Was China’s digital yuan behind Binance’s Shanghai office closing?

The high-profile closing of a Shanghai office used by the Binance exchange in late November appears to have been an early example of China’s latest crackdown on cryptocurrency trading.

Originally misreported as the result of a police raid, the office was actually shut down after it was “visited by local officials,” according to The Block, a cryptocurrency media outlet that broke (and partially retracted) the story on Nov. 21. Why local officials visited the office in the first place remained unclear, however.

As it turns out, their actions matched a warning issued by the China Securities Regulatory Commission on Dec. 27. 

Saying it suspected that “serious violations” of the country’s existing cryptocurrency trading ban had taken place, the CSRC announced a crackdown. Along with website closures and civil and criminal investigations, the authorities will “comprehensively use on-site interviews [and] administrative investigations,” the CSRC promised. 

The “illegal financial activities” included cryptocurrency exchanges providing “virtual currency trading services to domestic residents,” the CSRC said. “They have launched zero-interest loans, dual currency wealth management, and other projects through digital currency mortgages.” The agency also suspected Initial coin offerings and disguised ICOs had been launched. 

This is nothing new. Chinese authorities have been condemning a resurgence of cryptocurrency activities since President Xi Jinping called for the country to become a world leader in blockchain technology on Oct. 25.

No digital yuan competition  

When the story of the Binance Shanghai office closing originally posted, the exchange’s CEO, Changpeng “CZ” Zhao, angrily denounced the entire story. Aside from saying none of it was true, he added that the firm did not even have an office in the city. 

That ended up being only partially true. Dovey Wan, a founding partner of venture capital firm Primitive Crypto and a popular industry Twitter voice, revealed that the shuttered office held employees of a partially Binance-owned firm that outsourced customer service representatives for Zhao. 

Zhao also clashed with The Block in October after the outlet’s research director, Larry Cermack, tweeted that major Chinese cryptocurrency exchanges had “relationships” within the government that helped them get around digital payment processors like AliPay’s policy of banning accounts that buy cryptocurrency. 

Zhao promptly replied “somethings are better left unsaid. Recommend no more news like these, for the sake of the people, our industry (and your business).”

He had good reason to be concerned, according to a recent analysis of China’s official and unofficial cryptocurrency policy by Ryan Selkis, CEO of cryptocurrency research firm Messari.

In “Crypto Policy Trends and Predictions for 2020,” Selkis said that Chinese cryptocurrency miners and exchanges are tolerated by the ruling communist party, even though trading virtual currencies is currently banned.

However, as the country moves closer to launching a digital yuan, the sort of harassment Binance experienced in Shanghai may become more frequent, Selkis suggested.

“There remains serious ‘stroke of the pen’ risk that the party could ban non-state sanctioned currencies outright,” Selkis warned. “[A]nd they don’t necessarily have to ‘ban’ them to severely hinder their progress.”

Nor is it just an issue in China, said Selkis. All of Facebook’s major financial industry partners dropped out of its Libra stablecoin proposal after “the mere Congressional threat of enhanced oversight,” he noted.

The ability to exert influence over the economy that control of fiat currency gives governments means “states aren’t going to cede one of their primary sources of power to these leaderless networks,” Selkis added. 

New encryption law for digital yuan

China took another step towards a digital yuan as a law consolidating state control over encryption technology went into effect on Wednesday.

The so-called password law divides encryption into three categories, and grants the Communist Party control over all of them, according to a report in the Nikkei Asian Review

Core encryption is for highly classified state secrets. Common encryption covers sensitive national data. The government will strictly control these two categories, the Nikkei article said. 

The third category is commercial encryption, aimed at developing industries, it added. This standard focuses on business and private users. While the Nikkei article didn’t say whether the government will be granted the kind of back-door access the FBI has been unsuccessfully demanding for years in the U.S., it’s a safe bet that Beijing will have it.

The password law was initially announced in October, around the time the President Xi Jinping called for the country to become a world leader in blockchain technology. As blockchain technology requires strong encryption, the Nikkei called the law is a prerequisite for the digital yuan, which the country will likely issue on a blockchain platform.