BEIJING • Chinese investors are paying little heed to the government's biggest crackdown on cryptocurrency trading since 2017, underscoring the challenge for Beijing as it tries to rein in a speculative boom in digital assets.
Knee-jerk selling has given way to a steady recovery on over-the-counter (OTC) platforms that Chinese crypto traders have used since domestic exchanges were banned in 2017.
One key gauge of local sentiment - the exchange rate between China's renminbi and the stablecoin Tether - fell as much as 4.4 per cent after the government's warning earlier last month but has since recouped more than half the loss, according to crypto data platform Feixiaohao, a Chinese equivalent of CoinMarketCap.
China escalated its crackdown after a frenzied surge in Bitcoin and other tokens over the past six months heightened longstanding Communist Party concerns about the potential for fraud, money laundering and trading losses by individual investors.
Yet the hard-to-trace nature of transactions on local OTC platforms and peer-to-peer networks means it will be extremely difficult for the authorities to enforce a wholesale ban.
That may come as a relief to global crypto enthusiasts after worries about a plunge in Chinese buying power contributed to the nearly US$1 trillion (S$1.3 trillion) sell-off in digital assets from record highs in the middle of last month.
As to the losses and the crackdown, "I don't care," said Charles, a 35-year-old real estate consultant in Shanghai who asked to be identified only by his English first name. He has been buying cryptocurrencies since 2017 and claims to have lost US$11 million over three days in the recent pullback. "To me it's giving back the profits I made in the past few months," he said. "I'm looking at the 10-to 20-year horizon."
Before China outlawed crypto exchanges in 2017, local investors owned an estimated 7 per cent of the world's Bitcoin and accounted for about 80 per cent of trading, according to state media.
The exchange ban has made it impossible to gauge those figures today, but Chinese investors are still widely believed to have a major presence in the crypto world via domestic OTC platforms and offshore venues that they access using virtual private networks.
Domestic trades involving renminbi and digital coins are difficult for China's government to track because they typically take place in two separate steps.
The first happens on OTC platforms operated by firms including Huobi and OKEx, which allow traders to post bids and offers.
Once both sides agree on a price, the buyer will use a separate payments platform - operated by their bank or a fintech company like Ant Group - to send renminbi to the seller. The digital coins, usually held in escrow by the OTC platform until the renminbi payment clears, are then transferred to the buyer. Chinese regulators often have no way to connect one leg of the payment to the other.
Because the renminbi leg of the trades take place entirely within China's domestic financial system, the risk of large-scale capital outflows is low. But that has not stopped the government from warning financial firms and individual investors to stay away from crypto.
Regulators last month reminded Chinese banks and payments firms of the requirement to identify and block suspicious transactions, and pointed out that facilitating cryptocurrency trades often violates banking rules.
Chinese regulators have so far stopped short of labelling individual trading illegal, but the crackdown will involve the public security department as some of the activities were suspected to have facilitated money laundering and terror financing, according to a person familiar with the matter.
Police in Beijing have distributed printed warnings about potential risks associated with cryptocurrencies. Virtual currencies are among popular means for the latest scams, and anyone "in a panic, having a hard time distinguishing or not sure what to do" should call the local police contact listed, according to one notice seen by Bloomberg.
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