A look at China's wild month in crypto after President Xi praised blockchain

China is looking to lead the pack on blockchain development, but that doesn't mean it will loosen its grip over the market for cryptocurrencies. 

Last month, Chinese President Xi Jinping declared he wants China to lead the world in blockchain development. Crypto markets showed clear excitement, bitcoin's price jumped 12 percent the day after Xi’s remarks. Still, the government's enthusiasm for blockchain has not translated into a lax regulatory approach to firms working on projects tied to cryptocurrencies like bitcoin. 

In many instances, including developing blockchain technology, the Chinese government functions like a well-oiled, centralized machine: The initial public guidance by the state follows a series of well-planned government actions that spread from the state to local governments and are slipped into public discourse through state-owned media. 

Here is a summary of what the Chinese government and media have done over the turbulent month after Xi made his unprecedented remarks. 

The rally

Shortly after Xi advocated for blockchain on Oct. 25, the city of Gangzhou announced a plan to subsidize up to $1.4 million annually for a so-called token-less blockchain project. The city government also said it intends to establish a fund amounting to 1 billion yuan for investment in blockchain projects. 

On Oct. 28, China’s state-owned news site People.com.cn followed up on the blockchain hype with a series of three op-eds to deepen Xi’s narrative that the development of blockchain is a matter of “national strategy.” Notably, the op-eds also advocate for stringent regulations in blockchain and stress the danger of the public confusing cryptocurrencies with the blockchain technology. 

The clampdown

The blockchain hype didn't last long before the Chinese government started tightening the screws on cryptocurrencies. 

On Nov. 15, the Shanghai headquarters of the People’s Bank of China (PBoC) ordered the district administrative offices in the city to investigate cryptocurrency-related activities and finish the inspection by Nov. 22. The scope of the investigation included businesses that organized cryptocurrency trading in China, fundraising activities under the pretense of blockchain, and brokerage services for oversea ICO projects. 

Less than a week after Shanghai, the government of another major Chinese city, Shenzhen, launched a similar investigation on Nov. 21, and had already identified 39 undisclosed cryptocurrency exchanges. Around the same time, police in Beijing arrested around 10 suspects involved in operating cryptocurrency exchange BISS. 

Meanwhile, the Shanghai government’s investigation, which was set to end on Nov.22, has was extended. The regulator said it would “adopt monitoring measures such as interviews, inspections, and bans on the monitored entities involved in virtual currency activities to resolve related risks in a timely manner.”

According to a Xinhua News report, since 2019, a total of six cryptocurrency exchanges in China were shut down and around 10,000 accounts on two payments systems were closed. A news program aired at the state-backed TV channel CCTV also recently exposed the prevalence of frauds in the cryptocurrency space, claiming that less than 10% of the 32,000 alleged blockchain companies in China indeed possessed the technology. 

The next step

What’s going to happen next? 

The government crackdown on cryptocurrencies has echoes of the 2017 cryptocurrency purge. For now, the feeling of uncertainty may be unavoidable for some exchanges with deep ties in China. However, a few industry insiders told The Block that it's possible the Chinese government will end up green-lighting a few regulated cryptocurrency exchanges.

As one of the op-eds from people.com.cn stated, the general public's first impression of blockchain is bitcoin, which inadvertently perpetuates the misunderstanding that issuing tokens is essential to blockchains. Breaking the association between tokens and blockchain from people's minds and managing both separately may be what Chinese regulators are looking to achieve in the short- to medium-term.