Chinese bitcoin traders are in no mood to hit the pause button despite stricter regulations by the state. Last week, China made cryptocurrency transactions tougher by introducing new laws. It banned financial institutions and payment companies from providing services and warned investors against speculative trading.

While these efforts to restrain the crypto trading, initiated a 30 percent bitcoin plunge, China's influence on the crypto market has barely budged and Bitcoin since has bounced back approximately 10 percent.

Despite these restrictions, Chinese traders still are a significant force, Matthew Graham of Sino Global Capital said. Graham is the CEO of this Chinese blockchain tech-based venture capital firm.

He told CNBC, “The waning influence of Chinese bitcoin traders is an exaggerated story.”

In the past too, China has issued strict restrictions that hardly influenced its citizens. In 2017, China clamped down on the local cryptocurrency exchanges. It also banned exchanges from raising money by issuing new coins. This process of raising money by issuing coin is called initial coin offering.

Before these restrictions, in 2015, the Chinese renminbi (RNB) accounted for 92 percent of Bitcoin trading. Given the proportion, Chinese traders had the power to move the market. But, restrictions of 2017 smothered this speculative market so much so that RNB's share shrivelled to 0.007 percent.

While bitcoin plunged 30 percent after China's latest round of restrictions, Graham says, there may have been other factors in play.

The Chinese were heavily involved in last week's sell-off, Graham said, but it was more a function of price action than regulations.

China’s grey market

All these restrictions on cryptocurrency trading started a cryptocurrency grey market in China. And Bitcoin's massive 300 percent rally since October 2020, revived it.

After exchanges were shut down, Chinese investors moved to bitcoin platforms owned by Chinses exchanges overseas. While these exchanges are not licensed to operate on the mainland, they allow investors to trade if they upload their Chinese identity card.

This is the reason why the share of RNB decreased significantly from the crypto market, but the Chinese share did not.

These exchanges do not allow the use of RNB or Yuan. They only permit trading in cryptocurrency pairs, for example, bitcoin and tether.

According to the Tether website, it “converts cash into digital currency”. Tether then “anchors or tethers the value to the price of national currencies”. If linked to the US dollar, the coin is called USDT.

The investors use peer-to-peer markets to buy USDT in RNB, via online or bank transfers. This process allows them to skirt Chinese laws of dealing in bitcoin.

They can then use USDT to buy bitcoin, and deposit them in overseas exchanges.

Bobby Lee, former CEO of China's earliest cryptocurrency exchange told CNBC: “These days, more and more (Chinese) people use stable currencies like USDT.

It means they don't have to deal with RMB transfers anymore. “It is moving to USDT payments society and moving into and out of bitcoin,” he added.

They disguise their USDT purchases with medical or other lawful purchases, Reuters reported. The technicality allows the Chinese to get around the state's restrictions.

When in 2009, the first exchange was ordered to shut down, the value of Bitcoin was over $4,000. Today, bitcoin is over $36,000, according to data from CoinDesk.

China remains a very big market for cryptocurrencies, Changhao Jiang, CTO of Cobo, a Chinese crypto wallet provider said. Cobo's mission is to “make it easy to own and use cryptocurrencies.” And the company has seen a jump in business this year.

(Edited by : Abhishek Jha)

First Published:May 28, 2021 6:38 PM IST