China has long made its disinclination towards cryptocurrencies evident by putting a ban on the trade of cryptocurrencies within its border. They even put up a firewall to prevent and incriminate individuals that have tried to indulge in sale or purchase. However, allegedly, the number of platforms acting as cryptocurrency exchanges have been increasing. According to Sohu, a Chinese media news outlet, absence of a regulatory framework has driven a lot of these digital assets exchanging businesses to a “new type of gameplay” called the digital currency pledge.
The most popular cryptocurrencies that are being exchanged are Bitcoin and Ethereum. These platforms are lending money to those who wish to exchange their cryptocurrencies. Zhang Le who is considered an expert of the cryptocurrency industry told,
At present, most of the market only recognizes two major currencies, Bitcoin and Ethereum. This business is currently earning interest.
Essentially, only those people are likely to pledge crypto who need money, the rest are trying to gain an interest due to the volatility that is attributed to cryptocurrencies. Last year, Bitcoin soared as high as $20,000 and it has decreased to $6,400. The unstable market conditions entail that the fluctuating prices of the cryptocoins be monitored. In case a cryptocurrency loses its value, the borrower will be warned but in case the value falls beneath a certain amount, the company liquidates all assets. Xu Lizhen described those people by saying,
This is just the need. When the currency is low, people who are speculating in the currency will definitely not be willing to sell the coins. Once they are short of money, they must find such platforms. The demand has formed this market.
Although the Chinese government refused to draw up regulatory framework for regulating cryptocurrencies and out rightly put a ban on it, the investors have seen this as an opportunity to take advantage from the burgeoning technology. The loans are allotted by leveraging crypto that the loaner owns. An industry source who has converted from a cash loan to a digital currency mortgage told,
The industry has been suspended, but the market has not stopped.
A major number of digital currency exchange businesses have made the migration to this business. However, the borrowers should be careful while making such transactions as many illegal activities have been carried out in the name of cryptocurrencies. So it is mandatory that digital asset pledges have related qualifications for lending money. Hu Jie, a professor of practice at Shanghai Institute of Advanced Finance elaborated this fact by saying,
Currently, digital currency mortgage lending business mostly occurs only in the currency circle. One party has funds (or digital currency) to seek lending, and the other party lacks funds (or digital currency) to borrow. Digital assets can be used for mortgages, and such private trading behaviors can be allowed. However, if an entity specializes in this business and engages in this type of lending and financial management, it needs to have corresponding qualifications and conditions. Otherwise, it may be suspected of illegal lending and illegal business. .
He added on,
This is a gray game. The essence is to solve the problem of asset liquidity or direct fundraising. But even in the gray industry, we must not adopt a market manipulation method. This will only bring the 266th fraud of the criminal law to our future. The risk of sin.
Henceforth, it is concluded that due to government declining to regulate the cryptocurrencies, many of the digital currency exchanges have started loaning sums of money with cryptocurrencies as collateral. This unique business opportunity has been extremely advantageous to them as they score interest. Nevertheless, the threat of not being legitimized and regulated still looms over the heads of such organizations, because digital currency wealth management business is “completely outside the supervision” and there is “no legality in itself” as per the well known Internet Finance Lawyer Xiao Wei.