China’s cryptocurrency crackdown made its exchanges grow faster
Tighter regulations saw China's cryptocurrency exchanges pursue rapid global expansion by necessity.
In September 2017, word came down from China's financial regulators that ICOs were illegal and that exchanges would need to cease fiat-to-crypto order book trading by 16 September, CoinDesk reported. Trading volumes dropped quickly, with Huobi exchange founder Leon Li stating that on 1 November trading volumes were only 5% of what they were on 15 September.
But it was a short-lived downturn, and different exchanges found different ways to operate in compliance with the new laws and continue growing.
"Whatever the policy may be, we will comply with the rules," said Robin Zhu of Huobi. "The shift to over-the-counter trading is an unexpected pivot to us. We had never anticipated that to be one of our business strategies."
It seems to be working though. Today, two of China's then-largest exchanges, Huobi and OKCoin, are back in the world's top 10 exchanges by volume and trading cryptocurrency only. Huobi is also expanding rapidly overseas, opening offices in Hong Kong, Singapore, South Korea and the USA, and it has plans to get another office in Japan up and running by March.
The value of a diverse user base
The pivot might have come more quickly than Huobi anticipated, but it seems to have paid off with a more diverse user base. Huobi Pro currently has about 3 million users, but less than half of them are from mainland China. In an uncertain regulatory environment, this kind of geographic diversity can bring an important level of resilience.
Binance has experienced a similar evolution, but largely due to a coincidence of timing. It was registered in Hong Kong when news of the ban came down, drawing a lot of migrating Chinese speculators. It eventually diversified further, registering in the British Virgin Islands and elsewhere as well as acquiring an internationally diverse user and staff base along the way.
"So we are registered in multiple locations and we have people in multiple locations. That way we will never be affected by one regulatory body," said Binance CEO Changpeng Zhao to Bitcoin.com.
The difficulty of practical regulations
The trading ban in September wasn't as organised or straightforward as the market drop might have made it look.
"Basically, the Chinese government issued a warning that exchanges needed to shut down, so we shut down our Chinese users. No government official approached Binance to block Chinese IPs, but this was a move we thought would make sense," Zhao explained. "It is important to note that the Chinese government is not a single entity, there are a lot of people involved and there are a lot of different branches and different offices. Nobody knew what Binance was supposed to do. It’s all very high level and very vague... No one told us to shut down the exchange for Chinese users, but we just did it to show that we are cooperative."
The future of decentralised exchanges and anonymous trading may also pose a problem for regulators.
"Decentralized exchanges have the advantage of anonymous trading and you don’t have to have coins in custody of the exchange," Zhao says.
Much like other decentralised systems, this can prevent the mandatory shutting down of exchanges by authorities. Also, the lack of a central authority means there's not really any entity to impose criminal penalties on.
Decentralised exchanges are also on track to grow quickly, and Zhao said that Binance will "for sure" develop its own decentralised exchange.
"We want to promote decentralized exchanges and advance the technology in that space. That way we can ride a bit off their innovation later on and push our own tech forward.
"The current decentralized exchanges have low volume and are tricky to use. You have to send to a smart contract and then you have to wait. It’s not high frequency trading."
This plan might be well underway. The advancing technology in the space includes systems like the 0x protocol, and many more, which help overcome the mentioned limitations of decentralised exchanges like low liquidity.
Other developments include the idea of semi-decentralised exchanges, such as the Stellar Distributed Exchange. There's only one order book, but it's hosted in a decentralised way and can be accessed through different open-source platforms.
There have been many rumours of cryptocurrency bans in China, South Korea and India, but none of them have lasted long and only the China ban ever eventuated in any real way. And even when it did, exchanges simply found new ways to operate in compliance with the new laws, becoming even more resilient in the process.
This Darwinian business evolution, combined with the growth of decentralised exchanges and some of the inherent aspects of digital currency technology, means outright bans might be almost impossible to enforce.
Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VEN, XLM, SALT and BTC.