It’s no secret that savvy Chinese citizens with money will find a way to protect their money from the long arm of the Chinese government, often using technology, which always outpaces government regulation. Chinese citizens have stashed bundles of cash or other valuable items in shipping containers, employed more sophisticated means like using fake invoices, invalid customs forms, the bank accounts of dozens of employees, or even more sophisticated means like using point of sale machines in Macau casinos that are coded for mainland China or cryptocurrencies accessed through VPNs. Before the most recent crackdown on currency flight, Chinese citizens often used shadow banking networks to get their money from mainland bank accounts into accounts in Hong Kong or offshore locations, then often into safer capital markets like the U.S. where they invested in real estate and business ventures, the latter with an eye toward obtaining an EB-5 entrepreneur visa and a fast track to U.S. citizenship. Our firm’s international lawyers have seen a precipitous decline in the number of Chinese investors involved in FDI deals. We previously blogged about capital flight from China in Foreign Direct Investment (FDI) From China: Where Have All the Dollars Gone? and about increased U.S. scrutiny of Chinese FDI to the U.S. in CFIUS Has Slowed FDI From China to the United States, But It’s Not Dead Yet. But in the bitcoin era, where cryptocurrency provides a much desired avenue for anonymous transfers of wealth across international borders, Chinese citizens continue to find ways to move wealth.
In its race to become a global power on par with the U.S. and other developed nations, the Chinese government embraces (or tacitly permits while turning a blind eye) new opportunities for China’s economic growth, even if those opportunities are outside the norms (read: laws) of the generally law-abiding parts of the global economy. China’s role in the rise of cryptocurrencies cannot be understated, mainly due to China’s colocation of high technology manufacturing, technological talent, and cheap coal-fired and hydro power. In 2017, Beijing-based Bitmain Technologies controlled three-quarters of the market for the production of cryptocurrency “mining rigs,” which are computers specifically designed for solving the complex algorithms required to mine cryptocurrencies. Bitmain also produces the processing chips used in those mining rigs. And as of a year ago Bitmain Technologies operated 11 mining farms in China. But in China, all good parties must come to an end when they get too raucous.
China, in typical China fashion, fosters or ignores shadow economic activities until they threaten its economic or political stability. In September 2017, China banned Chinese cryptocurrency exchanges because they created too many financial risks. These cryptocurrency exchanges also presented too much social risk due to the inherent volatility in cryptocurrency prices. Some cryptocurrencies have lost as much as 75% of their value in short periods of time, and nothing creates social instability like plummeting asset prices. Throw a bit of garden variety fraud into the mix by way of Ponzi schemes, and cryptocurrencies provide much more trouble to Chinese regulators than they want to deal with. In February 2018, China took additional measures to reign in cryptocurrency trading by blocking all websites, domestic and foreign, related to cryptocurrency trading and ICOs (initial coin offerings). China also ordered Chinese financial institutions to stop providing capital to businesses related to digital currencies.
Earlier this year China moved to blacklist cryptocurrency activities because of their excessive drain on China’s energy sector. Recently the police in Jiangsu Province arrested a group allegedly involved in stealing electricity to power their illegal cryptocurrency mining operations. With the recent spike in unrest in the Middle East over global energy supplies involving Iran, it is unlikely that energy-hungry China will change its tune on cryptocurrency mining farms. (For some perspective on this, see this recent article that reported bitcoin mining worldwide consumes more energy than Switzerland.) Chinese have reportedly been exploring setting up operations in other countries like Iran with plentiful, thus cheap, energy supplies. With China engaging in closer ties with Russia, it is likely Russia will become another base of operations for Chinese cryptocurrency miners.
Chinese consumers and businesses continue to play an outsized role in global cryptocurrency operations. Recently experts opined that Chinese investors may have singlehandedly pushed bitcoin to its highest value this year. One Twitter user, @DoveyWan, was quoted by Forbes, saying “Bitcoin is winning the trade war while China and US is a lose-lose.” China’s role in the global cryptocurrency market (and the global market in general) will continue to be important in several ways: (1) China’s currency manipulation (devaluing the yuan in response to the trade war to make Chinese exports more affordable for the global economy) will drive more Chinese nationals to find safer havens for their funds by converting their yuan into cryptocurrencies like bitcoin, which will increase the market price for these digital currencies; (2) China’s manufacturers like Bitmain Technologies will continue to produce computing chips and mining rigs to supply bitcoin miners in countries other than the U.S. as long as their chips do not require ongoing interface with the U.S. or its allies that would cut off supply of key required technologies to produce the computing chips; (3) China’s cryptocurrency miners will continue to look for cheaper energy markets to house their mining farms, which will distribute the global cryptocurrency mining more evenly throughout the world but will also continue to drive up global energy consumption and the Chinese diaspora to those locations; and (4) Chinese cryptocurrency companies will look to list on cryptocurrency exchanges in countries like Malta, Israel, Russia, Japan, and South Korea rather than try to list on shuttered mainland China exchanges or in Hong Kong (though some companies have looked at utilizing reverse-mergers to list on Hong Kong’s exchange).
Alternative financing avenues like shadow banking and cryptocurrencies will continue to thrive despite China’s best efforts at stamping them out because they are an integral part of all developed economies.