Behind the SHIB Coin Explosion: China’s Regulation of Cryptocurrencies

Following Bitcoin and Doge Coin, SHIB Coin has suddenly exploded in popularity, even taking second place among hot topics within virtual currency circles. SHIB Coin, also known as Shiba Inu cryptocurrency, was developed in August 2020. It is a “copycat currency” along with previous DOGE, ELON, and AKITA Currencies, which considers itself as an experiment in setting up a decentralized spontaneous community.

Of course, the explosion of SHIB Coin cannot be separated from Elon Musk’s KOL role on Twitter. On May 7th, Tesla’s independent director, Hiromichi Mizuno, said on Twitter that “It’s fine if investors want to trade Shiba coins in the short-term but don’t even think of doing the same with Shiba dogs.” Musk responded immediately, “I’m looking for a Shiba pup!” After this tweet was sent out, the unit price of SHIB Coin skyrocketed to 1400% against the previous unit price over the next three days, even more than 200,000 times compared to the issuance price. Many investors in China also joined this virtual currency speculation upsurge but behind the explosion of SHIB Coin, China’s regulatory attitude toward cryptocurrencies cannot be ignored.

Definition of a Cryptocurrency

A cryptocurrency, also known as a “Token”, was firstly invented by “Satoshi Nakamoto” under the Bitcoin title. By using blockchain technology (“distributed ledger”) as the core technology, a decentralized accounting system is formed in which each user could keep a record of every transaction made since the beginning of the cryptocurrency on his or her computer. The record is kept by each user fairly and openly and could not be tampered with or confiscated. Although defined as a “copycat currency”, SHIB Coin was invented based on blockchain technology, the same as Bitcoin, therefore it also belongs to the category of a Cryptocurrency.

The properties of a cryptocurrency are generally divided into three parts: (a) a virtual commodity; (b) a virtual currency; and (c) securities. Throughout the world, a handful of countries endorse the definition as a virtual currency (e.g., Germany, New York State in the US) and securities (e.g., Singapore, Switzerland), However, China, like most other countries, only endorses the virtual commodity definition. As early as December 3rd, 2013, the People’s Bank of China (“PBC”) along with 4 other ministries and commissions, jointly issued the Circular on Prevention of Risks from Bitcoin (the “Circular”), stating that Bitcoin is not issued by the national currency issuer and does not have the monetary attributes of legal repayment and enforcement. Thus, Bitcoin was not considered as a true form of currency, but it confirmed that Bitcoin can be used as a “virtual commodity”. As the Chinese virtual currency market was not mature at the time, documents at that time mostly used the term “Bitcoin” to refer to a Cryptocurrency.

China’s Regulation of Cryptocurrencies

Because cryptocurrencies have the characteristics of “T + 0” (free to buy and sell on the same day), 24-hour uninterrupted trading, no upper & lower limit, uncontrolled issuance, anonymity, etc., they began to exponentially grow in both the primary and secondary markets.

Firstly, regarding blockchain technology, as the underlying technology and infrastructure of cryptocurrencies, it can be said that China has not imposed too many restrictions on its development. On January 10th, 2019, the State Internet Information Office issued Administrative Provisions on Block Chain Information Services (the “Regulation”), which mainly stipulates the obligations of users of Blockchain Information Services in regards to real-name registration, filing, and security assessment. On December 24th, 2019, the Shenzhen Stock Exchange released the “Blockchain 50 Index” to reflect the performance of blockchain industry-related companies, effectively helping to invest in blockchain concept stocks. However, when it comes to the cryptocurrencies, China’s regulatory stance is clearly much stricter. The Circular explicitly prohibits financial institutions and payment institutions from engaging in Bitcoin-related business and requires PBC branches to guard against possible money laundering risks arising from Bitcoin.

In addition, as a self-issued “white paper” is enough for endorsement to avoid regulatory scrutiny, more and more blockchain projects conduct Initial Crypto-Token Offering (“ICO”) in the primary market, most of which have no real value but are used for speculative money. In response to this market disorder, PBC and 6 other ministries and commissions issued the Announcement on Preventing Initial Crypto-Token Offering (the “Announcement”) on September 13th, 2017, which defines financing by issuing cryptocurrency as illegal fundraising and prohibits various organizations, individuals, fundraising trading platforms, financial institutions, and non-banking payment institutions from engaging in any activities relating to ICO. In addition, the Announcement clarifies that trading platforms shall not engage in the conversion between legal currency and cryptocurrency.

After the Announcement was issued, the original mainstream domestic trading platforms (Huobi, OKEx, etc.) successively closed down their Renminbi business and redirected their trading functions to offshore websites. However, the Announcement does not prohibit the transactions or withdrawals of cryptocurrencies between individuals or on offshore platforms. In addition, according to our observations, a series of operations such as logins, foreign exchange purchase & settlement, and trading can also be made on these trading platforms by using a VPN. Although the servers of these platforms have been relocated overseas, the possibility of further crackdown actions by the Chinese government cannot be ruled out as their operation teams may still be based in China.

Summary and Prospects

In conclusion, the prohibited business in China currently includes but is not limited to (1) Cryptocurrency transactions by financial institutions and payment institutions; (2) Cryptocurrency financing and (3) exchanges between legal tender and Cryptocurrency on transaction platforms.

However, the current regulatory attitude of the Chinese government on Cryptocurrency transactions between individuals, especially on Cryptocurrency transactions on offshore platforms, remains unclear, while not ruling out the possibility of tighter supervision in the future. In addition, given the unavoidable high risks of Cryptocurrencies (such as hacking[1], money laundering, over-issuance[2], non-withdrawal[3], etc.), it is advisable that investors be cautious about cryptocurrencies, make rational investments, control investment risks in a reasonable manner, and keep the security of their assets. As Andrew Bailey, the governor of the Bank of England said, “If you intend to purchase Cryptocurrency, you should be prepared to lose it all.”

[1] In the “Binance Incident” of March 7, 2017, hackers attacked and stole Cryptocurrency accounts in Binance, a digital currency exchange, for more than RMB 700 million.

[2] According to Decrypt, on May 13, 2021, Vitalik Buterin, who received 50% of SHIB Currency issued as a gift from its founders, withdrew the currency (originally sealed) from the exchange and transferred it to foundations such as the India Covid-Crypto Relief Fund, causing the unit price of SHIB Currency to plummet by nearly 40% on the day.

[3] As the Cryptocurrency business in China is still in a gray area, the trading platforms currently used in China will occasionally have the issue of not being able to withdraw cash.