China made its stance on cryptocurrencies clear with a crackdown that began in late 2017. Chinese authorities then and now view decentralized digital currencies as more harmful than beneficial. In Beijing’s view, cryptocurrencies empower non-state actors in the financial system in a way that it believes exacerbates systemic financial risks.
This risk stems from cryptocurrencies’ ability to hide capital outflows — something Chinese regulators want to curb, not encourage — and their involvement in money laundering.
However, the crypto bros never miss an opportunity to try to pump up a particular product or jurisdiction when they deem it to be in their financial interest. For this reason, rumors are filled with talk of China preparing to ease restrictions on digital assets even though there is absolutely no evidence to suggest that Beijing is changing its cryptocurrency policies.
Fueling the rumor mill
Over the weekend of January 6-7, the Shanghai Municipal Tax Department published an article online outlining, among other things, the fees charged for digital currency transactions in China. It was not specifically intended for digital assets. The title of the article, since it was removed from the Internet by censors for attracting too much unwanted attention, is “Common Misunderstandings Regarding Personal Income Taxation on Business Income and Classified Income.”
Before the article was deleted, it sparked rumors that Beijing was preparing to ease its cryptocurrency ban — although it is not an official policy document and does not indicate any potential change in the country’s cryptocurrency policy. The reference to which digital assets refer is in the form of virtual tokens used in video games. Individuals who obtain virtual currencies from other players through online transactions and generate revenue by selling them at a higher price must pay income tax on these profits, according to Beijing-based lawyer Guo Zhihao.
While China has denied the legal tender status of cryptocurrencies, it has not – at least not yet – banned their attribution as property or commodity, according to Jin Jianzhi of Shanghai Mancon law firm. Jin said that under Chinese law, the government can impose taxes on relevant transactions.
Separating Web3 and encryption
Another common misconception regarding China’s cryptocurrency policies is based on the assumption that because Beijing has a lasting interest in Web3, it will therefore relax its restrictions on decentralized cryptocurrencies. While cryptocurrencies already form the building blocks of Web3 in most parts of the world, this is not the case in China.
On the contrary, China aims to develop a Web3 ecosystem with Chinese characteristics for applications in industries such as energy, legal, and trade finance. In late December, China’s Ministry of Science and Technology said it planned to issue a Web 3 strategy document focusing on issues of inheritance, innovation, security and government obligations, adding that it would “strengthen interaction between relevant departments to encourage Web 3 innovation, disseminate more research and foster talents in the field.” Industry.”
Meanwhile, China is preparing to trial a national blockchain-based real name verification system known as the Real Name Decentralized Identifier (RealDID) system. The project allows users to store public encryption keys in a RealDID document published on the blockchain after real name verification by the police’s trusted cyber identity system. RealDID is said to aim to enhance privacy by allowing internet users to log in to online platforms without using their personal information such as phone numbers.
One country, two systems
Another reason some observers expect crypto liberalization in China is that Hong Kong is making fast-tracked efforts to become a digital asset hub. They believe the mainland will be next. One of the biggest proponents of this line of thinking is Tron founder Justin Sun, who tends to make far-fetched connections. For example, following the US Securities and Exchange Commission (SEC) approval of BitcoinBTC ETFs this week, Tron wrote on X “The approval of the Bitcoin ETF in the United States shows that the trend of cryptocurrencies is unstoppable. In the near future, the Asian and Chinese markets will also seize this opportunity, and Bitcoin will finally reach the world’s population of eight billion people.”
While we cannot rule out some form of future crypto liberalization in mainland China, it remains unlikely in the near to medium term as Beijing sees very little upside in decentralized cryptocurrencies. China has achieved an impressive level of financial inclusion in a short period of time using government-approved digital financial technology. The emergence of the digital renminbi represents another step by the Chinese state to assert its control over a rapidly digital financial and monetary system. Given the Chinese government’s heavy investment in the digital yuan, it is unlikely to welcome decentralized competitors.
Finally, under the one country, two systems model, Hong Kong’s financial system is completely different from the mainland’s financial system. It is more compatible with the broader global financial system. The mainland and Hong Kong financial systems are not expected to converge anytime soon, and it is already questionable whether doing so would best serve the interests of key stakeholders.
Hong Kong could therefore be free to develop itself as a cryptocurrency hub just as it has done for banking, alternative investments and capital markets even if digital assets remain effectively banned on the mainland.
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