China’s Latest Fintech Plan Paints a Bleak Future for DeFi

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After slamming multiple bans on cryptocurrency-related activities multiple times over the years, the wording of China’s newly-released four-year fintech plan not only reiterates that cryptocurrency as the world currently knows it won’t be tolerated in the country, it hints at a difficult future for protocol developers in decentralised finance (DeFi) underpinned by blockchain technology.

The blanket embargo on cryptocurrency in September 2021 was preceded by restrictions in phases dating back to December 2013 when the People’s Bank of China and the country’s technology ministry banned banks and payment firms from offering cryptocurrency services and labelling Bitcoin a “virtual good” with no legal status. This was shocking news for many Chinese citizens who had begun trading the virtual currency following an earlier comment by the government that they were free to do so.

The next interdiction by the state fell on initial coin offerings (ICOs) in 2017. China said this action was to protect investors and prevent financial risks. Crypto exchanges in the country had to close down. And by the middle of 2018, the PBOC said that 85 cryptocurrency trading and ICO platforms had exited the market. By 2021, the effects of these proscriptions were manifesting with some miners leaving China to set up in countries such as Thailand, the United States and Kazakhstan while others sold their mining equipment and closed operations.

China has now lost its top position as the largest cryptocurrency mining hub in the world to the United States, but the one-party communist dictatorship appears unbothered as it continues to emphasize its yearning to ‘control’ its financial and economic systems. However, at its core, DeFi and blockchain – the philosophy and technology that bolster cryptocurrency-related activities – counter China’s push to hold its financial system in tight grasp.

Chan, a DeFi protocol developer in China, whose real name Arweave News is withholding for his safety, said – like big cryptocurrency miners, DeFi protocol developers were also affected but the latter could explore multiple ways to circumvent the ban and government officials were aware of the potentials of cryptocurrency but chose to focus on the perceived danger.

“It (cryptocurrency) has been heavily used for money laundering and capital flight for many years. It is very difficult to use fiat for these purposes in China. China has a very powerful technology system. There is no other way for the government than to ban it,”Chan said.

Indeed, the ban has not been effective in preventing individuals from trading virtual currencies as fiat-cryptocurrency trading is done over the counter through a broker-dealer arrangement.

“The nature of cryptocurrency makes it unnecessary to circumvent the ban. In China, the cryptocurrency ban is a situation of don’t talk about it and don’t embarrass the government,” Chan said.

Beijing’s 8-task plan to develop its fintech industry stunned some observers. But the plan is vague and left many questions unanswered including how it plans to execute the tasks and what exactly it would do with cryptocurrency.

The components of the tasks suggest that cryptocurrency, with its decentralisation philosophy and power consuming features, does not have a future in China’s fintech landscape. It is also not clear what role the e-CNY, the country’s Central Bank Digital Currency which got over 16 million downloads in its first week of launch will play.

“We will build a green and highly available data center…put in place an advanced and efficient computing power system…”, the third task read. The country added in the sixth task that it would provide “more inclusive, green and humanized digital financial services”. Expressing its urge to strengthen its hold over the fintech industry, Beijing stated it would “implement look-through supervision over fintech innovation and build a firewall for finance innovation and build a firewall for finance and technology to fend off risks”.

The plan’s goal of developing the nation’s fintech industry, however, does not excite that section of the technology community that favours DeFi. Chan said he does not take the plan seriously and believes that the use of the word “fintech” in the development guideline is out-of-date.

“We either use DeFi or cryptocurrency but nobody uses fintech today. It is a word from at least 3 to 5 years ago. If nobody understands it, how do you implement it?” he asks.

“As Chinese people, we do not know what [the fintech plan] really means if we read the Chinese version. We cannot understand the meaning of each sentence. Government policy in this context says nothing despite elaborating with 1,000 words.”

For now, cryptocurrency’s use by individuals in China thrives. The vast majority of Arweave nodes, even, are based on the Chinese mainland. How long this continues before the country is able to effectively stop it is unknown. Although the Fintech plan puts a dark cloud over decentralised finance including cryptocurrency, Chan is hopeful that its future is bright.

“Crypto markets and investors remain active and vibrant, even in China. This is promising. Crypto investors and holders know it is the trend and it is the future. China’s investors are not discouraged by the ban,” he said.

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