The Checkered Saga of Crypto in China, 2018


Following the historic ban of the initial coins (CIOs) of September 2017 and the banning of national encryption platforms, an enterprising cryptic community was already showing signs of devising multiple means to evade the increasingly draconian actions of the authorities.

The second part of the three-part series of Cointelegraph continues to investigate the factors that have catapulted the Chinese regulators to redouble their efforts to curb the rapid rise of the commercial crypts; their unprecedented actions to try to reduce the size of the titans of the country's crypto mining; the response of the Chinese technological triumvirate – Alibaba, Tencent and Baidu – to new constraints; and as always, the proliferation means that investors continue to use to climb an "impregnable" anti-crypt wall.

January 2018: pressure on Chinese Bitcoin miners

January 2018: pressure on Chinese Bitcoin miners

In December 2017, Leonhard Weese, president of the Hong Kong Bitcoin Association, noted: "The Chinese authorities are more concerned with fiction than with what people actually do. Bitcoin trading is good 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 unspecified number of OTC trading accounts across the country. It was said that the combined value of those frozen in the southern cities of Shenzhen and Guangzhou was over 300 million yuan ($ 46.1 million at the time); it is said that about thirty other accounts have been frozen in the northern province of Hebei.

Sources also indicated that a policy was in progress to curb the prosperous Bitcoin mining industry. Because of the abundance of cheap energy and hardware in the country, the 2017 reports showed that over two-thirds of the world's mining pools were based in China.

The mining giants, such as Bitmain, born in Beijing, not only benefited from the overabundance of power in coal-rich regions such as Xinjiang and Inner Mongolia, but reportedly tailor-made agreements had been cut by the local government. In the city of Ordos, in Mongolia, it was said that the authorities offered Bitmain a subsidized electricity rate of only four US cents per kilowatt hour – 30 percent less than the current rate for other local industrial enterprises.

On 2 January a reminder leaked from the PBoC to a high-level Internet finance group in the government – the main group of Internet Financial Risks remediation – it is said that Bitcoin miners should make "an orderly exit" from China due to the consumption of "huge" amount of resources and speculation on the virtual "currencies".

The links between the central bank and the Internet finance regulator were said to be neighbors, as a deputy governor of PBoC, Pan Gongsheng, had been appointed head of the regulatory group when it was established in 2016. Pan was not the most crypto – number of figures: it was said that he predicted the death of Bitcoin in December 2017, and was quoted by the Chinese media in the same month that he stated that:

"If we had not closed the Bitcoin exchanges and reduced control over ICOs several months ago, if China still represented over 80% of Bitcoin's world trade and ICO fundraising, everyone, what would happen today? It's scary to think of this question. "

Returning to the note from the Bitcoin miner, Quartz reported that the Internet-finance regulator subsequently ordered local authorities to exercise all available means in their arsenal – including "measures related to electricity prices, land use, taxes and environmental protection "- to pressure miners to cease their operations.

At the national level, it was reported that the regulatory authority asked the local authorities to present a progress report by January 10, specifying the existing mining structures in their jurisdictions, followed by monthly reports on the progress of the " exits "of the miners on the 10th of each month.

A separate document leaked by the regulator's Xinjiang regional office is accused of having ordered authorities in western China to file similar reports, citing almost identical concerns. The quartz surveys with the Xinjiang office confirmed the authenticity of this last regional document.

In parallel, Bloomberg reported a "closed door meeting" to be held at the PBoC in late December 2017, allegedly outlining a plan to direct a wider spectrum of local officials and national regulators to monitor – and even potentially limit – high energy consumption associated with the mining industry.

Anonymous sources told the media that Chinese officials were "worried" about the fact that miners were "taking advantage" of cheap energy sources in some regions. Bloomberg noted, however, that the Caixin news agency had refuted that the PBoC meeting had taken place, citing an undisclosed source.

On January 13, the Chinese Economic Observer (EEO) reported on the consequences and responses in the "close" approach of the government to the mining sector.

Officials from the relevant eastern Chinese provinces of Shandong and Jiangsu noted that the regulatory pressure was not uniform with respect to the different geographic regions: they claimed they had not received any notification and believed that the "clean-up" centered on the central and western regions of the country.

Apparently uneven pressures were consistent with the news of a national effort to transfer power away from energy-rich but sparsely populated regions where it was most needed. Virtually all the lines of China's new high-voltage transmission network – designed to redirect electricity from overcrowded east to the north and west to the east – would be completed that year.

Lauri Myllyvirta, a Beijing activist with Greenpeace, said that he considered that the extraction of Bitcoin in China at the time was "primarily an opportunistic way to derive some money from bankruptcies and inefficiencies. of the energy system ".

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

As pressure intensifies, several mines in the south-western Sichuan province – where mining is said to have concentrated – have now entered a "period of inactivity" awaiting regulatory clarification. It is said that the main group for the remediation of financial risks on the Internet has undertaken an "inventory" of mining activities throughout the province.

EEO also noted that some vast mining deposits were starting to transfer their activities abroad; for small and medium-sized pools, however, the cost of overseas transition has been described as "too difficult to bear", as confirmed by a small owner of a mining pool.

On January 11, ViaBTC, reported at the time the fourth largest Bitcoin mining group in the world, issued a statement that would increase its maintenance fee for cloud mining:

"Due to recent policy changes, some of our long-term hosting partners are facing a closing downturn because mineral resources in mainland China have become scarcer, causing costs of our cloud mining operations to increase."

In parallel, "three independent sources" revealed that local authorities had frozen assets totaling over 600 million yuan in bank accounts that had been found to invest in mining crypt companies in the provinces of Hunan, Heilongjiang, Hebei and Guangdong.

January-July 2018: escalation of the prohibition of cryptography to include "exchange type" services

January-July 2018: escalation of the prohibition of cryptography to include services

As it doubled its efforts to eliminate the economy from perceived risks, Beijing seemed likely to intensify its ban on the encryption of trade to include "market-making" platforms, whose definition was not – in the beginning – clearly outlined . Already in the previous September, reports had already indicated that the government would try to do so extend its ban beyond internal trade and repress the access of mainland China to foreign exchange sites.

On January 15, Bloomberg quoted undisclosed sources according to which the authorities effectively tried to "block domestic access to national and offshore platforms that enabled centralized trade", without exactly defining "how policymakers [would] define such platforms. "

Despite the September internal trade closures, January analyzes continued to include Bitcoin trading as a capital outflow factor from China: a Jan. 6 article suggested that government capital control measures – which included the submission of yuan conversions at a quota – only additional incentive cryptocurrencies. Shanghai Qiu Difan economist noted that:

"Under [China’s] the regulations on cross-border flows, the use of Bitcoins to obtain foreign currency and take capital from 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 Gatecoin, the over-the-counter (OTC) trading desk based in Hong Kong, believes that "poor stock performance, a potential real estate bubble, the weakness of the yuan and the control of capital are driving the Chinese question of Bitcoin. "

With an imminent crypto-crypto, the BTCC CEO Bobby Lee announced that the government's intention to reduce trade by interrupting the encryption exchanges would have been a Pirro victory: "they can not crack on Bitcoin itself", He said. In response to the restrictions, "the desire will only go underground, and when the desire goes underground, it will be out of control".

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

"I can do over-the-counter operations or go offshore … my wallet is my wallet, I never registered my ID."

At that time, over 15 exchanges of domestic cryptocurrencies had been closed.

On January 17, the PBoC issued an internal circular to financial institutions, tightening the noose on any remaining provision of banking or financing services for activities related to encryption:

"Every bank and branch must carry out self-inspection and correction, starting today[s] for cryptocurrency trading [are] strictly prohibited. Effective measures should be taken to prevent the use of payment channels for cryptocurrency regulation. "

The central bank added that "banks should improve the daily monitoring of transactions and the timely closure of payment channels as soon as they discover suspicious exchanges of cryptocurrencies". A deadline for the notification of the implementation of these measures was set for 20 January.

On January 26th, the National Internet Finance Association of semi-official China issued a risk warning to investors emphasizing that "offshore encryption platforms pose the same hidden dangers as systemic risks, market manipulation and money laundering" .

By February 5, the Financial News – an official publication affiliated with PBoC – stated that:

"To prevent financial risks, China will step up measures to remove all onshore or offshore platforms related to trade in virtual currencies or ICOs."

The article acknowledged the limitations of the effectiveness of the national prohibition of cryptography of 2017, stating that:

"ICOs and virtual currencies trading have not completely withdrawn from China after the official ban after the closing of trading of virtual national currencies, many people [have] aimed at foreign platforms to continue participating in virtual currency transactions. Overseas transactions and regulatory evasion have taken over the risks that are still there, fueled by illegal issuance, and even by fraud and pyramid schemes ".

An interview with the PBoC confirmed that the central bank was ready to strengthen its restrictions on internal access to overseas platforms.

Donald Zhao, a Bitcoin merchant who had left Beijing's regulatory climate for Tokyo following the September ban, commented:

"I think the new move literally means that it would be even more difficult to circumvent the ban in China. People who promote related business programs can be arrested."

He added that the use of VPNs (virtual private networks) to exchange cryptocurrencies on previously domestic cryptographic exchanges that had been transferred offshore was at that time "common" among Chinese traders. This, despite the fact that Beijing had ordered the three Chinese telecommunications companies to completely block citizens' access to the VPNs by February 2018.

China's infamous Great Firewall – the web surveillance and content control system designed to prevent residents from accessing restricted sites – has remained porous, despite the MIIT campaign to "clean up" internet access services, making it illegal the use of a VPN service without government approval.

The online sweep in Beijing was immediately palpable; when "Bitcoin", "virtual currency" and "ICO" were entered into the Baidu Chinese search engine and the Weibo social media platform, no obvious paid sponsored content appeared alongside the expected results.

On March 6, it was reported that the Chinese government has closed multiple encryption accounts with encrypted exchange, including that of OKEx.

On 9 March, the governor of PBoC Zhou Xiaochuan once again transmitted the official position towards the crypt, frankly declaring that:

"At the moment we do not 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 the digital currency was a "technological inevitability" and ultimately diminished the circulation of money, the central bank was not rushing to issue a national digital currency. He stressed that the PBoC continued to mobilize its efforts to "prevent substantial and irreparable damage" to the domestic economy.

Then, on March 19, the "unexpected" appointment of a new governor of PBoC, Yi Gang – a figure who was reported to have made positive comments on Bitcoin – has led some to speculate that the central bank could be ready to soften its position towards decentralized cryptocurrencies.

In 2013, Yi had admitted that while Bitcoin could not be legally recognized by the central bank, "ordinary people [had] the freedom to participate. "He believed that the currency was" innovative and stimulating ", foreseeing that it would remain the object of long-term public attention.

Yi – just like President Xi Jinping – was both pro-market and market-driven reform, constantly emphasizing the importance of market liberalization and invited economists who could support his long-term plan to increase flexibility of the Chinese market. Within a few weeks, the new governor had made the unprecedented move to officially open the doors of the Chinese payments market for $ 27 trillion to foreign companies.

In the wake of Yi's appointment, Cointelegraph reported on a piece of opinion dating back to September 17, which had claimed that the president's restrictions on cryptocurrencies had been little more than a political move to appease the Communist Party members prior to the 17 October. Blogger Jon Creasy had proposed:

"My prediction is this: as soon as President Xi Jinping is re-elected – and it will be – conservative regulations will be introduced, free (and), and the Bitcoin exchanges will be reinstated:

But for now, Mr. Xi must appeal to the people who hold him in power: the Communist Party. In my opinion, prohibiting the trade of Bitcoin is nothing short of a temporary change of luck ".

At the beginning of May, once again the Chinese media focused on the "overseas" of its titans of domestic cryptocurrencies. The "Voice of China" of National Radio (CNR) reported that investors claimed that OKEx continued to "illegally" work in China with domestic customers.

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

The report also found that OKEx's p2p platform allowed consumers to purchase crypto using their Alipay or Wechat accounts, flaunting the prohibition of making transactions between crypt and fiat.

First independent Chinese monthly analysis of cryptography and blockchain projects

Yet, a week later, on May 11, the government announced with surprise that it would start publishing a monthly "independent analysis" of the cryptocurrency and blockchain projects, supervised by a MIIT department, the development of Chinese information industry (CCID). The government has given impetus to the project as what it considers a "completely independent evaluation / evaluation system" for digital resources, stating that:

"The project demonstrates the confidence of the Chinese government in technology and will act as a guide for governments, businesses and research institutes".

The classifications, dubbed the "Global Public Chain Assessment Index", were intended to cover 28 cryptocurrencies, including Bitcoin, Ethereum, Litecoin, Monero, NEO, QTUM, Ripple and Zcash, just to name a few.

When it was published, the first iteration of the new index was crowned Ethereum in the first place, followed by Steem, Lisk, NEO and Komodo. Bitcoin was placed 13th. Based on three parameters – "technology", "application" and "innovation" – Bitcoin had been found lacking in the first two, although it was able to circumvent – perhaps not surprisingly – all other cryptocurrencies on the innovation front.

The same month, on May 18, the government launched an educational initiative, publishing the results of a study conducted by MIIT that claimed to have identified 421 "fake" cryptocurrency. MIIT has set up a national committee of experts on Internet financial security (ICFERT) to identify the key features of fraudulent digital currency profiles. They found three:

First, rely on a "pyramid scheme" model, in which investors are first forced to make a payment, and then promise returns based on the fact that they enroll others in the scheme.

Secondly, the absence of open source code for the false digital heritage, which allows its creators to deceive investors into an illusion of vertiginous growth by artificially dividing tokens to create an impression of prizes proliferating. The scammers claim that the more tokens are generated, the more wealth increases, "only increasing without falling".

Thirdly, since counterfeit coins can not be traded on legitimate encryption exchanges, they are mostly traded via OTC agreements, or even on fake transitional platforms. Without transparency, scammer authors can manipulate price spikes, while avoiding that investors withdraw funds to benefit from such "peaks".

At the beginning of July, the PBoC published a report stating that the yuan now represented less than 1% of Bitcoin's global transactions, extolling the enormous impact of policy restrictions.

He went on to celebrate the fact that the country's policies have secured a "risk-free" exit for the 88 cryptocurrency exchanges and 85 ICO trading platforms closed since the end of 2017.

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

"This indicates that the policy has been very successful, it is in the expectations that the yuan's share in global Bitcoin transactions will decline after China announced the ban."

August-October 2018: new anti-cryptic measures, both online and offline

August-October 2018: new anti-cryptic measures, both online and offline

Despite the PBoC apparently praised the success of its measures, this summer saw intense attempts to fatally hit Chinese cryptocurrency traders.

On 7 August, the Chinese cyberspace administration issued new rules that established that content providers within chat apps had to respect "national interests" and "public orders".

The impact on the cryptic space was almost immediately felt. By August 21st, Tencent's WeChat – which had over 1 billion users – said it had blocked a number of crypto and blockchain accounts.

The 10 best most popular social networks in the world

A WeChat official made it clear that some public accounts were suspected of publishing ICO and crypto trading "hype", in violation of the clauses "Provisional Services on the development of public information services for instant messaging tools" of the service – as had just been outlined in Cyberspace New rules of administration.

Deepchain, Huobi News, Jingse Caijing sponsored by Node Capital and CoinDaily were among the stakeholders. At the time, SCMP reported that Jingse had had 350,000 "unique visitors per day" before the ban and claimed that "an important source of revenue" for the channel consisted of content paid for by blockchain-related projects. Reportedly, by publishing more than 200 articles a day, a sponsored article cost 12 Ethereums, worth $ 3,500 at the time.

In a statement obtained by SCMP, the Huobi team provided a more indeterminate reason for the blocking of its WeChat account, attributing it to "extensive action by the industrial media".

The SCMP also indicated an article by the People & # 39; s Daily of March 2018, the "spokesperson" of the Communist Party, which had put a strain on the accusations against the blockchain news:

"These" media "have made a huge fortune in the speculative wave of cryptocurrencies, but because of their nature, it is doubtful how long their barbaric growth can continue."

Just a day later, on August 22, local reports emerged that all the business premises had been banned from hosting events related to encryption in the Chaoyang district of Beijing.

The new tender has banned all public spaces in the district – including shopping centers, hotels and offices – from offering any form of encrypted promotions. Among the reasons given for justifying the measures, the warning cited the "protection of public property rights", "the prevention of money laundering" and support for the "security and stability of the financial system". report any violation of its terms.

On the same day, the Fintech Chinese Risk Rectification Office identified 124 cryptographic platforms with IP addresses abroad and intended to block access to their services.

New measures have also been reported to strengthen the "remediation" of third-party cryptographic payment channels, including those used by OTC platforms and other "loopholes" through which investors could still gain access to international product organizations. and to the crypt. The officials of the Chinese Office for the special remediation of Internet financial risks would be set up to meet with third-party payment institutions and order them to cease any encrypted relationship.

On August 24, a new risk warning was issued by five Chinese government regulatory authorities: CRBC, PBoC, Ministry of Public Security, Central Information Office on the Network and General Administration of Market Surveillance. The warning warned about "lawless entities" attempting to accumulate funds "using the banner of" financial innovation "and" blockchain "and distributing the so-called" virtual currency "," virtual assets "and "digital assets". "

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

"[Such schemes are] rely on […] Internet chat tools for trading, use online payment tools to raise funds, rent servers overseas, but do business for domestic residents […] the funds for these illegal activities are mostly abroad, and supervision and monitoring are very difficult ".

The warning stated that the authorities would increase the measures against "illegal" ICOs.

On the same day, the Chinese mobile payment app Alipay, managed by the Alibaba affiliate, Ant Financial, has taken measures to limit and even permanently block any accounts discovered using its network to make transactions with Bitcoin OTC.

According to a Beijing News report, Alibaba was creating an inspection system to identify "websites and key accounts". Sources of Ant Financial told the news agency that the company would lead a "Risk prevention" program intended to educate users about dangers of crypto-related false "propaganda".

On August 27th, the Chinese "Baidu" closed at least two popular chat forums related to cryptography, with a warning informing users that the move was "in compliance with relevant laws, regulations and policies".

Two days later, the ban on hosting cryptographic commercial events was extended to the Guangzhou Development District, a special economic zone in southern China, near Hong Kong.

After a hectic August, however, SCMP published a new report describing the resilience with which crypto dealers continued to evade government restrictions.

Published September 8, the article reflected that it seemed "virtually impossible to ever impose a complete stop to trade".

According to the SCMP, in the days following the strengthened measures at the end of August, the combined trade volume on seven popular trades among Chinese traders had actually decreased by around 33%. However, several industry figures have pointed out that as long as a platform has remained nominally offshore and has supported p2p transactions, regulators should face an almost intractable challenge to completely eliminate such operations.

Terence Tsang, COO of TideBit, told SCMP that:

"The last warning and the potential increase in the monitoring of foreign platforms are aimed at a series of small exchanges that claimed to be foreign entities, but actually operate in China, claiming to have outsourced their operations to a Chinese company […] Those exchanges whose website landing pages are in Chinese have attracted special attention from regulators. "

The report further outlined how traders began to exploit Tether (USDT) as a means to enter and exit cryptocurrency markets. In combination with a VPN, two operators could then use an "overseas" platform as an intermediary to exchange crypto with fiat and vice versa.

"Two individuals who have both completed a" know-your-customer "procedure with an exchange exchange" fiat "currencies […] in Tether, "said SCMP, explaining how:

"The exchange plays the role of superintendent of these trades, and is ready to judge in case of failed trades, or transactions that are not honored […] the money will usually be transferred via bank accounts or online payment networks of third parties, between these two individuals. Once received Tether, the trader can start to exchange crypto-to-crypto in any exchange, with the execution via VPN. "

The report quoted a source "close to" one of these exchanges saying that "while the Chinese regulators definitely have the technical ability to turn off the VPN […] tradizionalmente richiede numerose conversazioni con diverse parti interessate per raggiungere un consenso sulla configurazione di un firewall, che allunga il processo. "

Anche se erano presenti restrizioni sull'operatività dei servizi VPN, non c'erano "restrizioni attuali o addirittura prevedibili" sul loro uso privato, secondo quanto riferito alla fonte.

Due giorni dopo, WeChat ha bloccato il canale di vendita ufficiale del gigante minerario Bitcoin (BTC) Bitmain – senza apparentemente chiudere i suoi servizi post-vendita o il suo account ufficiale. Ancora una volta, la piattaforma media ha emesso un avviso di violazione delle regole, affermando che:

"Seguendo i reclami degli utenti, [WeChat] ha esaminato e scoperto che questo account – senza aver acquisito credenziali o licenze autorizzate – ha pubblicato e distribuito informazioni sulle attività rilevanti a cui è coinvolto. "

Le fonti di Cointelegraph in Cina consideravano allora che i conti gestiti dall'azienda erano apparentemente più mirati di quelli gestiti da individui, come suggerito dalla gestione della piattaforma dell'account "Crypto Mad Man", che operava con l'ID WeChat "shuzihuobiqushikuangren".

Il conto ufficiale del canale – un canale di previsione dei prezzi criptato gestito da un individuo – è rimasto in diretta, mentre il suo sotto-conto – gestito da un'azienda, e includendo la promozione occasionale di nuovi banchi di prova – era stato vietato.

Il 18 settembre, il quartier generale di Shanghai della PBoC ha ancora "ricordato" agli investitori i rischi associati agli ICO e al criptaggio, censurando il modello di finanziamento "non autorizzato" e "illegale" per porre "una grave interruzione" all'economia, alla finanza e ordine sociale ".

La banca ha nuovamente lodato il successo del pestilismo da parte delle autorità nell'industria della cripto, in particolare le recenti misure "puntuali" e "mirate" intraprese dal Gruppo leader nazionale per la bonifica dei rischi finanziari su Internet:

"[China’s] La quota globale delle transazioni nazionali in valuta virtuale è diminuita dal 90% iniziale a meno del 5%, in modo efficace [preventing] la bolla valutaria virtuale causata dall'aumento vertiginoso dei prezzi delle valute virtuali nella seconda metà dell'anno scorso [from affecting] Il mercato finanziario cinese. L'impatto è stato ampiamente riconosciuto dalla comunità ".

PBoC ha inoltre affermato che "i canali di pagamento di terze parti rilevanti sono stati controllati", con conseguente chiusura di "circa 3.000 account impegnati in transazioni in valuta virtuale".

Quota mensile del volume di trading Bitcoin eseguito in Yuan cinese

Mentre la banca centrale continuava a ostentare statistiche apparentemente attinenti al successo delle sue politiche, la rivista tecnologica cinese Technode diffondeva un'analisi accademica della prevalenza delle criptovalute in un certo strato sociale del Medio Regno: il 26 settembre pubblicò il "2018 White". Libro sulla nuova classe media ", preparato dallo scrittore finanziario cinese e professore dell'Università di Shanghai Zhejiang, 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 are always more people who can join the game and be lured, this fraudulent game can repeat itself over and over again.”

Cutting the Leek

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.

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