In August 2012, a young Chinese entrepreneur posted to the online forum BitcoinTalk that he was selling shares in a company that would make hardware with chips dedicated to mining bitcoin and pay out dividends based on its earnings.
Jiang Xinyu, known as Friedcat on the forum, was one of the first people in the world to promote such an idea through his company ASICMiner, which used the acronym for application-specific integrated circuits. Eventually, there were accusations of fraud when people alleged they did not get their payments or equipment, and the company went bust.
The idea lived on, though, and the bitcoin mining business boomed in China, a product of the country being the "world's factory". This was when the idea of bitcoin started to take hold in China, as it became the dominant producer not only of the mining equipment, but also of bitcoin itself thanks to the country's cheap electricity.
Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.
"The idea of decentralised money never really got a lot of traction in China," said Leonhard Weese, founder of the Bitcoin Association of Hong Kong who now serves as technical content lead of Lightning Labs in Vancouver. "But the idea of decentralised crowdfunding and start-ups was very attractive in China. I think people in China were just much more interested in gambling on future start-ups than speculating on what the money of the future looks like."
The cryptocurrency landscape could not be more different today, as the re-election of Donald Trump to the US presidency affirmed this month. After the November 5 election, the price of bitcoin soared, nearly reaching US$100,000. The enthusiasm over the future of crypto and blockchain in the US has prompted some to question how China lost what once looked like a commanding lead, and how it might regain some of that business.
The Chinese government has built up a draconian regulatory system over the past decade to root out bitcoin trading and mining in the country, regarding the digital currency as a threat to the country's financial stability. Meanwhile, Trump ran on a crypto-friendly platform, attracting both the wider crypto industry and the bitcoin true believers who see the digital asset as the future of money. On the campaign trail, Trump promised, among other things, to create a "strategic bitcoin reserve".
"Trump's speech at the Nashville [bitcoin] convention during his campaign was met with a huge amount of support from the bitcoin community," said Sandy Peng, founder of the blockchain company Scroll and adviser to Trump's crypto company World Liberty Financial, which uses Scroll's technology. "That was the first time a major candidate had really appealed to the crypto demographic for election purposes. In my opinion, that was akin to something like 30 million votes that were addressed due to this policy stance."
Many in the industry are watching to see how China might respond. To this day, some crypto enthusiasts are holding out hope that Beijing might open the mainland to cryptocurrency trading, but experts say this is unlikely. Going through financial markets in Hong Kong, which has been serving as a kind of crypto sandbox for China, is a more likely bet, they say.
"If China doesn't open up to crypto before Trump leaves office, then it probably won't ever open up, because it will definitely become even more difficult later. With Trump in office, at least there is still room for discussion," said He Yifan, founder and CEO of Hong Kong-based Red Date Technology.
Red Date develops the technology behind China's Blockchain Service Network (BSN), and the company is now focused on blockchain-based digital identification that allows mainlanders to conduct transactions without needing to provide personal information to intermediaries.
If China moves to opening up to crypto, it could allow mainlanders to trade on licensed crypto exchanges in Hong Kong, according to He, while still adhering to the national US$50,000 foreign exchange limit for individuals.
"If this takes off, Hong Kong will immediately become the crypto centre of the world," He said. "However, there is one red line that will never be crossed, which is the ability [for mainlanders] to be able to transfer money abroad through crypto. The inflow and outflow of money remain the most sensitive issue and will never be relaxed."
Beijing has been cracking down on digital currencies since the days of gold farming in the video game World of Warcraft. That would seem to make it an unlikely place for a bitcoin boom, but the circumstances of China's economy at the time made it almost inevitable.
"Basically the exchanges that were built out of China came about because a bunch of people had mining chips and then started mining, and then they needed a place to buy and sell," said Roger Huang, author of the book Would Mao Hold Bitcoin? The Past, Present and Future of Bitcoin in Techno-Nationalist China.
"Some of these entrepreneurs still dominate bitcoin today," he added. "Bitmain and MicroBT, which are still Chinese-incorporated companies, and to a certain extent Bitdeer, which split off from Bitmain, are still the vast majority ... of the mining chips provided around the world."
The most famous and richest among these figures is Zhao Changpeng, a China-born Canadian known in the industry by his initials CZ, who recently served four months in prison in the US for lax money laundering enforcement. He founded Binance, now the largest crypto exchange in the world, in Shanghai in 2017.
While China-based cryptocurrency exchanges had been debanked in 2013, the first big blow to the industry came in 2017, when exchanges were told to shut down and initial coin offerings, a popular means of fundraising that had emerged, were deemed illegal. Binance, which had existed for less than two months, started shifting operations to Hong Kong.
Crypto business boomed in Hong Kong, already home to some of the largest crypto exchanges such as ANX - which would evolve into OSL, one of Hong Kong's three licensed crypto exchanges today - and Bitfinex, founded by the same people who would also start Tether, the world's largest stablecoin. Many traders at the time, including Sam Bankman-Fried, who founded FTX in Hong Kong in 2018, were taking advantage of arbitrage opportunities.
"When [people in] China [were buying bitcoin] 2013, you could really see the renminbi premiums spiking," Weese said. "In 2018, when the Koreans and Japanese were buying, you could see these 'kimchi' premiums, and you could see just how much more expensive bitcoin was in Japan than in Hong Kong."
China's crypto fortunes permanently changed in 2021. On the mainland, Beijing pushed out nearly all bitcoin mining activity, or chased it underground, and declared crypto business activity illegal. In Hong Kong, some exchanges also pulled out because of perceived regulatory uncertainty after the city's government in 2020 introduced a voluntary licensing scheme and proposed banning retail investors.
"China was a leader in both mining and adoption of cryptocurrency in general," said Chris Pereira, CEO of business consultancy iMpact who advised crypto companies after the FTX collapse in 2022. After 2021, "it became truly culturally or socially unacceptable, to be saying you like crypto is whispered in China these days".
China has since sought ways to maintain some sort of leadership in Web3. In 2019, Xi Jinping called for more research into blockchain, and it was included in China's five-year plan in 2021 as a core cutting-edge technology. Red Date became part of an effort to separate mainstream blockchains from cryptocurrency so they could be used legally on the mainland.
"I feel China woke up early but ended up lagging behind," He said. "But a good thing about China is that when everyone abroad is using something, China will catch up."
Part of the effort to catch up may have already started in Hong Kong, which in 2022 made a big pivot to try to court the industry back to the city. The local government promised regulatory clarity under a new mandatory licensing scheme, but it proved costly and onerous, attracting few applicants.
"The market is too small even for just one or two platforms," Weese said. "And the licence ... is super difficult to get. It's very expensive to get."
Meanwhile, courts on the mainland have repeatedly said that cryptocurrencies could be considered property, and therefore legal to own, even if not legal to sell commercially. This raises questions about how China might deal with its confiscated bitcoin holdings, the largest in the world after the US, which may also face legal issues in trying to turn those holdings into a reserve.
A report published in September by People's Court Daily, a media outlet owned by China's Supreme Court, estimated that by the end of 2022, the total value of cryptocurrencies awaiting disposal by Chinese authorities exceeded several billion dollars.
The process for handling confiscated cryptocurrencies in China, however, remains opaque. "Cryptocurrencies lack the same legal status as fiat currency in China, and related activities are deemed illegal," said Chen Mingjie, a lawyer specialising in internet and financial law at ZHH Law Firm. "Yet their property value cannot be ignored when disposing of assets involved in criminal cases."
Promising moves on the crypto front signal to some that it is still too early to count China out.
"These pendulums swing wildly in one direction and then sometimes back to the other," Scroll's Peng said. "There's definitely a shift right now, in this moment in time, but it's hard to say where it will go in the future. We're still very early and in the very first innings of mass adoption."
Peng noted that the shift to the US actually started a few years ago, which could be seen in the time of day that a lot of trading activity was taking place. But Trump has captured the imagination of many in the industry. Even some Chinese entrepreneurs are betting on Trump.
Tron founder Justin Sun, who is now the public face of HTX, this week bought US$30 million worth of WLFI tokens, joining Peng as an adviser to World Liberty. Sun called this a "critical moment" for cryptocurrency and art after an event where he ate a banana taped to a wall, a conceptual artwork called Comedian that he bought for US$6.2 million.
The excitement around Trump in crypto circles is so overwhelming that it may have even awoken the dead.
A week after the November 5 election, a bitcoin address that users on BitcoinTalk once identified as one of the three used by Friedcat, made a transfer of more than 206 bitcoin, currently worth over US$19.6 million. It was the largest transfer it had made in seven years, nearly emptying the wallet.
Additional reporting by Wency Chen.
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.
Copyright (c) 2024. South China Morning Post Publishers Ltd. All rights reserved.
