A number of countries, but most notably China, have banned cryptocurrencies. But what does this mean in practice and will it work:
There is no legal protection or recourse for holders of crypto assets.
Companies cannot recognize crypto assets in their balance sheets (at least in their Chinese accounts – the ban may not cover overseas subsidiaries).
Authorized banks and payment platforms are not allowed to process transactions.
Chinese citizens are not allowed to have an account with international crypto exchanges and the exchanges themselves are subject to fines where this regulation is breached.
From what has appeared in the media to date, the ban on crypto in China is a regulatory ban by the Central Bank but does this mean cryptocurrency itself is illegal? Regulators don’t make laws as such. There is some confusion as to whether individuals are still allowed to own cryptocurrencies.
The crypto ban in China is motivated by a number of factors, prominent among them that it facilitates money laundering by criminal organizations and political bribes and corruption, and these issues are also relevant in the rest of the world. However, the fact that the ban came from the Chinese Central Bank indicates that they may be concerned about Chinese citizens using crypto to take money out of the country (and beyond the eyes of the tax authorities). China enforces an annual limit of $50,000 in foreign currency per individual.
The nature of a crypto is that the hashkey can’t be broken even by a Government. Thus, an individual can have assets in a crypto wallet that are beyond the reach of the State. The ownership of the assets is determined by the having access to the hashkey so there is no need for legal proof of ownership. He who controls the hashkey controls the account.
The Chinese government could decree, for example, that it is illegal for its citizens to own overseas securities, e.g., Australian Government bonds. But these bonds have a value determined by the market price in their country of domicile and if the ownership of the bonds is not disputed by the issuing country, then they still have a value to their Chinese owners even if held illegally. In theory, in this case the Chinese could exert diplomatic pressure on the issuing country to disclose its’ citizens holdings although there are ways around this using proxies but the main issue is that the Chinese citizen is getting further away from solid legal ownership the more he/she has to obfuscate.
For crypto this issue does not arise as ownership is determined by controlling access to the hashkey and if the asset has determined value around the world then that is its value in China also. China will not be able to prevent its citizens from installing crypto wallets such as Metamask and Trust and there are a number of offshore crypto exchanges which don’t require KYC (Know Your Customer ID) so citizens will still be able to buy crypto tokens and store them in their smartphone wallets. They won’t be able to pay directly from their bank account as that would alert the authorities but they can use peer to peer networks to make the purchase.
Another issue is that the blockchain technology itself facilitates a much more efficient payments sector with low commissions and instant settlement and it is unlikely governments will want to restrict innovation in this area. This could apply to China’s new CBDC (Central Bank Digital Currency) too.
Then there is the whole DeFi space (decentralized finance) – eventually this will be regulated all over the world but its still in its embryonic high growth phase at the moment.
China’s ban on betting
In China gambling is illegal except for two state institutions where it is very restrictive. Citizens can cross over to Macao and Hong Kong and make in person over the counter bets but they are not allowed to make remote bets over the internet. In China betting on European football is very popular – so how does this work?
A group in a specific town could form a betting pool.
The price of a bet could be sent by X to an intermediary Y in, say, Singapore. X deposits money in Y’s account in Singapore. Y sends X a voucher code by SMS. X logs into the betting website using a VPN (a Virtual Private Network that disguises X’s IP address) and enters the voucher code.
The second example shows that, unless there are very regulations about sending money abroad, the betting ban can’t, in practice, be enforced. There are estimates that some Y1trn ($150bn) leaves China by this route every year but since not all of this will be on losing bets it means that Chinese citizens are accumulating substantial overseas assets.
Since this works for betting it could also work for crypto. Crypto wallets can be linked to betting exchanges to reduce custodial costs and delays and offer instant settlement – they are also anonymous.
A crucial test case for the Chinese attitude to crypto will be the upcoming roll out of KYC (Know Your Customer ID) for the consumer orientated Pi Coin Network. The Pi Coin is a project to create a blockchain network that is user friendly to ordinary members of the public. If China let KYC proceed without interfering then it signals that they will tolerate citizens owning crypto and will presumably allow it to be used in payments.
Vietnam is another country where crypto payments are illegal but it is also one of the countries with the world’s highest crypto participation by the population.
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