Parade of Scams Fueled Chinese Government’s Crypto Skepticism
On the evening of August 21st, 2018, a group of blockchain WeChat public accounts, including Golden Finance, Huobi Information, Dapao Rating, Bishijie, Daily Currency Reading, TokenClub, Wujie Blockchain, etc. were ordered to block all content. Everyone was asking what happened. Why has the Chinese government has repeatedly issued orders to supervise cryptocurrency, and even prohibited ICOs altogether? Let me explain some possible reasons.
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Chinese Government Orders Industry Cleanup
Subsequently, on August 22nd, there were media reports that the Office of Financial Social Risk Prevention and Control of Chaoyang District, Beijing, issued a notification to “clean-up and rectify” cryptocurrency trading venues (including bitcoin), which requires that all shopping malls, hotels, office buildings and other places cannot undertake any form of cryptocurrency lecture and promotion.
In fact, as early as December 5th, 2013, The People’s Bank of China (PBOC) and five other departments issued the “Notice on the Prevention of Bitcoin Risk”, which clearly stated that bitcoin is not a currency (only a specific virtual commodity), cannot be circulated in the currency market, and that financial institutions cannot undertake related business.
On August 29th, 2017, the Office of Special Remediation of Internet Financial Risks mentioned the clean-up and rectification of cryptocurrency trading venues such as bitcoin would be included in the special rectification of Internet financial risks. In September 2017, the PBOC, Cyberspace Affairs Commission of China, China’s banking regulator the China Securities Regulatory Commission, and other three departments jointly issued the “Announcement on Preventing the Risk of ICOs”. It pointed out that the tokens or cryptocurrencies used in ICOs are not issued by the monetary authority. In the other words, they do not have monetary attributes such as legality and mandatory use, and cannot and should not be used as currency in the market.
Some opinions on Twitter stated that the reason why Chinese government such strict controls over bitcoin, especially ICOs, is obscurantism — or deliberately attempting to prevent certain facts from becoming known. That is, similar to the way the government has blocked access to Facebook and YouTube.
Actually, These Are the Real Reasons
In fact, the most important reason is to prevent scams. “Risk Warnings for Illegal Fund Raising in the Name of ‘Cryptocurrency’ and ‘Blockchain’” indicates that recently, some people have used the banner of “financial innovation” and “blockchain” to absorb funds through ICOs, which infringed the legitimate rights and interests of the public. Those activities are not actually based on blockchain technology, but use the concept of blockchain to conduct illegal fundraising, MLM, and fraud.
HoIy shit, just spoke with someone based in Beijing who told me that the reason why these crypto media outlets got shut down is because they reported on the vaccination scandal that bypassed censorship via the Ethereum blockchain. This is WILD. (https://t.co/vGkcUBNs3z)
— Katherine Wu (@katherineykwu) August 21, 2018
1/ The latest vaccine scandal coming out of China and the subsequent social media censorship got me thinking back to the basics of why crypto and blockchain technology captivated me in the first place. 👇
— Katherine Wu (@katherineykwu) July 23, 2018
Above: possible other examples of obscurantism
Examples of Investment Fraud
For example, Superstar (MXCC), which was born in Hong Kong’s Shangya Exchange, announced an ICO in January 2018. The private placement cost was about $0.35 and the token circulation was 2 billion. They raised more than $730 million USD. However, the token fell on its first day of trading, and the opening price was just $0.03 in the end, before returning to zero and becoming the first worthless ICO project. Now, the MXCC official website no longer loads, and the team was suspected to have run away. As the same time, a large number of users complained about MXCC’s false publicity, which resulted in huge losses for investors. They illegally obtained $730 million in just six weeks.
There’s also Spacechain (SPC), packaged with a bunch of high-tech keywords such as “quantum”, “space” and “satellite”. SPC started a private placement in January 2018 (the price was around $0.60), and they raised $ 150 million in a day. However, after the ICO in January 2018, it was caught in suspicions of whitepaper fraud, and the price quickly fell to only a few cents. The market value is now close to zero. The total amount involved in the project was about $150 million. At present, details of this project and related personnel have been filed by the Public Security Bureau for suspected fraud.
In January 2017, some more big news was exposed in China: “EGD Scam Cracked Down in China over 1.6 Billion USD”. Three months later, the online gold project EGD was investigated on suspicion of organizing and leading an MLM. Leaders Lei Pei and Chenfang Wang are wanted by the Xuzhou police office. Also associated with EGD was Marco Santori, now chief legal officer at Blockchain, who served as legal counsel to the project during his time at Pillsbury Law. (We contacted Santori for comment about his role in advising and promoting the project, but did not receive a response.)
In addition, there are 13 projects including Bee, Refereum, Current, etc. involved in false investments, and the amount of ETH involved in the projects is 140,000, worth nearly ¥700 million ($102.4 million) at the time.
Chinese Government Still Sees Opportunities in Blockchain Tech
The decentralization and anonymization promised by blockchain technology are not compatible with traditional corporate management and government regulatory systems. But the government can also see the opportunities it offers. The official website of the State Council of China shows that they have written the blockchain into the 13th Five-Year Plan and will support blockchain development as part of the recently-announced five-year plan. The plan emphasizes that China will focus on the development of blockchain technology over the next five years, and has implemented cryptocurrency and blockchain technology projects in the Shenzhen region.
However, in order to avoid more scams, blockchain enterprises need to actively meet regulatory requirements, as well as standardize the technology and governance of blockchain technology itself, enhancing its credibility. Therefore, the future of China’s blockchain industry still looks good.
Is the Chinese government justified in prohibiting some uses of blockchain technology? Why or why not? Please share your thoughts in the comments.
Images via Chinese government, egd1319.com, Pixabay