Facing regulatory pressure, Chinese exchanges want to establish legitimacy by cozying up with one local government

As cryptocurrency businesses in China toe the government line amidst a new wave of regulatory clampdown, a tourist hot spot has gradually become the new crypto heaven.

Hainan, an island province that is less known for its economic prowess and more as China’s Hawaii, has convinced two major cryptocurrency exchanges, Huobi and OKCoin, to set up their China headquarters there. Over the past week, the two firms also hosted two high-profile conferences in the province, featuring government officials from both China and abroad. 

Behind the two Hainan conferences

This shouldn't come as an unexpected development for market observers. China’s recent embracement of blockchain technology has given government officials the green-light to associate publicly with the fledgling technology. Still, this acceptance of blockchain doesn't transfer to cryptocurrencies. Indeed, the government's hostile position against cryptocurrencies is forcing exchanges to quickly establish their legitimacy in the country by connecting themselves with various government initiatives. 

“At the moment, every forward-thinking exchange focused on the China market is working to maintain close ties with the government. This often takes the form of an 'appeasement' approach to regulators that includes participation in voluntary, regulator led initiatives,” said Matthew Graham, CEO of Beijing-based blockchain consulting firm Sino Global Capital. 

Indeed, the Nov. 30 conference hosted by OK Group, the firm behind OKCoin, was prefaced by opening remarks from two high profile local government officials: the vice governor of Hainan and a member of the standing committee of the communist party committee in Hainan. 

The conference also featured a speech by OK Group founder Star Xu, in which he paid tribute to the government by assuring the audience that data stored on a decentralized network can still be managed by government watchdogs through “a super private key.” Although Xu did not explain what “a super private key” is, he did mention that a New York financial authority, presumably the New York Department of Financial Services (NYDFS), asked the firm to hold such a key in order to issue its stablecoin USDK so that it can stop a transaction “at any time.” 

NYDFS has not replied to The Block's request for confirmation.

“The local governments both in the cities of Sanya and Haikou were really involved in the conference. This is rarely seen before,” said Chao Deng, partner at Hong Kong-based venture firm HashKey Capital. “Local government tends to be very careful about getting involved in crypto-related events. This is the first time I have seen a provincial official attending [this kind of conferences] and making opening remarks.” 

While OK Group moved quickly to strengthen its Hainan tie, Huobi has taken a more global approach. For its conference, the cryptocurrency exchange invited a string of government officials from countries participating in “The Belt and Road initiative,” a state-led effort to develop infrastructure and make investments in over 150 countries across Asia, Europe, Africa, the Middle East, and the Americas. During the conference, the exchange also signed memos of understanding with representatives from Malaysia, Bahrain, Indonesia, Kazakhstan, and Singapore, aiming to integrate Huobi's public chain into these countries' infrastructure development. 

“Participating in government-led initiatives like the blockchain zone in Hainan is a prudent play. Whether or not the regulatory and tax benefits of the zone will translate into attracting top companies and promoting innovation in the technology remains to be seen, however as a crypto exchange, it is a smart move to toe the government line,” said Graham. 

What does Hainan have？ 

Despite being one of the slowest growing economies among Chinese provinces, Hainan has implemented innovation-friendly policies and shown a recorded ambition to lead the country in blockchain technology. In April 2018, China's President Xi Jinping designated the island as China’s 12th free-trade zone, which would grant foreign firms greater trade and economic freedom when conducting businesses in the region. The policy has already attracted interests from tech conglomerates such as IBM and SAP. 

Later that year, the city of Haikou founded a blockchain pilot zone and a blockchain research institute, the latter in collaboration with the University of Oxford. People’s Daily also recently reported that the vice governor of Hainan wanted the province to be a national “demonstration zone” of digital asset trading. 

The island has more than political support to offer. Geographically speaking, it is close to financial powerhouses such as Hong Kong and Singapore, which could supply Hainan with finance and blockchain talents. Additionally, as Huobi Group CEO Leon Li pointed out, some of Hainan’s major industries, including exportation, agriculture, and tourism, have the potential to be integrated with blockchain technology.  

However, worries still persist as to whether the region can provide the protection that cryptocurrency businesses are seeking. While OK Group and Huobi were able to pull together high profile conferences, several smaller gatherings in cities like Shanghai and Beijing were told by the local government authorities to shut down, several sources told The Block. 

Even Huobi and OK Group seem to be navigating through the same precarious regulatory environment. Both firms' Hainan conferences were strictly themed as blockchain, not crypto. OK Group’s Xu even felt the need to make the parallel between bitcoin and games. 

“When we play games, we think that certain equipment, like a cannon, is valuable. In the bitcoin community, they are playing such a social game. They think bitcoin is valuable, so bitcoin is a consensus of a specific group of people, just like the consensus of all players in a game community. Bitcoin is not a payment currency,” said Xu. 

For now, there seem to be no better strategies than “crossing the river by feeling the stones” when it comes to dealing with the regulators, said Graham. This means exchanges that have a big presence in China may have to work attentively to appease regulators, and that process may require some trial and error, he said.