Crypto Regulation
Pro-blockchain, anti-crypto? The curious case of China, Russia and India
By Michael Borowiec, contributor to Trezor Blog
This blog is the third in a three-part series on cryptocurrency regulation. Revisit part one, Will Crypto Laws Devastate the Industry or Help It Grow Stronger?, and part two, What recent regulations tell us about cryptocurrencies’ future.
In this series, we discussed how the majority of economic superpowers see intrinsic, long-term value in incorporating the cryptocurrency industry into its market structures, as long as it plays by their rules. As with anything, in this development there are winners and losers. But the overall sentiment is that crypto is staying relatively independent, with large parts of the sector allowed to thrive, along with a rich ecosystem of tokens alongside it.
At the same time, a smaller group of countries is taking a much more cautious approach to regulating cryptocurrencies. There are a number of reasons why some countries reject the technology. Bolivia has banned them since 2014 so as to protect its native currency, the Boliviano.
Iran’s central bank similarly prohibited all financial institutions from dealing with cryptos in 2018, following the decade-old logic of curbing terrorism and money laundering within its own borders. Some islamic countries, on the other hand, have had a slow start to crypto adoption due to its religious leaders, such as Egypt’s Grand Mufti, issuing a religious ban on the industry that was lifted only in 2019.
Today, we will focus on three economic giants whose relationship with adoption of cryptocurrencies has been problematic, to say the least. China, Russia and India cumulatively are home to nearly three billion people. With a joint Gross Domestic Product (GDP) of nearly 20 trillion USD and a history of technological innovation, they are ripe for propelling the blockchain industry and the cryptocurrency markets to previously unforeseen heights.
Instead of participating in a unified global push for regulating the crypto markets however, these countries choose to take what they like from blockchain technology and incorporate it into their internal economies. In doing so, they choose to hold out with centralized solutions for as long as they can, while the global industry flourishes. Today, we will explore the friction between centralized power and blockchain technology, as well as how it affects the growth of this nascent industry inside their borders.
“C” for crypto, “C” for chaos
Around the same time when Japan was busy putting together the first pieces of legislation favorable to the sector, Beijing has issued a decree banning all cryptocurrencies from official use, as well as blocking its local exchanges from being fully operational.
While it is not technically illegal to own, purchase, or sell bitcoins in China, it is strictly prohibited to circulate them as actual currency in its markets. To put in perspective the lack of formal access of Chinese netizens to cryptocurrencies, before the ban in 2017, China accounted for over 90% of global Bitcoin trading.
Understanding China’s unique historical context helps us see their position on the rapid crypto boom. Ever since the late 1970s, the East Asian giant has undergone a phase of rapid economic development which made it wary of a volatile, financial system. The Chinese Communist Party has since aimed to hold a close control over its domestic markets. The rise of a deregulated, decentralized crypto market which floods the economy with additional currency is seen as something undesirable for the direction China is heading
China has had a long history of regulating peer to peer financial services, which explains the hardline stance against its exchanges, the historic peddlers of cryptocurrencies. Even the native Chinese Binance, the world’s largest exchange by far, had to leave its borders due to the country’s draconian regulations. Others have experimented with navigating legal loopholes to remain compliant with the strict guidelines of the Communist Chinese Party.
Moving quickly to control deregulated finance in its own borders, the Chinese Communist Party is disrupting the industry in its own, controlled way.
One of the biggest examples of such navigation is the use of special middleman tokens like Tether’s USDT as an intermediate between trading fiat and crypto. Another example includes companies using third party platforms like Alipay or Wechat Pay to facilitate these transactions without the exchange acting as a legal facilitator.
Alas, the all-ruling hand of the Chinese Communist Party has stifled these legal innovations. While the barrier of entry is high for projects in free markets, the failure to stay compliant with the regulatory environment in China can have dire consequences for aspiring entrepreneurs and investors alike.
Having said that, the official crackdown on cryptos clearly has done little to stop budding investors from participating in the recent boom. While Chinese authorities are trying to curb its citizens participation in global trading, outside of its physical, legal and digital boundaries, there is little they can do.
Onshore investors are able to participate in the never-before-seen price surge via offshore located exchanges such as Huobi and OKEx. USDT can still be bought using the Chinese yuan on the peer-to-peer markets, a process that technically doesn’t violate Chinese laws. Money required to do so can be moved to an overseas account to facilitate the transaction under the guise of a medical transaction. To add to complexity, the absence of investor information on these exchanges makes it harder to pinpoint any capital flow to an individual trader.
Considering all of this, it is of no surprise that in 2020, over $17.5 billion digital assets flowed out of Chinese exchanges to foreign venues, a 50% increase from the year before. One can only imagine the 2021 reinvestment into the sector with a crypto-friendly regulatory approach from Chinese authorities.
The relationship between fears of economic chaos and regulating crypto can also be seen in India. The South Asian country similarly banned holding of private crypto transactions in 2018, with non-compliant investors facing up to 10 year jail time. The move was inspired by a number of crypto-related crimes and frauds following the months after the country’s prime minister, Narenda Modi, decided to ban 80% of the nation’s currency. Since then, local business leaders have taken the matter to the local Supreme Court, winning a respite in March 2020.
But it hasn’t been smooth sailing for Indian hodlers. Bitcoin remains illegal tender in the country. It even gets bad press from some of India’s top industry leaders. Rakesh Jhunjhunwala, India’s Warren Buffett, recently proclaimed he will “never buy Bitcoin’’ and that the power to issue currencies should “only be with the state.” India’s regulators also want any organisation wanting to go public to divest from their cryptocurrency holdings, which constitutes another blow to the institutional adoption in the South Asian country.
Based on India’s approach so far, we can assume that it will prioritize plug-and-play blockchain technology, over any projects and protocols that need tokenization to thrive.
Recently, India announced plans to introduce a new law banning trade in cryptocurrencies, which would put it out of step with other Asian economies, who have chosen to regulate the fledgling market. The draconian measure could have dire consequences for the country’s traders. Currently, seven million Indian citizens hold cryptocurrencies with a total value of over 1 billion USD. With a trading and holding culture already so deeply embedded within India’s borders, any ban would have to also include a way to provide liquidity to those affected, otherwise risking an economic crisis.
It should be no surprise that Russia, yet another country wanting to keep its economic machine in the hands of the ruling elite, has signed two new legislations, which similarly limit cryptocurrency’s use in the Russian economy, but don’t shy away from taxing the new assets.
The law itself built on an already existing regulation, which automatically associated any cryptocurrency trading activity with money laundering. Russian citizens can now own and trade cryptos without much hassle. They are not, however, allowed to use it as a legal tender in Russia’s domestic economy. There are plans to open up state-controlled cryptocurrency exchanges, which will oversee the entire process of minting digital currencies and processing sensitive investor data.
Pick-and-mix your crypto industry
It’s important to note that while these countries have taken a strong stance against the global, cryptocurrency sector, it does not mean that they are necessarily against blockchain technology itself. In a lot of cases, they have actively pursued, or even spearheaded some aspects of the market, or made its features work for their preexisting structures.
Pursuing an anti-crypto trading policy has not stopped China from implementing favourable crypto regulation in other areas. Xi Jingping himself has openly made it clear that that there is a huge potential for blockchain, but that the technology must serve the “real” economy of the East Asian Giant. The country has spearheaded their own versions of think tanks, innovation hubs and regulatory bodies, with the government more than doubling the number of tenders to procure blockchain technology to 72 in 2020.
Government-backed infrastructure, called the Blockchain-Service Network (BSN) allows developers to build their blockchain programs on a pre-existing framework. This government-backed provision radically decreases time and cost to develop innovative solutions, while at the same time ensures all projects staying automatically compliant with Chinese regulations.
Industry giants including Ethereum, EOS, Tezos and NEO already have nodes on BSN’s public blockchain. This is all while various Chinese projects like VeChain are being the green light to thrive under the Party’s protectorate and strict oversight.
The Russian state is similarly keen to develop blockchain solutions under the strict protectorate of its regulatory institutions. The central authority has turned to the country’s nascent industry, keeping a close eye on a number of Russia-hosted ICOs and plans for some of its internet giants to release their own cryptocurrency.
This willingness is best illustrated by the publishing of the Sovereign Internet Bill in 2019. Mimicking China’s oversight of its digital landscape, Russia has moved to force all foreign service providers, including Google and Facebook, to reroute their traffic through the data infrastructure controlled by Roskomnadzor, or Russia’s internet censor.
Interestingly enough, some of the earliest signs of blockchain adoption spearheaded by the Russian state have been in the area of voting and elections. Last summer, Russian digital service provider Rostelecom published details of a system that was to be tested in support of two regional by-elections in September 2020. The project, executed in collaboration with the Russian blockchain project Waves, was immediately mired in controversy.
Most notably, weak file protection meant hackers could easily retrieve voter information and sell it on the black market. Paradoxically, attempts to apply blockchain into voting systems seem to go hand in hand with controversial elections. In 2018, blockchain platform Agora had to publicly acknowledge its shortcomings in aiming to improve the transparency of elections in Sierra Leone.
Even the Indian crypto ban might not be so total after all. In a recent interview, India’s Finance Minister Nirmala Sitharaman, implied that the South Asian country will keep “a window available for all types of experiments in the crypto world.” The details of what experimentation will be allowed to take place are not clear. Based on India’s approach so far, we can assume that it will prioritize plug-and-play blockchain technology, over any projects and protocols that need tokenization to thrive.
Hash rates make for good stock prices
The cryptocurrency mining industry, long scoffed at by Chinese authorities, has recently gotten a green light as well. With cheap electricity prices, mining has proven to be a profitable industry in China, with companies like Blockstream or Canaan Creative recently receiving a rare go-ahead from the authorities to safely expand their business.
The lucrative mining industry is seeing a rise in a variety of established, institutional players. Shenzhen-based lottery giant 500.com has entered the playing field with a lucrative contract from the State Grid Corporation of China, which allows it to enjoy discounted electricity for its data centers. In 2019, these data centers have contributed to over 96% of its total revenue and could amount to up to 6% hash rate of the entire Bitcoin network.
Pivots to crypto mining are becoming increasingly popular, especially for companies hit by the US-China trade war, tightening regulatory landscape on their initial bets and stagnating product offerings. The9, another Chinese giant, with exclusive rights to distribute World of Warcraft in China, has seen its shares rise by over 700% on news of crypto investments in January 2021.
Russia is also joining the cryptocurrency mining party. In February 2021, a shipment of twenty thousand cryptocurrency mining machines worth up to $60 million was imported into the Russian city of Bratsk by an unknown entity. While keeping a close eye on individual crypto use, Russia now totals up to 7% of global crypto mining capacity, putting it after the US with 7.2% and China with a staggering 65%. Here it’s important to note that about half of China’s hash rate is produced in just one place, the autonomous Xinjiang region, which makes up 35.76% of the global total.
Digital currencies and where to find them
Another element of the technology that remains appealing to most countries is the prospect of experimenting with releasing a native digital currency. A survey released at the beginning of 2020 by the Bank for International Settlements has found that out of 66 central banks asked, 80% are exploring the idea of a digital currency, while 10% are ‘imminently close’’ to a launch.
Russia, for example, is openly flirting with the idea of creating a digital token pegged to the Russian rouble. While the idea is definitely in the former camp of feedback and focus groups, the move illustrates Russia’s willingness to invite blockchain technology into its economy, but on its own terms. India is toying with similar concepts, while at the same time exploring the idea of a total cryptocurrency ban.
China has also been making big waves in the news with the rollout of its digital currency, the catchy Digital Currency Electronic Payment or as it’s more commonly known, DCEP. The Communist country has its own Digital Currency Research Institute, overseeing the goal of issuing the digital money.
Increased usage of China’s digital currency across the globe means more data and more control for the Chinese Communist Party.
Throughout the last few years, China’s central bank has piloted the rollout and practical implications of DCEP, with successful trials in cities such as Shenzhen, Chengdu, Suzhou and Xiongan. 2021 trials of the ‘Digital Yuan’ will see the world’s most advanced digital currency tried out in the megalopolis of Beijings and Shanghai.
You can read more about the nature and implications of digital currencies, as well as how they differ from crypto in our blog here. Instead, today we will look at how the development of China’s own digital native currency again underlines the willingness of these states to experiment with technology inspired by blockchain to serve their own political objectives. And to look for proof of this, look no further than China’s three-decade long Africa policy.
Through a series of government contracts, corporate investments and societal initiatives, China has amassed incredible influence over Africa’s telecommunications infrastructure. In 2021, 50% of mobile handsets and 70% of mobile networks on the continent have been built by Chinese companies. Coupled with African continent’s lack of a unified payment service that inhibits it from interacting with external markets, this makes for ample room for China to offer its own payment solutions across the continent.
Huawei’s Mate 40 model, which recently launched in South Africa, is the first smartphone allowing for the storing and using of DCEP. In its continued expansion across African countries with its consumer technology, telecommunications solution and political influence, China is facing little opposition. To add fuel to the fire, extended political influence and debt obligations means that up to 14 African countries are already openly considering adopting the yuan as its reserve currency, which would fast track the spread of the DCEP even further. Increased usage of China’s digital currency across the globe means more data and more control for the Chinese Communist Party.
The fight to control decentralization
At the time of writing this blog post, one thing is clear — cryptocurrencies and blockchain technology are here to stay. Even if you ignore the recent heights achieved by the overall market cap, it’s clear that the industry has fully embedded itself into the global economy, with the majority of its economic players eager to let it develop compliant, yet largely undisturbed.
On the other hand, today’s blog post showed us how some countries are much more hesitant in their approach to regulating crypto. Russia and India opt for cracking down on individual cryptocurrency holders, while losing first mover advantage on developing their domesting blockchain scenes. At the same time, China’s cautious approach seems much more pragmatic and forward-thinking.
Moving quickly to control deregulated finance in its own borders, the Chinese Communist Party is disrupting the industry in its own, controlled way. From absolutely dominating global Bitcoin mining and technological innovation, to spearheading its digital currency project as a Trojan Horse of extended political influence in the continents it aims to control, China’s use of the opportunity that blockchain presents is both fascinating and frightening at the same time.
Nevertheless, the decentralized nature of the technology coupled with the interconnected, global nature of the industry means even the most draconian of regulations cannot fully stop their subjects from dipping their feet in crypto. The hope is that pragmatism will win over any authoritarian backlash in the long-term. In the case of these three countries however, I wouldn’t hold your breath.
