Bank of China Clamps Down on ‘Airdrops’ and Crypto Related Financial Activities

Bitcoin and other cryptocurrencies, which were initially warmly welcomed by China which also made 90% return of all investments in bitcoin in its fiat, however, since the firewall went up, putting a ban on all kinds of trade of crypto, the numbers have dropped tremendously. It is no secret that the Chinese plan to adamantly stick to their centralized currencies and has iteratively been declaring to do so. Recently, Bank of China, one of the biggest state-owned commercial Bank in China has also highlighted airdrops, the crypto tokens offered to users as incentives, poking at mystery and enigma surrounding it as well in its financial stability report which was published on November 2, 2018.

People’s Bank of China has a tough anti-ICO and crypto trading agenda. It defines ICOs as “illegal” fundraising and has highlighted the widespread risks of financial fraud and pyramid schemes. Previously the bank issued a notice in 2013 ‘Notice on Precautions Against the Risks of Bitcoin’ designating Bitcoin as a virtual item that is not identified as legal tender/currency in China. In its financial stability report, published November 2 this year, People’s Bank of China further enlarged its regulations by covering token airdrops. The report characterized the airdrops as “disguised” ICOs. According to the bank airdrops are issuing free virtual assets to investors and hence evading regulation around the public token scale model by allowing Chinese citizens to participate in ICOs.

Airdrops, as commonly known among cryptocurrency enthusiasts, are a way of publicly issuing tokens free of cost to the masses. After giving out the free tokens the projects responsible reserve a part of the total token amount which significantly increase in value when the price of the tokens rises. People’s Bank of China stated that the projects were profiting on speculations in the market by inflating the token’s value.

That being said, China’s stance on Blockchain is opposite to that on Cryptocurrencies. Endorsements for blockchain technology from government agencies has demonstrated China’s interest in developing blockchain with the intention of progressing China’s financial systems and leading the world in its innovation.  Banks such as China Merchants Bank, Wing Lung Bank of Hong Kong, and Wing Lung Bank, Shenzhen Branch have successfully performed transfers of renminbi payments in December 2017, across the border, using blockchain technology. According to news several banks have made progress by experimenting with the use of blockchain technology in order to improve their transaction systems.

Officials belonging to the hierarchy of People’s bank of China publicly promoted the use of blockchain technology to improve convenience, promptness and low cost of marketing remittances. The bank has established its own Digital Currency Research Institute. On 22nd June, 2018 a patent was submitted, with China’s State Intellectual property Office (SIPO), by the research lab for a digital wallet that allowed its users to keep a track of their transaction histories.

The patent chalked out how the digital wallet could be used to track data of transactions in coordination with a centralized digital currency issuance registration agency. The patent enables multi-signature security and managing encrypted digital assets – as existing cryptocurrencies – with private keys. Information including digital currency type, amount, and source currency, along with identification of the source and destination wallets can be acquired through the transaction queries.

Despite all this, cryptocurrency related activities face little tolerance from the government. A notice was jointly issued on 4th September, 2017 by seven government agencies of China regarding Prevention of Risk of Token Offering and Financing. The notice banned all Initial Coin Offerings (ICOs) in China. Exchange platforms involved in cryptocurrency related trades or providing financial services were ordered to be shut down following the crackdown on ICOs. Even Chinese citizens organizing and promoting ICOs abroad were not free from the reach of China’s laws against ICOs. Hence exchanges chose to relocate to areas more favorable to cryptocurrencies.

Despite continuous activities, to clamp down on issuance of cryptocurrency in China, such initiatives continue to rise in number. People’s Bank of China called for “early detection” and increased scrutiny on the regulators behalf, suggesting the need for cooperation on a global level to better protect investors. Further the financial stability report referred to suspected manipulation of market and breach of anti-money laundering (AML) systems in the crypto sector. It also warned of the adverse impact on society posed by cryptocurrencies due to their evasion of capital controls, international sanctions, and financing of terror activities.

Hassaan Malik

Co-founder of BlockPublisher, Hassaan is a technologist at heart with a keen interest in blockchain, cryptos and traditional financial markets. Email: hassaan@blockpublisher.com, hassaanmalek@gmail.com

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