Crypto market activities have been under heavy scrutiny in China. As Beijing seeks to have more control over the market, Chinese traders are now opting for over-the-counter desks to escape regulations.
Despite China experiencing the largest crypto trading crackdown since 2017, investors are doing very little to heed the new regulations. With crypto sales on the rise amidst the recent crash, traders have now revived over-the-counter transactions. In 2017, Beijing had barred domestic crypto exchanges from operating in the country.
Before the crypto exchange ban in 2017, China accounted for 80% of global; crypto trading transactions, and investors in the country owned around 8% of the total Bitcoin supply.
Hard to Enforce Ban
China tightened its noose around the crypto market after Bitcoin’s value was slashed by almost 50% during the recent market crash in May. The communist party has, however, been tailing cryptocurrencies ever since their boom this year, with many legislatures fearing an increased use of digital assets for criminal activities.
However, the crypto market has many loopholes that traders can exploit to go around the stipulated regulations. Such avenues include OTC platforms and peer-to-peer networks.
Domestic crypto trading can be difficult for authorities to track because of the processes involved. OTC platforms allow crypto traders to agree on the bid and ask prices. The buyer will use a local payment firm to send fiat currency to the seller. The OTC platform, which holds the digital currencies in escrow, will only transfer them to the buyer after payment. This process makes it hard for regulators to pinpoint the people behind either side of the transaction.
While this may be concerning to Chinese authorities, it is a glimmer of hope to the entire crypto community. After the Chinese crackdown, around $1 trillion worth of digital assets was wiped off the market, and a reviving of OTC platforms may help the market recover some of its lost glory. However, OTC platforms are only used in low-volume trades.
Regulations aimed to prevent financial Risks
Chinese regulators have urged payment firms and banks to identify and prevent any suspicious trades associated with cryptocurrencies. According to the regulators, cryptocurrency trading is contrary to the banking laws.
Besides, China’s State Council also recently cracked down on Bitcoin mining and trading, citing it as a contingency plan to prevent financial risks presented by the crypto market. According to the policymakers, the crypto market volatility is concerning, given that it can cause major economic disruptions.
The regulations on crypto mining in China led to mining firms such as Huobi and OKEx halting their Bitcoin mining operations in China. The mining firms stated that regulatory risk was the reason behind stopping their operations. This decision led to Bitcoin mining difficulty dropping by 16% to reach 21 trillion, which is the greatest fall in 2021.