China steps-up countywide investigation on Crypto-related businesses

After Shanghai, the Shenzhen government is also now investigating cryptocurrency exchanges. The move comes to be a fresh step to crack down on crypto-related businesses in China.

As per the reports, the finance bureau of Shenzhen has identified undisclosed 39 entities suspected of involvement in crypto-related Ponzi / fraud schemes. As per experts, exchanges involved in doing business with these startups may also come under the authorities’ investigation.

Why recent surge in the investigation:

China imposed a ban on cryptocurrency trading, ICO participation, etc in late 2017. Since then authorities have been regularly monitoring and shutting down crypto-businesses operating in the mainland.

The latest step-up efforts to crackdown crypto-related businesses are due to the resurgence of the crypto speculative bubble after the public endorsement of the blockchain technology by President Xi Jinping. Following the President’s endorsement, stock prices of firms engaged in blockchain business sore to 10% and China-based cryptocurrency project sore too by 30-40%.

Immediately after the surge, China’s state media urged investors to stay rational. Recently another state media reported that of 32,000 blockchain companies in China, less than 10 percent actually possess the technology.

Fearing the rise of crypto Ponzi schemes after President endorsement, soon the reform measures were undertaken by the Shanghai government and ordered the investigation of crypto-related businesses operating in the city.

As per the official announcement, the Shanghai authority stated that it will “adopt monitoring measures such as interviews, inspections, and bans on the entities involved in cryptocurrency activities to resolve risks in a timely manner.”

Reforming cryptocurrency exchanges:

Recently, the Shanghai Financial Bureau and PBoC launched an investigation on the crypto-related businesses including cryptocurrency trading platforms. According to the notice, the scope of the investigation includes:

• Organizing cryptocurrency transactions,
• Fraudulent, Ponzi schemes raising funds on the grounds of blockchain application, and,
• Those who provide services such as publicity, ICO fundraising and trading platforms engaged in the distribution of ICO tokens.

A similar investigation is believed happening across mainland China, with reports of Beijing authorities investigating specifically exchanges. But WHY exchanges?.

WHY 1 | Allowing the Chinese nationals to participate in ICOs/ IEOs.

• In July, China’s Deputy Governor Mr. Pan revisit ICO supervision. He said digital currency trading institutions, without Chinese government permission, are still doing business with Chinese nationals.
  
  Chinese authorities imposed a ban on initial coin offerings (ICO) or other means of cryptocurrency-based fundraising process in late 2017. Termed illegal in China, however, businesses operating overseas still allow mainland users to participate in ICOs or IEOs.

WHY 2 | China’s digital currency unauthorized distribution by asset trading platforms:

• Current investigation on cryptocurrency exchanges also strongly points out the recent unauthorized distribution of ‘DCEP’ – China’s digital currency from unknown asset trading platforms.
  
  PBoC on Nov,13 clarified that reports of PBoC have already issued the digital currency are false. Adding, it has not authorized any asset trading platform or institution to distribute the legal-digital currency. The official also asked the general public to not trust any institution or individual who distributes the digital currency as these are pyramid schemes and therefore, alert the fraudulent activity to the officials.

If the above two reasons are true, this may impact many well-known exchanges. The investigation is said to close before Nov, 22 and identified non-compliant exchanges will have to close their businesses in China.