How Chinese traders and miners get around China’s crypto ban

Chinese investors are finding new ways to tap into the digital assets market and participate in one of the year's most lucrative trends despite Beijing's ban on cryptocurrency trading.

Crypto has been in the public eye several times, including a 2013 ban on banks, 2017 initial coin offerings and exchanges, and a ban on trading and mining in 2021.

Despite this, finding cryptocurrencies in the mainland is not that difficult, anonymous investor Lowell told the magazine.

Lowell is a recent university graduate who describes herself as a full-time cryptocurrency trader. She had the option of pursuing a career in the field she studied, but she says that a “normal” job could not match the profits she was making in crypto.

China's cryptocurrency bans are not always transparent or effective. Although crypto trading and trading are prohibited, there are ways for investors to participate in the global market.

Local traders say they buy and sell their cryptocurrencies to other investors through peer-to-peer trading on centralized exchanges like OKX and Binance. Even if the Great Firewall of China blocks access, savvy users with a VPN can still access the websites and apps they want.

Investors are also looking for profitable opportunities in borderless DeFi, such as using bots or recruiting students into airdrops that have become a quasi-industry for some.

Crypto is not completely illegal in China.

Robin Hui Huang, a law professor at the Chinese University of Hong Kong, told the magazine that this is because the crypto tokens themselves are not illegal in China. Swapping them also falls into a gray area.

“People can hold cryptos in China. They can also exchange cryptos for other assets, but such exchanges are not protected by law, meaning if the other party violates the contract, there is no legal protection.”

The law does not protect these transactions but does not prohibit them. Therefore, private individuals can exchange cryptocurrencies for other assets if they mutually agree to do so and meet their commitments, Huang added.

Outside the mainland, rumors are swirling, with key opinion leaders in the cryptocurrency community including Galaxy Digital billionaire founder Mike Novogratz suggesting Beijing may be considering reversing the crypto ban.

However, experts told the magazine that the likelihood of this rumor being true is very low.

They point to recent developments regarding China's central bank's digital currency, the digital yuan, which was highlighted during the Third Plenary Session of the Central Committee of the Communist Party of China led by President Xi Jinping.

China's mining ban has failed to stop mining

Although China's ban on Bitcoin mining in 2021 has been widely reported by all major media outlets, it has failed to prevent mining in the country.

According to Bitcoin ESG researcher Daniel Batten, this is because the ban was misreported as being more severe than it actually was. A closer analysis of the ban's wording suggests that the law only contains a “statement of intent” that prohibits the establishment of new mines and that mining should be phased out due to electricity use, climate targets and money laundering.

Exact figures aren't that easy to come by, and many seem out of date, but most estimates show that China still accounts for at least one-fifth of the world's hashrate.

According to figures from Cambridge University of Alternative Finance and World Population Assessment, China accounts for about 21.1% of the total, CryptoQuant founder Ki Yang Ju released a chart in July showing that China's mining pools account for 54% of global hashrate. . Not all of the miners in the pool are in China, the minister said, but some mines may still be operating clandestinely in China, where officials are withholding information.

VPNs and business apps make crypto available in China

Crypto users in China are aware of transaction restrictions, finding creative ways around them without attracting the attention of the authorities.

“Most crypto traders in China don't talk about these things because we know China is like that,” Lowell says.

Today, P2P trading channels are available through social media or crypto exchanges. Users exchange Chinese yuan with bank transfers, WeChat Pay or Alipay — two of the country's top payment methods.

OKX and Binance are the two most popular in Lowell's network, although she personally prefers the former. As shown in the picture below, Binance offers P2P sales of yuan in the Chinese region. The two exchanges did not respond to the Journal's request for comment.

“I can get these two apps. I use an iPhone and I can download these two apps at the Hong Kong store or other local stores,” Lowell said, adding that the apps are not available on Apple's main app store.

Access to apps in China is governed by a more restrictive internet environment than that experienced by users outside the country. Known as the “Great Firewall,” this system blocks popular domains like Google and Facebook from connecting to many others.Magazine asked a source to check the accessibility of cryptocurrency exchanges in mainland China. The test confirmed that users cannot access Binance and OKX websites without using a VPN. The mobile apps of these exchanges are accessible without a VPN.

Some projects like MakerDAO ban users Accessing the protocol via VPN, but this is mainly for fear of being prosecuted by US regulators rather than the Chinese.

Wayne Zhao, formerly CEO of Beijing-based analytics firm Token Insight, has moved to Singapore to launch its DeFi project, BitU. He says using a VPN is second nature to mainstream internet users.

“If you want to visit Google or YouTube, a VPN is common sense for people,” Zhao says. The same is true of DeFi platforms.

For platforms, providing users with P2P access is a “grey area,” with regulators putting overseas exchanges and their executives at risk, Hong Kong Web3 Association co-chairman Joshua Chu told the magazine.

“This can lead to a lot of legal costs, especially after entering China, even if they don't lead to prosecution,” Chu said, citing the recent arrest of a Binance executive in Nigeria as an example.

Airdrop farming in China

Chinese crypto businesses are limited to P2P options, but that's not the only way to hold tokens.

Lowell has received a good amount of profits from airdrops, including $50,000 from Etena's ESA campaign and $40,000 from Starknet.

According to at least three local sources, airdrop farming has grown into an industry in China.

Bitcoin mining was once accessible to private individuals using laptops in their bedrooms, but has finally grown into a profitable enterprise with businesses investing in professional equipment and replenishing warehouses.Airdrop farmers are investing in advanced technology and equipment to maximize their profitability.

Zhao attributes the rise of airdrops to an era of monetization during the pandemic, popularized by StepN, a Solana-based project that rewards users with GST tokens for moving.

“When people start to realize that you can make money with your mobile phone, it's natural to think that you can do it with hundreds of mobile phones at the same time,” Zhao told the magazine.

Airdrop farmers automate transactions with bots on incoming and outgoing protocols that are believed to be planning future airdrops, or even manually recorded by multiple devices.

Protocols know that users deploy bots to conduct transactions to increase their airdrops and take steps to limit them.

But airdrop farmers are taking creative ways to get around the hurdles. Some Chinese climate farmers employ students to conduct transactions to replicate organic on-chain behavior.

“My friend made more money in airdrops than I did because he hired some college students to do marketing for them,” says Lowell.

“I had about 30 or 40 accounts, but they have about 200 accounts,” she says.

Crypto traders and businesses still exist, but there is always risk.

Any crypto business in China always carries the risk of sudden shutdown notices.

“It happened to a very good friend of mine before,” says Zhao.

“Now they get a notice saying, ‘Sorry guys, you can't do this. You have to shut up' and that was that. They shut it down after a few days.”

P2P merchants are at risk because there is no trusted intermediary.

They are buying cryptocurrencies directly from strangers, often without knowing the origin of the assets. This creates the risk of unknowingly engaging in money laundering or being found guilty of colluding with other illegal activities.

Because of such risks, Lowell said that option is limited, but she prefers to meet with personal acquaintances.

“When I sell to my friends, I know they're not doing something illegal and I'm not going to get arrested,” she says.

“So I'm willing to sell my USDT to people I know, but they may not always have that much money, so I have to use an exchange.”

CBDC plans have paid off with rumors of a crypto ban reversal.

Winston Ma, an assistant professor of law at New York University, told the magazine that it is impossible to reverse the crypto ban because Beijing wants to go all-in on the CBDC.

In July, Beijing held the Third Plenary Session, a meeting of the Communist Party's top officials. The meeting decided to promote the RMB globally with a particular focus on the digital yuan, state-backed media Xinhua News Agency reported.

China considers CBDC as the only legal digital tender, making it illegal to use all other digital currencies, including Bitcoin, as payment.

“You can expect the central bank to move at full speed now because it comes from the Central Committee. You can't get more empowered than that,” she says.

Ma's renewed push for China's CBCC to reverse the crypto ban points in the “complete opposite” direction.

“You can expect the central bank to move at full speed now because it comes from the Central Committee. You can't get more empowered than that,” she says.

Ma's renewed push for China's CBCC to reverse the crypto ban points in the “complete opposite” direction.

Local merchants have everything you need

While Zhao of BitU continues to trade, he believes that the demand for crypto in China is low, and indicates the trading performance of Hong Kong's newly launched crypto exchange-traded funds (ETFs).

Chinese nationals are prohibited from entering the ETF unless they obtain a temporary or permanent residence permit.

We all saw what happened to the Hong Kong ETF. The transaction volume is painful,” Zhao says.

“The reason is that most people who are willing to buy Bitcoin or other cryptocurrencies in mainland China or Hong Kong have already done so.”

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John Yun

Yohan Yun is a multimedia journalist who has been reporting on blockchain since 2017. He has contributed as an editor to crypto media outlet Forkast and covered Asian technology stories as an assistant reporter for Bloomberg BNA and Forbes. He spends his free time cooking and experimenting with new recipes.