The Paradox of Blockchain and Cryptocurrency in China
China’s relationship with blockchain technology and cryptocurrency is complex. While Beijing has firmly opposed the trading of cryptocurrencies, it has simultaneously embraced the potential of blockchain. This contradiction raises questions about the future of digital assets within the country.
Hong Kong: The New Gateway for Crypto Trading
With Hong Kong stepping up to offer regulated cryptocurrency markets, insiders believe a significant loophole for trading could be emerging. This development presents an intriguing question: If China permits investors to purchase U.S. stocks through the Qualified Domestic Institutional Investor (QDII) program, why not extend similar access to Bitcoin?
Understanding Capital Control Systems
In China, there are distinct systems in place for mainland investors to trade stocks beyond their borders. The QDII program allows select investors to buy U.S. Exchange-Traded Funds (ETFs) using Renminbi (RMB). Additionally, the Shanghai-Hong Kong Connect and Shenzhen-Hong Kong Connect enable Chinese investors to trade Hong Kong stocks via mainland securities firms, with all transactions settled in RMB.
Yifan He, CEO of Red Date Technology, highlighted that the critical aspect of these systems is that capital does not flow freely out of China. “If you apply this logic to cryptocurrency, there’s no reason it couldn’t function similarly,” He stated at Consensus Hong Kong.
The Challenge of Regulatory Hurdles
The primary challenge is not the cryptocurrency itself, but rather the stringent capital controls designed to prevent excessive currency fluctuations and capital flight. These regulations aim to maintain the stability of the RMB’s value. They also explain why Hong Kong’s crypto ETFs, which feature in-kind redemptions, have not been permitted on the mainland.
He posed an important question: “What’s the difference between a Hong Kong-regulated stock and a Hong Kong-regulated crypto asset?” He emphasized that as long as there is a system allowing for transactions in RMB without the movement of funds outside of China, crypto could be treated as just another regulated investment product.
The Intermediary Model for Crypto Investments
Under this proposed system, Chinese investors would not have the ability to self-custody their cryptocurrency. Instead, purchases would be managed by an intermediary, such as a licensed securities firm. “They buy crypto directly, but it’s not like they’re holding it themselves,” He explained. “The security company in the middle actually holds it for you.”
This model is consistent with how China approaches stock and ETF investments. Just like mainland investors can trade U.S. ETFs through QDII without direct custody of the assets, they could potentially gain exposure to cryptocurrencies without owning the underlying assets, ensuring no money crosses borders.
A Compromise for Economic Growth
For a nation with approximately 200 million retail investors and an economy in need of stimulus, regulated access to cryptocurrency through Hong Kong’s framework could provide Beijing with a strategic compromise that balances innovation and control.
Blockchain Versus Cryptocurrency: A Cultural Divide
China has consistently championed blockchain technology while maintaining a cautious stance toward cryptocurrencies. “We don’t allow guns in China, but we can still make steel,” He offered as an analogy. The technology itself is not restricted, enabling the development of various applications. However, once an application triggers regulatory concerns, the situation changes.
Based on his discussions with financial regulators, He suggests that attitudes may be shifting. “I see some signals from financial regulators,” he remarked. “They’re beginning to talk about Bitcoin, indicating a need for more attention and research on digital assets.”
The Future of Bitcoin in China: A Growing Possibility
Could this shift lead to wider acceptance of Bitcoin? Two years ago, He would have deemed it impossible. “Now, I’d say there’s more than a 50% chance within three years,” he concluded, offering a glimmer of optimism for the future of cryptocurrency in China.
With the evolving landscape, traders and investors alike will be watching closely to see how these developments unfold.
