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China vs Cryptocurrency: A Review of Chainalysis' Report

Estimated reading: 8 mins

China vs Cryptocurrency: A Review of Chainalysis' Report on China’s Cryptocurrency Activity Amidst Government Crackdowns

Here's the one we were all waiting for; the Chinese Government Vs Crypto. One of the world's largest cryptocurrency markets has fallen off the face of the earth. Is it a warning to all? The Crypto Crackdown of 2021 certainly will go down in history as the first authoritarian intervention against the market. It's important to understand the political factors involved in this situation; so many internal and external factors affect the crypto environment, and these are amplified extensively in China. So why did one of the world's most dominant crypto superpowers declare it illegal? How did this affect the world around us, and will any other governments follow suit?

Click the above image for a PDF copy of the full report by Chainalysis, or read our summary below.

How Was China Interacting With The Market, Pre-Crackdown?

In terms of scale, to see how important this really is – have a look at the graph below:

graph showing the total crypto value received by country in usd from jan to jun 2021

I'm going to explain to you why this 'Crackdown' is monumental – and it's certainly not because they were lacking or saw little national activity. Since 2021, China, second only to the United States, has been estimated to have about $150 Billion worth of cryptocurrency controlled by Chinese users. If we are to compare that amount to other cases of 150 Billion, it equates to or near enough; the EU's investment in Africa ($170B), How much America spends on illicit substances per year ($150B) and an estimate on how to build a more digitally sound Europe ($150B). Looking at those points, you can see how immense the amount of crypto value they held is. I mean, an entire investment into a continent like Africa! It seems crazy, but the Chinese Government clearly had their reasons for restrictions.

One estimate says that China-based mining operations have historically been estimated to control 65% of the global hash rate of Bitcoin! If we were to extrapolate that further, that would mean Chinese users would control nearly two-thirds of newly minted Bitcoin; a mean feat indeed. But that dream all came crashing down in May 2021 when government officials announced a crackdown on crypto mining and trading. This has seen an estimated 50% of the Global Hash rate fall since May. One constant debate is why so many closed their trading accounts despite the government making it illegal. You'd expect them to find loopholes or even keep doing it until they get caught and hopefully make enough to pay the bail. One overlying component is fear, the fear of the government catching you. In other countries where you'd get a slap on the wrist, China ensures you’re punished and in fear of reoffending. Despite this, estimates (which understandably aren’t verified due to the situation) say 20% of the worldwide bitcoin network remains in China - now referred to as the Black Market of Crypto.


Cryptocurrency Crimes

You can easily tell that China has played a rather large hand at crypto, contributing to its success; with that territory also comes the crypto crime rate. For obvious reasons, crime has been steadily declining in China since the crackdown was announced. Using the graph I've edited below, I'll take you on a step by step analysis of two historical crypto events related to China, as well as a general overview of their crypto crime tactics!

graph showing crypto value sent to illicit addresses by country

PlusToken Ponzi Scheme

If you're an avid trader or newsreader, you'll remember the story of PlusToken. It started in 2018 and offered monthly payments to users of its crypto wallet, which on face value sounds fantastic – the perfect money maker for investors. However, all was not what it seemed, and it was revealed as a Ponzi scheme in which the total amount of cryptocurrency taken was estimated to be between USD2-2.9 Billion! The idea was that you would invest in the platform, transform your money into cryptocurrency, recruit family and friends (word of mouth is the most reliable source of advertising!). It was so mainstream in mainland China it was hard to resist. You can see on the graph where all of their ill-gotten gains had caught up with them, crippling their scheme and the market. Long story short, many people were hurt, and cryptocurrency's reputation was damaged, at least for a while. All the ringleaders were jailed for up to 11 years, and I sincerely hope we never see such a travesty again.


Chinese Crackdown Announcement

This Crackdown may define a generation or perhaps inspire a new one. At the start of this article, "is it a warning to all?" And from my research, I certainly think so. Governments have become increasingly aggressive towards crypto (excluding El Salvador – The Crypto Genies), with lawmakers finding new ways to regulate, tax and limit the crypto transactions state-wide and nationwide. You can see here that there's about a 20 million dollar spike in Cryptocurrency value sent to China around the time the Crackdown was announced. Why has this happened? It's going to be illegal? Wherever there’s a suppressed group in society, there's always a small group that refutes and holds on to their ideologies. This is the group, but for crypto, the opening of the Chinese black market for crypto has been booming recently, and there's no sign it'll stop until the government has caught them. During this time, the value sent to China is to set up illegal operations, mine crypto 'off the grid' and hopefully not get caught - talk about living on a prayer!


Scams and Other Devious Deeds

Scams play a massive part in their Crypto crime rate and movement of funds; let me go through some key ones. Email Scams – using your information against you to gain your trust, and appeal to your best qualities. Social Media – you always see them in Twitter comments or your DM's on Instagram; they try to appeal to your emotions to gather support. There are so many more mundane links and fake URLs. We've moved on a bit from the 2000s "The Son of a Deposed Nigerian King needs your help!" scams; they're now more refined and scarier. Chinese hackers and scammers have refined the art of fake profiles and better AI to try and fool you into thinking you're talking to a real person. Approximately 2.2 Billion has been tied to Chinese addresses linked to illegal crypto activity, so you can see that China is making some sort of stand against the unlawful activity, but it may be more convoluted than we think.

There are certain bits of cryptocurrency-based crime, such as fentanyl trafficking, of which China is a central hub. Linking drugs to crypto may seem a stretch, but they carry out their transactions using cryptocurrency. A famous example is when Fujing Zheng, the head of a fentanyl trafficking organisation, had sanctions against him. He then used Bitcoin to launder the proceeds. People use cryptocurrencies to hide their activities the same way people used to "diversify" their portfolios by investing in a charity to avoid tax or using a tax haven like the Isle of Man. It's natural for people to avoid accountability by searching for loopholes, but we shouldn't use crypto for these illegal activities.


How Has the Crackdown Worked?

Their status of being one of the top mining countries globally has changed a fair amount since the first round of announcements around the topic started. According to the CCP, the reason is around the financial stability and the environmental impacts as well. Which considers the amount of power and energy consumed by mining rigs, often with people setting up so many to mine faster that they forget how much power they are consuming. One report stated that an average of 143,000 kWh of energy is required to produce one bitcoin - now imagine if you had hundreds set up, and that's just you. Not counting any other miners in your area, it all adds up. Let's see how mining has gone pre-crackdown and post-crackdown:

You can see exactly where the crypto ban came into effect, seeing the destination of Bitcoin mined by week just drop in all criteria shown. Many people adhered to the government's new laws, but some kept on going, seeing a slight resurgence in June. It seems all mining pools in China were hit the hardest, with all of them dropping in relation to the new rules.


Why Is the CCP Cracking Down on Cryptocurrency?

This is the meaty part of the article; why is this happening? There are a few practical reasons that have been presented. These prevent capital flight, as the CCP sees crypto as a threat they can't regulate or directly control; they want rid of it as it provides no value to them. But it is clear to most that it is a purely ideological choice; it's just fronted by the concerns for the welfare and the environment. One crypto official interviewed said, "They take a top-down approach, and the goal is to maintain stability and unity. So when government officials see people like early Bitcoiners getting ultra-rich and advocating for liberty and self-sovereignty, the natural inclination is to see them as dissidents". When I say ideological, it's because they're communist, an ideology built on equality; where's the equality in some being richer than others? Despite them themselves being filthy rich but, that's for another day. Ignorance is bliss, and hypocrisy is free! They're leaning heavily on crypto companies to close, creating state-sponsored ads to further warn and suppress the community. The message in China is clear, "cryptocurrency, you are no longer welcome here."


The Yuan

Here's where things get interesting: in April 2020, the CCP started working on the digital yuan - a year before the crackdowns. The Digital Yuan, like most cryptocurrencies, would provide more transparency into how people spend, and because it's government-owned and controlled, they're in on it too. This idea has been met with many criticisms from countries and leaders alike. Dovey Wan, a founder of a crypto investment firm, says that she sees two main goals the CCP is trying to achieve. The first is more control over the economy, if all central banks existed entirely on the CBCD form, everything would be under one umbrella, meaning the banks could exert much more power and control over the financial flows of the country like interest rates. Do they control their whole economy within one line of code, a dangerous weapon or an innovative spectacle? Many criticised the fact that the CCP will continue to use it for financial surveillance, not as if that exists in China anyway... If the digital yuan went into full effect, it means the CCP could hand what's been labelled a "financial death sentence" to anyone or any business for any infraction.

China vs Cryptocurrency Conclusion

The CCP's clouded attempt to improve the environment is overshadowed by their current actions in making the digital yuan. China's long affiliation with cryptocurrency is damaged, and the global hash rate and subsequent mining have significantly fallen. There are still more pockets of people in China continuing to illegally mine crypto, which has led to increased government raids and punishments dished out to the offenders. If the main idea of the crackdown was to decrease crime, it has certainly worked. Even though their crime rates don't directly impact us, fewer scams are coming out of China is a good thing. It is clear that the Chinese government has recognised the power and innovation of blockchain technologies and wants to capitalise on them to create a stronger sense of power and control in their homeland. The reason for this is to have heightened surveillance on their citizens and to be able to twist monetary policy to fit their ends. While the CCP may have questionable motives, it has been a global example to other governments that government-led blockchains are doable and, obviously in their case, extremely fitting for their goal. They have been a pioneer in government intervention with cryptocurrency and could pave the way for more countries to limit mining in the future. Time will tell if their efforts are in vain or an example of what cryptocurrency is to expect in the near future.


About the author:

Austin Watene is a writer who has collaborated with a multitude of different partners in Business, Social Media and News Companies. He produces quality content in which he aims to resonate with viewers, or at least raise their eyebrows to the new opportunities of tomorrow.


The above references an opinion and is for informational purposes only. Do not take this as personalised financial advice or investment advice. The views expressed by the author do not necessarily represent the opinion of BitPrime.


Last updated: 16/03/2022

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