When analyzing the global crypto market, it is difficult to overlook China with its 1.4 billion people and massive economic influence. And yet, since the country introduced a de-facto blanket ban on all things crypto in 2021, it has been all but cast aside from most market analyses.

Both Bitcoin mining and crypto finance have flourished in the US, with smaller competitors scattered over Europe and Asia. Meanwhile, China has focused on its e-yuan, a Central Bank Digital Currency (CBDC) designed to fit its population surveillance framework better than decentralized assets.

However, despite the official prohibition, crypto activity persists in China. People exploit legal grey areas and peer-to-peer channels to acquire cryptocurrencies, which have become especially appealing as the Chinese stock market experiences a downturn.

Then, there is Hong Kong. Since last year, this autonomous (or maybe not so much now) region has been advancing clear crypto legislation, with Bitcoin spot ETFs approved this spring.

These developments set a fertile ground for recent rumors suggesting China might soften its stance on crypto. Though concrete evidence is scarce, these speculations merit consideration.

Let's explore the current state of crypto in China and contemplate its potential future developments.

Crypto activity in China

Decentralized activities are notoriously difficult to ban.

After China expelled the “official” miners in May 2021 (who represented 68% of Bitcoin hashrate at the time), Cambridge Bitcoin Electricity Consumption Index still indicated that about 21% of the hash rate was produced in China by January 2022. Since then, this valuable statistic was regrettably discontinued, but various sources suggest there’s still a significant number of underground miners operating in China. What’s more, the market for mining equipment, specifically ASIC chips, is overwhelmingly dominated by Chinese companies, which design these chips and manufacture them in Taiwan.

In September 2021, the People’s Bank of China banned all cryptocurrency transactions. However, various reports, including this recent one from Reuters, regularly highlight how Chineze citizens circumvent this ban. Some find ways to trade crypto on exchanges such as OKX and Binance using overseas bank accounts and/or VPNs (virtual private networks). Others use OTC (over-the-counter) and P2P (peer-to-peer) mechanisms. Furthermore, following Hong Kong's open endorsement of cryptoassets last year, Chinese citizens are also using their $50,000 annual forex purchase quotas to invest in crypto.

Crypto regulation in Hong Kong

Once a leading financial hub, Hong Kong has been losing some of its financial attraction in recent years, notably due to mounting concerns over Beijing’s increased oversight. In response, Hong Kong legislators have been striving to maintain the region's appeal. Introducing in 2023 a clear licensing regime for crypto service providers was an important step towards developing the crypto finance sector. This spring, the first Bitcoin spot ETFs were launched.

This week, Hong Kong’s financial regulators published the conclusions of the public consultation on stablecoins. They plan to present a bill on the region’s fiat-referenced stablecoins later this year.

Could China un-ban Bitcoin?

Last month, the famous crypto investor and co-founder of Tether, Brock Pierce, gave an interview to the South China Morning Post, where he discussed the potential of the crypto sector in China. He hinted at a possible new venture in Hong Kong and said that the question of China opening up to crypto was “not so much if, it's a matter of when”.

Pierce’s optimism, also shared by many at the Bitcoin Asia conference that took place in Hong Kong in May, is fueled by numerous economic reasons for China to legalize crypto. The potential gains from Bitcoin mining, along with various financial and blockchain-related activities, are non-negligeable. Additionally, the country likely resents having effectively ceded these opportunities to the United States.

However, a strong ideological barrier might impede such aspirations. By its nature, cryptocurrency is borderless and decentralized, which conflicts with China's current regime. The government is likely reluctant to risk potential capital flight, even in the interest of fostering innovation. Nevertheless, with Hong Kong now offering crypto ETFs, there could be a gradual warming-up to the idea, allowing exposure to crypto within the confines of regulated financial products.

Overall, the rumors about China un-banning Bitcoin might lack substantial evidence at this time. However, economies and political decisions are known to change, and the state of crypto in China is an interesting topic to monitor.