Blockchain and Crypto: China’s Complicated Status
Beijing Says No to Crypto, But Yes to Blockchain
China has a complicated status when it comes to blockchain and crypto. While the country bans trading, it is building infrastructure for blockchain technology. This raises questions about the future of crypto in China.
A Loophole Emerges
With Hong Kong offering regulated crypto markets, insiders claim that a loophole is emerging. China already allows investors to buy U.S. stocks through its Qualified Domestic Institutional Investor (QDII) program. So, why not bitcoin? The key, according to one expert, is control, and Beijing may have just found a way to keep it.
Two Systems for Mainland Investors
In China, there are two systems for mainland investors to buy and sell stock outside China. First, there’s QDII, which allows select investors to buy U.S. ETFs using RMB. Then, there’s the Shanghai-Hong Kong Connect and Shenzhen-Hong Kong Connect, which let Chinese investors buy and sell Hong Kong stocks through mainland securities firms, with all trades settled in RMB.
The Key: Capital Controls
"The key is that capital never flows freely out of China, and if you apply this same logic to crypto, there’s no reason it couldn’t work the same way," said Yifan He, CEO of Red Date Technology, at Consensus Hong Kong. He emphasized that the biggest regulatory hurdle isn’t crypto itself but capital controls, ensuring that funds don’t move freely in and out of China.
Capital Controls: A Solution?
These capital controls are in place to prevent excessive currency fluctuations and capital flight, maintaining the stability and value of the RMB. They are also one of the reasons why Hong Kong’s crypto ETFs, with their in-kind redemptions, were not allowed on the mainland.
A New Model: Intermediary Holding
"What’s the difference between a Hong Kong-regulated stock and a Hong Kong-regulated crypto asset?" He continued. "If they have a system for you to buy and sell in RMB, but never move money outside China, then it’s just another regulated investment product." This model would not allow Chinese investors to self-custody their crypto. Instead, purchases would be held by an intermediary, such as a licensed securities firm.
Aligning with China’s Approach to Stock and ETF Investments
Just as mainland investors can trade U.S. ETFs through QDII but never take direct custody, they could gain exposure to crypto without owning the underlying assets – no money moves across borders. For a nation with 200 million retail investors and an economy in need of stimulus, regulated crypto access through Hong Kong’s sandbox might offer Beijing a calculated compromise.
Blockchain vs. Crypto: A Proponent of Blockchain
China has long been a proponent of blockchain technology, while taking a cold approach to crypto. "We don’t allow guns in China, but we can still make steel," He explained as an analogy. "The technology is not regulated so that you can build all kinds of applications. But when some application triggers regulations, that’s different."
A Shift in Regulatory Perspective?
Based on his conversations with financial regulators, He sees a shift in perspective. "I see some signal from financial regulators," he said. "They’re beginning to talk about Bitcoin, saying we need to pay more attention and do more research on digital assets." Could this lead to broader adoption? Two years ago, He would have said "zero chance." "Now, I’d say there’s more than a 50% chance in three years," he concluded.
Conclusion
China’s complicated status on blockchain and crypto has raised questions about the future of crypto in the country. The emergence of a loophole and the potential for regulated crypto access through Hong Kong’s sandbox offer Beijing a calculated compromise. While China’s approach to blockchain and crypto has been complex, the country’s proponent of blockchain technology may be shifting its perspective on digital assets.
FAQs
Q: What is the Qualified Domestic Institutional Investor (QDII) program?
A: The QDII program allows select investors to buy U.S. ETFs using RMB.
Q: What is the Shanghai-Hong Kong Connect and Shenzhen-Hong Kong Connect?
A: These systems allow Chinese investors to buy and sell Hong Kong stocks through mainland securities firms, with all trades settled in RMB.
Q: What is the key to China’s approach to crypto?
A: The key is capital controls, ensuring that funds don’t move freely in and out of China.
Q: What is the new model for holding crypto?
A: The new model involves an intermediary holding the crypto on behalf of Chinese investors, rather than allowing self-custody.
Q: What is the potential for regulated crypto access through Hong Kong’s sandbox?
A: The potential is significant, offering Beijing a calculated compromise for the country’s 200 million retail investors and the economy in need of stimulus.
