accepting deposits in fiat. Malta, with ambitions to become a global pioneer, is looking to standardize the blockchain technology industry, to create a favorable climate for blockchain companies.
Some projects started by Chinese teams are registering entities overseas and targetting foreign investors to raise capital. And there are also signs that China’s crypto innovators are not fazed by the bans or strict regulations.
Based in San Francisco, with a coalition in Singapore, Bodhi is a decentralized prediction market platform. The company completed its ICO before the ban so is entitled to keep its [pre-ICO] funds, but decided to refund everything in order not to scupper the opportunity of working in China.
Xiahong Lin CEO at Ockchain, Inc., and Founder at Bodhi Prediction Market told CoinTelegraph that, with most tokens now built in the West, he believes China now has even more potential for products designed explicitly for its domestic market. For this reason, he explained, Bodhi is built on the Qtum blockchain. “Qtum has a partially Chinese team, which will help us to build it and cooperate together to make this product for China,” he said.
To circumvent ICO-related issues (in both China and the USA) and in order to raise funds, the company has come up with an idea for an Initial Exchange Offering (IEO), which entails selling a portion of its tokens to investors via exchanges, instead of directly.
Also keen to toe the Chinese line, some exchanges, such as Binance, announced limitations to access for users from inside China. However, others have not been so scrupulous. According to the Beijing-based Caixin news agency and reported by CNN, officials are moving to block the IP addresses of such exchanges.
But Robin Zhu, chief operating officer at China’s Huobi exchange says the use of Virtual Private Networks, which mask user's IP addresses is an easy ruse; ”One can always surf the internet ‘scientifically’”, he told Coindesk.
Undeterred by regulation, some startups are aiming to raise capital from qualified investment institutions in China, instead of from individual investors, which is now prohibited.
But the clampdowns appear to continue. Whilst the closure of the Black Cell ICO in Hong Kong took some by surprise, it’s not entirely unexpected. In February, a warning was issued to cryptocurrency trading platforms to not involve themselves with tokens that could be perceived as securities. Reports suggest that Black Cell was targeted because its token specifically referenced a return for token holders, marking it as a potential security.
Other projects have been more ambiguous in their approach and there are signs, too, that Chinese regulators, banks, and payment providers are still keen to use blockchain to improve payment infrastructure and enable financial institutions to instantly settle cross-border payments with end-to-end tracking.
A recent statement by Ripple indicates that China’s regulators, payment providers, and banks are looking at its xCurrent payment settlement solution. Sagar Sarbhai, Ripple’s head of government and regulatory relations for Asia Pacific, said:
“This year you will see more announcements coming in on China, in terms of educating and differentiating us from some of the other cryptocurrencies that are out there. As we speak, our team is strategising about entering the market, but it’s still very early days.”
Even though Ripple has yet to reach mainland China, the company reported in February that it had teamed up with LianLian, a Chinese payment provider, to provide faster payments in China. The payment company will receive real-time, cross-border remittances, invoice and e-commerce payments from companies that use Ripple’s network, RippleNet.
And China may yet undo its numerous cryptocurrency bans; its new central bank governor, Yi Gang is thought to be supportive and bullish on Bitcoin and cryptocurrencies.
As Jack Lu, recently pointed out, “China needs blockchain as a tool for stable international trade.” It’s but a “sleeping dragon”, he was keen to remind delegates.
And while China can imprison citizens for starting ICOs, it cannot access, confiscate or freeze people’s funds stored on the blockchain outside a centralized cryptocurrency exchange without an owner’s private key.
As Mike De’Shazer, editor of Think Consortium on the Blockchain notes, “China has only done blockchain a favor by outlawing ICOs. They will prove that even the second most powerful government in the world cannot restrict blockchain adoption and the side economies emerging.”