The Chequered Saga of Crypto in China, 2018

 

In the aftermath of September 2017’s historic ban on initial coin offerings (ICOs), and the banishment of domestic crypto trading platforms, a resourceful crypto community was already showing signs of devising multiple means of circumventing the authorities’ increasingly draconian actions.

Part two of Cointelegraph’s three-part series continues to investigate the factors that catapulted China’s regulators to redouble their efforts to curb the meteoric rise of crypto trades; their unprecedented actions to try to cut the country’s crypto mining titans down to size; the response of China’s tech triumvirate — Alibaba, Tencent, and Baidu — to new constraints; and as ever, the proliferating means investors continue to use to scale an “impregnable” anti-crypto wall.

January 2018: Pressure on China’s Bitcoin miners

In December 2017, Leonhard Weese, president of the Bitcoin Association of Hong Kong had observed: China’s “authorities are more worried about the narrative, rather than what people actually do. Once it gets widely reported that Bitcoin trading is well and alive in China, the government will again try to put a lid on it.”

Wesse’s predictions were sound: as early as January 4, local reports revealed that financial regulators had frozen an unknown number of OTC trade accounts country-wide. The combined value of those frozen in the southern cities of Shenzhen and Guangzhou was said to be over 300 million yuan ($46.1 million at the time); around thirty further accounts were said to have been frozen in the northern province of Hebei.

Sources further indicated that a policy to curb the country’s thriving Bitcoin mining industry was in the works. Due to the country’s abundance of cheap energy and hardware, early 2017 reports showed that over two-thirds of global mining pools were based in China.

Mining behemoths, such as Beijing-born Bitmain, not only benefited from the power glut in coal-rich regions such as Xinjiang and Inner Mongolia, but were reportedly being cut bespoke deals by local government. In Mongolia’s Ordos city, authorities were said to be offering Behemoth a subsidized electricity rate of just four U.S. cents per kilowatt hour — 30 percent cheaper than the going rate for other local industrial firms.

On January 2, a leaked memo from the PBoC to a top-level government internet finance group — the Leading Group of Internet Financial Risks Remediation — reportedly proposed that Bitcoin miners should make an “orderly exit” from China due to them consuming “huge amounts of resources and stoking speculation of virtual currencies.”

The ties between the central bank and the internet-finance regulator were said to be close, given that a deputy PBoC governor, Pan Gongsheng, had been instated as head of the regulatory group when it had first been established back in 2016. Pan was not the most crypto-receptive of figures: he was said to have predicted the death of Bitcoin in December 2017, and was quoted by Chinese media that same month as saying that:

“If we had not shut down Bitcoin exchanges and cracked down on ICOs several months ago, if China still accounted for more than 80% of the world’s Bitcoin trading and ICO fundraising, everyone, what would happen today? Thinking of this question makes me scared.”

Returning to the leaked Bitcoin miner memo, Quartz reported that the internet-finance regulator subsequently ordered local authorities to wield all available means in their arsenal — including “measures linked to electricity prices, land use, tax, and environmental protection” — to pressure miners to cease their operations.

At a national level, the regulator is reported to have requested local authorities to submit a progress report by January 10, detailing the existing mining facilities in their jurisdictions, followed by monthly reports on the progress of miners’ “exits” on the 10th of each month.

A separate leaked document from the regulator’s regional Xinjiang office is alleged to have ordered authorities in western China to submit similar reports, citing near-identical concerns. Quartz’ enquiries with the Xinjiang office at the time confirmed the authenticity of the latter, regional document.

In parallel, Bloomberg reported on a “closed-door meeting” said to have been held by the PBoC at the end of December 2017, allegedly outlining a plan to direct a wider spectrum of local officials and national regulators to monitor — and even potentially restrict — high energy consumption associated with the mining industry.

Anonymous sources had told the media that Chinese officials were “concerned” that miners were “taking advantage” of cheap electricity sources in certain regions. Bloomberg noted, however, that Caixin news agency had refuted that the PBoC meeting had taken place, citing an undisclosed source.

On January 13, China’s Economic Observer (EEO) reported on the unfolding consequences and responses to the government’s “tightened” approach to mining.

Officials from the relevant authorities in China’s eastern provinces of Shandong and Jiangsu observed that the regulatory pressure had been uneven with respect to different geographic regions: they claimed not to have received any notices, and considered that the “clean-up” was focused on the country’s central and western regions.

Seemingly uneven pressure was consistent with news of a national effort to transfer power away from energy-rich but sparsely-populated regions to where it was needed most. Virtually all the lines in China’s new ultra-high-voltage transmission network — designed to redirect electricity from the oversupplied north and west to the east — were set to be completed that year.

Lauri Myllyvirta, a Beijing-based campaigner with Greenpeace, said she considered that Bitcoin mining in China at the time was “mainly an opportunistic way of making some money out of the failures and inefficiencies of the power system.”

EEO cited “a person familiar with the matter” as saying that this fact had not gone unnoticed, and that regulation of Bitcoin mining pools had in fact “entered the regulatory horizon as early as the September 2017 ICO policy.”

As a consequence of the intensified pressure, several mines in the southwestern Sichuan province — where mining activity is said to have been concentrated — had now entered a “period of downtime” pending regulatory clarification. The Leading Group of Internet Financial Risks Remediation is reported to have been undertaking an “inventory” of mining activities across the province.

EEO also noted that some large mining pools were beginning to relocate their operations overseas; for small-medium sized pools, however, the cost of overseas transition was said to be “too difficult to bear,” as corroborated by one small mining pool owner.

On January 11, ViaBTC, reportedly the world’s fourth largest Bitcoin mining pool at the time, issued a statement that it would be increasing its cloud mining maintenance fee:

“Due to recent policy changes, some of our long-term hosting partners are facing a crisis of closure as mining resources in Mainland China become more scarce, leading to rocketing costs of our cloud mining operation.”

In parallel, “three independent sources” revealed that local authorities had frozen assets totalling over 600 million yuan in bank accounts that were found to be investing in crypto mining firms in the provinces of Hunan, Heilongjiang, Hebei, and Guangdong.

January–July 2018: Escalation of crypto trading ban to include “exchange-like” services

As it redoubled efforts to purge the economy of perceived risks, Beijing looked set to escalate its ban on crypto trading to include “market-making” platforms, the definition of which was not — at the outset — clearly delineated. As early as the previous September, reports had already indicated that the government would be looking to extend its ban beyond domestic exchanges and clamp down on Chinese mainland access to foreign exchange sites.

On January 15, Bloomberg cited undisclosed sources that claimed the authorities would indeed try to “block domestic access to homegrown and offshore platforms that enable centralized trading,” without defining exactly ”how policy makers [would] define such platforms.”

Despite September’s domestic exchange closures, analyses in January continued to include Bitcoin trading as a factor in capital outflows from China: an article January 6 suggested that the government’s capital-control measures — which included subjecting yuan conversions to a quota — only further incentivized crypto trades. Shanghai-based economist Qiu Difan noted that:

“Under [China’s] regulations on cross-border flows, the appeal of using Bitcoin to obtain foreign exchange and take capital out of the country will increase, especially for funds that may have been used in illegal operations such as money laundering.”

Thomas Glucksmann, head of marketing at Hong Kong-based over-the-counter (OTC) crypto trading desk Gatecoin, considered that “lackluster equity performance, a potential real-estate bubble, yuan weakness, and capital controls are all driving Chinese demand for Bitcoin.”

With an intensified crypto clampdown imminent, BTCC CEO Bobby Lee presciently noted that the government’s intent to reduce trading by shuttering crypto exchanges would be a Pyrrhic victory: “they can’t crack on Bitcoin itself,” he said. In response to restrictions, “the desire will just go underground, and when the desire goes underground, it’s out of control.”

This seemed to be corroborated by domestic traders: in the words of one anonymous Chinese crypto investor:

“I can do over-the-counter trades or I’ll go offshore… my wallet is my wallet. I’ve never registered my identification card.”

Over 15 domestic crypto exchanges had been shut by that time.

On January 17, the PBoC issued an internal circular to financial institutions, tightening the noose on any residual provision of banking or funding services to crypto-related activities:

“Every bank and branch must carry out self-inspection and rectification, starting from today. Service[s] for cryptocurrency trading [are] strictly prohibited. Effective measures should be adopted to prevent payment channels from being used for cryptocurrency settlement.”

The central bank added that “banks should enhance their daily transaction monitoring, and the timely shut down of payment channels as soon as they discover any suspected trading of cryptocurrencies.” A deadline for the disclosing the implementation of such measures was set for January 20.

On January 26, the semi-official National Internet Finance Association of China issued a risk alert to investors emphasizing that “offshore crypto-trading platforms pose the same hidden dangers of systemic risks, market manipulation, and money laundering.”

By February 5, the Financial News — an official PBoC-affiliated publication — stated that:

“To prevent financial risks, China will step up measures to remove any onshore or offshore platforms related to virtual currency trading or ICOs.”

The article acknowledged the limitations of the efficacy of the 2017 domestic crypto exchange ban, stating that:

“ICOs and virtual currency trading did not completely withdraw from China following the official ban after the closure of the domestic virtual currency exchanges, many people [have] turned to overseas platforms to continue participating in virtual currency transactions. Overseas transactions and regulatory evasion have resumed risks are still there, fuelled by illegal issuance, and even fraud and pyramid schemes.”

An interview with the PBoC confirmed the central bank was set to toughen its restrictions on domestic access to overseas platforms.

Donald Zhao, a Bitcoin trader who had left the stifling regulatory climate of Beijing for Tokyo in the wake of the September ban, commented:

“I think the new move literally means it would be even harder to circumvent the ban in China. People promoting related business programmes may be arrested.”

He added that using VPNs (virtual private networks) to trade crypto on formerly domestic crypto exchanges that had relocated offshore was at that time “common” among Chinese traders. This, despite the fact that Beijing had ordered China’s three telecoms companies to completely block citizens’ access to VPNs by February 2018.

China’s notorious Great Firewall — the country’s web surveillance and content-control system designed to prevent residents from accessing restricted sites — remained porous, despite the MIIT’s campaign to “clean-up” internet access services, making it illegal to operate a VPN service without government approval.

Beijing’s online sweep was immediately palpable; when “Bitcoin,” “virtual currency,” and “ICOs” were entered into Chinese search-engine Baidu and social media platform Weibo, no obvious paid sponsored content came up alongside the expected results.

On March 6, the Chinese government was reported to have shut down multiple crypto exchange WeChat accounts — including that of OKEx.

On March 9, PBoC governor Zhou Xiaochuan broadcast once again the official stance towards crypto, frankly declaring that:

“We do not currently recognize Bitcoin and other digital currencies as a tool like paper money, coins, and credit cards for retail payments.”

He added that while the development of digital currency was a “technological inevitability,” and would ultimately diminish cash circulation, the central bank was not rushing to issue a national digital currency. He emphasized that the PBoC continued to marshal its efforts to “prevent substantial and irreparable damages” to the domestic economy.

Then, on March 19, the “unexpected” appointment of a new PBoC governor, Yi Gang — a figure who was reported to have made positive remarks about Bitcoin — led some to speculate that the central bank might be poised to soften its stance towards decentralized cryptocurrencies.

Back in 2013, Yi was said to have conceded that while Bitcoin could not be legally recognized by the central bank, “ordinary people [had] the freedom to participate.” He considered the coin to be “innovative and inspiring”, predicting it would remain a subject of public attention in the long term.

Yi — just as President Xi Jinping — was both pro-market and pro-market reform, having consistently emphasized the importance of market liberalization, and invited economists who could support his long-term plan to increase the flexibility of the Chinese market. Within weeks, the new governor had made the unprecedented move to officially open the gates of China’s $27 trillion payments market to foreign companies.

In the wake of Yi’s appointment, Cointelegraph reported on an opinion piece dating back to September 17, which had argued that the president’s restrictions on crypto exchanges had been little more than a political move to appease hardline Communist Party members ahead of the October 17 elections. Blogger Jon Creasy had proposed:

“My prediction is this; as soon as President Xi Jinping is re-elected  —  and he will be  —  conservative, free(er)-trade legislation will be put in place, and Bitcoin exchanges will be reinstated:

But for now, Mr. Xi must appeal to the people who keep him in power: the Communist Party. In my opinion, banning Bitcoin exchanges is nothing short of temporary glad-handing.”

By early May, once again the Chinese media was focused on the “overseas” afterlife of its domestic crypto exchange titans. The National Radio’s (CNR) “Voice of China” reported that investors had alleged that OKEx was continuing to “illegally” work in China with domestic clients.

As part of a radio series devoted to “revealing the secret behind digital currencies,” the channel interviewed an OKEx investor who claimed that OKEx was still operating in Beijing for “almost exclusively” Chinese users and that the exchange had moved its headquarters to Belize and the team to Hong Kong in name only.

The report also noted that OKEx’s p2p platform enabled consumers to purchase crypto using their Alipay or Wechat accounts, flaunting the ban on transacting between crypto and fiat.

Chinese first monthly ‘independent analysis’ of crypto and blockchain projects

Yet a week later, on May 11, the government made the surprise announcement that it would begin to issue a monthly “independent analysis” of cryptocurrency and blockchain projects, overseen by an MIIT department, the China Electronic Information Industry Development (CCID). The government gave the impetus for the project as being what it considered to be a “lack of a completely independent assessment/rating” system for digital assets, stating that:

“The project demonstrates the confidence of the Chinese government in the technology, and will act as a guide for government, enterprise, and research institutes.”

The rankings, dubbed the “Global Public Chain Assessment Index,” were set to cover 28 cryptocurrencies, including Bitcoin, Ethereum, Litecoin, Monero, NEO, QTUM, Ripple, and Zcash, to name but a few.  

When published, the first iteration of the new Index crowned Ethereum in first place, followed by Steem, Lisk, NEO, and Komodo. Bitcoin was placed 13th. On the basis of three parameters — “technology,” “application,” and “innovation” — Bitcoin had been found lacking in the former two, even as it outflanked — perhaps unsurprisingly — all other cryptocurrencies on the innovation front

That same month, on May 18, the government launched an educational initiative, publishing the results of an MIIT-led study that claimed to have detected 421 “fake” cryptocurrencies. The MIIT had established a national committee of internet financial security experts (ICFERT) to identify the key features of fraudulent digital currency profiles. They found three:

First, reliance on a “pyramid scheme” model, in which investors are first compelled to make a payment, and then promised returns on the basis that they enroll others in the scheme.

Second, the absence of open-source code for the fake digital asset, allowing its creators to dupe investors into an illusion of skyrocketing growth by artificially splitting the tokens to create an impression of proliferating rewards. The fraudsters claim that the more tokens are generated, the more wealth increases, “only rising without falling.”

Third, given that bogus coins cannot be traded on legitimate crypto exchanges, they are largely traded through OTC deals, or even on transient phony platforms. With no transparency, scammers can manipulate apparent price surges, while at the same time preventing investors from withdrawing funds in order to benefit from such “spikes.”

By early July, the PBoC released a report claiming that the yuan now accounted for less than one percent of global Bitcoin transactions, extolling the momentous impact of policy restrictions.

It went on to celebrate the fact that the country’s policies had ensured a “zero-risk” exit for the 88 cryptocurrency exchanges and 85 ICO trading platforms closed since late 2017.

Guo Dazhi, research director at the Zhongguancun Internet Finance Institute, commented:

“This indicates that the policy has been very successful. It is within expectations that the yuan’s share in global Bitcoin transactions would drop after China announced the ban.”

August–October 2018: Renewed anti-crypto measures, both on and offline

Despite PBoC apparently lauding the success of its measures, this summer saw intensified attempts to strike a fatal blow on China’s cryptocurrency traders.

On August 7, the Cyberspace Administration of China issued new regulations stipulating that content providers within chat apps were required to comply with “national interests” and “public orders.”

The impact on the crypto space was almost immediately felt. By August 21, Tencent’s WeChat — which had over 1 billion users — was reported to have blocked a number of crypto- and blockchain-related accounts.

A WeChat official clarified that some public accounts were suspected of publishing ICO and crypto trading “hype,” in violation of the service’s “Interim Provisions on the Development of Public Information Services for Instant Messaging Tools” terms — as had just been outlined in the Cyberspace Administration’s new rules.

Deepchain, Huobi News, Node Capital-backed Jingse Caijing, and CoinDaily were among those affected. SCMP reported at the time that Jingse had had 350,000 “unique daily visitors” prior to the ban, and claimed that “a major revenue source” for the channel was paid content from blockchain-related projects. Reportedly publishing over 200 articles per day, a sponsored article was said to cost 12 Ethereum, valued $3,500 at the time.

In a statement obtained by SCMP, the Huobi team gave a more indeterminate rationale as to the reason for the blocking of its WeChat account, attributing it to the authorities’ “broad action targeting industrial media.”

SCMP also pointed to a March 2018 article from People’s Daily, the “mouthpiece” of the Communist Party, which had levelled vigorous accusations at blockchain news outlets:

“These ‘media’ outlets have made a huge fortune in the speculative wave of cryptocurrencies, but due to their nature, it’s doubtful how long their barbaric growth can keep on going.”

Just a day later, on August 22, local reports surfaced that all commercial venues had been prohibited from hosting crypto-related events in Beijing’s Chaoyang district.

The new notice banned all public spaces in the district — including shopping malls, hotels, and office buildings — from hosting any form of crypto-related promotions. Among the reasons given to justify the measures, the notice cited the “protection of public property rights,” “prevention of money laundering,” and the upholding of “the security and stability of the financial system.” It appealed to citizens to come forth to denounce any violations of its terms.

That same day, the China National Fintech Risk Rectification Office identified 124 crypto trading platforms with overseas IP addresses and was intending to block access to their services.

New measures were also reportedly underway to toughen the “clean-up” of third party crypto payment channels, including those used by OTC platforms, and other “loopholes” through which investors could still gain access to ICOs and crypto. Officials from China’s Office for Special Remediation of Internet Financial Risks were said to be set to meet with third-party payment institutions and order them to cease any crypto-related dealings.

On August 24, a fresh risk alert was issued by five Chinese government regulators — the CRBC, PBoC, Ministry of Public Security, Central Network Information Office, and the General Administration of Market Supervision. The notice sounded the alarm on “lawless entities” attempting to amass funds “using the banner of ‘financial innovation’ and ‘blockchain’ and distributing ‘so-called ‘virtual currency,’ ‘virtual assets,’ and ‘digital assets.’”

“Such activities are not really based on blockchain technology, but rather the practice of speculative blockchain concepts for illegal fundraising, pyramid schemes, and fraud,” the document stated, urging the public to stay “rational”:

“[Such schemes are] rely on […] internet chat tools for trading, use online payment tools to collect funds, rent overseas servers, yet actually carry out activities for domestic residents […] the funds for these illegal activities are mostly overseas, and supervision and tracking are very difficult.”

The notice declared that authorities would be ratcheting up measures against “illegal” ICOs.

That same day, China’s mobile payment app Alipay —  run by Alibaba affiliate Ant Financial — took measures to restrict and even permanently block any accounts it found to be using its network to transact Bitcoin OTC.

According to a Beijing News report, Alibaba was in the process of establishing an inspection system for identifying “key websites and accounts.” Sources from Ant Financial told the news agency the firm would be conducting a “risk prevention” program intended to educate users about the dangers of false crypto-related “propaganda.”

On August 27, China’s “Google” Baidu, closed at least two popular crypto-related chat forums, with a notice reportedly informing users that the move was “in accordance with relevant laws, regulations and policies.”

Two days later, the prohibition against commercial venues from hosting crypto-related events was then extended to Guangzhou Development District, a special economic zone in southern China, close to Hong Kong.

As a feverish August passed, however, SCMP came out with a fresh report describing the resilience with which crypto traders continued to circumvent government restrictions.

Published September 8, the article reflected that it seemed “practically impossible to ever impose a complete shutdown on trading.”

According to SCMP, in the days that followed late August’s toughened measures, the combined trading volume on seven exchanges popular among Chinese traders had indeed dropped by around 33 percent. Yet multiple industry figures emphasized that as long as a platform remained nominally offshore and supported p2p transactions, regulators would face an almost intractable challenge to wipe out such trading entirely.

Terence Tsang, COO of TideBit, told SCMP that:

“The latest warning and potentially increased monitoring of foreign platforms is targeted at a batch of smaller exchanges that had claimed to be foreign entities, but are in fact operating in China, claiming they have outsourced their operations to a Chinese company […] Those exchanges whose website landing pages are in Chinese have drawn particular scrutiny by regulators.”

The report further outlined how traders had begun leveraging Tether (USDT) as a means of entering and exiting cryptocurrency markets. Combined with a VPN, two traders could then use an “overseas” platform as an intermediary to swap crypto for fiat and vice versa.

“Two individuals who have both completed a ‘know-your-customer’ procedure with an exchange would swap ‘fiat’ currencies […] to Tether,” SCMP reported, detailing how:

“The exchange plays the role of an overseer of such trades, and stands ready to adjudicate in cases of failed trades, or transactions that are not honored […] the money will usually be transferred through bank accounts, or third party online payment networks, between these two individuals. Once Tether is received, then the trader can start trading crypto-to-crypto on any exchange, with the execution done through VPNs.”

The report quoted a source “close to” one such exchange as saying that “while Chinese regulators definitely have the technical ability to shut down VPNs […] traditionally it takes numerous conversations with different stakeholders to reach a consensus on configuring a firewall, which lengthens the process.”

Even as restrictions on operating VPN services were in place, there were no “current or even foreseeable restrictions” on their private use, the source reportedly added.

Two days later, WeChat blocked the official sales channel of Bitcoin (BTC) mining giant Bitmain — without apparently shuttering either its after-sales services or its official account. Yet again, the media platform issued a rules violation notice, stating that:

“Following users’ complaints, [WeChat] has reviewed and discovered that this account — without having acquired authorized credentials or licenses — has been publishing and distributing information of relevant businesses it is involved in.”

Cointelegraph’s sources in China considered at the time that company-run accounts were seemingly being more stringently targeted than those run by individuals, as suggested by the platform’s handling of the account “Crypto Mad Man,” which operated under the WeChat ID “shuzihuobiqushikuangren.”

The channel’s official account — a crypto price prediction channel which was run by an individual — remained live, whereas its sub-account — run by a company, and including the occasional promotion of new altcoins — had been banned.

On September 18, the Shanghai headquarters of the PBoC yet again “reminded” investors of the risks associated with ICOs and crypto trading, censuring the “unauthorized” and “illegal” financing model for posing a “serious disruption” to the “economic, financial, and social order.”

The bank again lauded the success of the authorities’ pummeling of the crypto industry, especially the recent, “timely” and “targeted” measures undertaken by the National Internet Financial Risk Special Remediation Leading Group:

“[China’s] global share of domestic virtual currency transactions has dropped from the initial 90% to less than 5%, effectively [preventing] the virtual currency bubble caused by skyrocketing global virtual currency prices in the second half of last year [from affecting] China’s financial market. The impact has been highly recognized by the community.”

PBoC further stated that “the relevant third-party payment channels have been checked,” resulting in the closure of “around 3,000 accounts engaged in virtual currency transactions.”

As the central bank continued to flaunt statistics that seemingly attested to the success of its policies, Chinese tech journal Technode circulated an academic analysis of cryptocurrencies’ prevalence among a certain social stratum of the Middle Kingdom: on September 26, it published the “2018 White Paper on the New Middle Class,” prepared by Chinese financial writer and Professor of Shanghai Zhejiang University, Wu Xiaobo.

TechNode noted that this was “the first time” that the annual report had included Bitcoin and other cryptocurrencies as an investment option, as part of its efforts to “decipher China’s middle class and their purchasing, investment, career, family, and value profiles.”

The report portrayed an apparently “risk-averse” demographic: digital currency was identified as the least popular asset in the respondents’ portfolios — with less than 10 percent holding any such investment. Wu’s analysis found that only 9.2 percent of surveyed individuals said they would accept an investment loss higher than 15 percent — leaving over 90 percent distinctly unlikely to take the plunge on the notoriously volatile crypto markets.

That same day, the official state-run Xinhua News Agency released its own account of the present situation in the wake of the PBoC’s renewed warnings and other restrictive measures: it published a “reporter’s” account of how despite the summer’s measures, ICO’s continued to “reemerge.”

Notably, the report characterized ICOs using a Chinese idiom “Ge jiucai”  — which translates roughly as “cutting the leek” — as a metaphor for the agency’s belief that ICOs are little more than fraudulent Ponzi schemes.

Cointelegraph’s Chinese sources clarified that the idiom derives from the fact that the leek is a plant that reproduces itself very fast — an analogy for the constantly proliferating stream of incoming new investors to such schemes. The “cutting”  — or harvesting — refers to perpetrators making away with a bundle of money:

“Since potential new investors are numerous and there’re always more people who can join the game and be lured, this fraudulent game can repeat itself over and over again.”

Xinhua outlined that even as crypto-fiat trading and the publication of ICO hype had been curtailed, OTC transactions remained a time-tested means for domestic investors to purchase crypto:

“Upon logging in to OTCBTC, CoinCola, and other platforms you can see that the platform has an off-exchange area, [and that] through Alipay, WeChat, or a bank transfer, you can easily buy mainstream currencies such as Bitcoin.”

The agency noted that traders could then easily enter crypto-crypto trading areas to purchase any ICO token they wished. Citing an unnamed “industry insider,” Xinhua compared OTC trades to “Taobao shopping” — a popular Alibaba-owned e-commerce platform. The source remarked:

“It seems that throughout the entire transaction process, these platforms do not violate the relevant policies, and that over-the-counter transaction has actually opened a loophole into ICO token transactions.”

It was further suggested that social media accounts that “enable crypto trading under the guise of blockchain” remained just as active as before the September 4 ban. Moreover, it was alleged that — facilitated by social media — crypto exchanges and ICO projects continued to “join forces” to perpetrate ruinous ‘pyramid’ schemes.

Further “industry insiders” portrayed the lucrative, offshoot industry of social media platforms. Social media accounts were said to be engaged in forms of commercial writing, project meetings and even liaising offline interviews to further the promotion of ICOs. “Some social media actors will ask for 100,000 yuan or at least 1 Bitcoin, and some video interviews will cost 1,000 yuan for 1 minute,” the agency claimed.

The article diagnosed the litany of evasions that continued to succeed despite toughened measures. It reiterated that despite their relocations “overseas,” trading platforms nonetheless continued to focus on providing services to domestic traders.

“For example, some platforms register in Malta,” but provide Chinese web pages in parallel to their English-language homepages; many evade supervision by creating groups on Telegram to facilitate “believers.” VPN usage remains rife.

An interview with an ICO project leader at a business incubator event in Beijing’s Haidan district revealed the surreptitious “new ecology” of China’s ICO space:

“In order to evade supervision, a foundation is set up abroad to issue ICO tokens. The fundraising remains primarily targeted domestic investors. The project white paper can be purchased on “Taobao” at a price of around RMB 40,000.”

Moreover, the interviewee said, the ICO project pays a “foreign face” to “provide a facade” — beyond this role, the figure behind it “rarely shows up.”

The reporter also cited an industry research institute’s monitoring of five of the most popular crypto trading platforms among Chinese investors — such as Binance and OKEx — during the first half of 2018. Out of 337 listed coins, the institute identified 264 successfully completed ICOs. Noting that the figure overlapped with the “264 ICO tokens issued ‘overseas,’” the trading platforms were reported to have removed them, having identified them as projects targeting Chinese investors.  

As of August 21, Xinhua stated, 98.8 percent of the 264 currencies had all but collapsed in value. As a cautionary tale, the reporter interviewed Liu Peng, an investor in the city of Tianjin, who related how he had himself used loophole mechanisms to access crypto trading platforms. His initial investment of 80,000 yuan was alleged to now be valued at less than 20,000 yuan.

Peng observed that many borrowed money to speculate on coins, with some subsequent losses coming to as high as over 90 percent.

“In the face of the resurgence of virtual currency speculation, the industry calls for supervision to continue to deepen,” the reporter declared.

Li Honghan, a researcher at the International Monetary Institute of Renmin University of China, remarked that social media continued to circulate “false propaganda” misleading investors; a figure in charge of a “relevant” department at the Beijing Financial Work Bureau said it was “necessary to take timely measures” — such as shutting down media accounts in order to prevent their participation in the ICO “hype.”

Xu Zezhen, secretary of the Party Committee of the Beijing Internet Finance Industry Association, commented that in the context of the ban on ICOs, many companies claim to be blockchain-related but in fact “sell dog meat.” Again, Zezhen considered such projects were simply “Ge jiucai.”

The colorful rhetoric of Xinhua’s scathing report betrays a vehemence that is commensurate with the apparent indomitability of China’s crypto community, vindicating commentators’ shrewd predictions that any measures to dampen crypto-related activities could only ever be a “Pyrrhic victory.”

The forthcoming third part of Cointelegraph’s crypto in China series will delve into the apparent paradoxes that govern the ownership, useability and legal protection of cryptocurrencies in the country, even as the official curtailment of trading has reached fever pitch.