Blockchain and cryptocurrency hold a complex position in China: while Beijing rejects crypto, it embraces blockchain technology. Trading is prohibited, yet infrastructure continues to develop.
Now, with the regulated crypto markets arising in Hong Kong, insiders suggest an emerging loophole.
If China allows its investors to purchase U.S. stocks via the Qualified Domestic Institutional Investor (QDII) program, why not Bitcoin? An expert from Consensus Hong Kong emphasized that the crucial factor here is control, which Beijing is working to maintain.
Two mechanisms permit mainland investors to engage in buying and selling stocks outside the country:
- QDII allows qualified investors to purchase U.S. ETF products using RMB.
- Shanghai-Hong Kong Connect and Shenzhen-Hong Kong Connect enable Chinese investors to trade Hong Kong stocks through mainland brokerage firms, with transactions settled in RMB.
As Yifan He noted, “The key [with these systems] is that capital never flows freely out of China. If you apply this same logic to crypto, there’s no reason it couldn’t work the same way.”
The primary regulatory challenge lies not with cryptocurrency but with capital control, which ensures that funds do not move freely across borders, thus maintaining the stability of RMB. This regulation explains the ban on Hong Kong’s crypto ETFs, which might otherwise operate under in-kind redemptions.
He posed a crucial question: “What distinguishes a Hong Kong-regulated stock from a Hong Kong-regulated crypto asset?” He argued that if a framework exists for trading in RMB without allowing funds to exit China, cryptocurrencies could become just another investment product.
This potential system wouldn’t allow individual Chinese investors to manage their crypto directly; intermediaries, such as licensed securities firms, would handle all purchases.
For instance, they would acquire crypto directly, but investors wouldn’t hold the assets themselves - a licensed security firm would.
This proposed model mirrors current practices for stock and ETF investments in China, suggesting mainland investors could gain crypto exposure without direct asset ownership, keeping all monetary transactions within the nation’s boundaries.
Given China’s large investment base of 200 million retail investors and its economy’s pressing need for stimulus, this regulated access to crypto through Hong Kong’s framework could represent a strategic compromise for Beijing.
Blockchain Versus Crypto
China has consistently advocated for blockchain while maintaining a cautious stance on cryptocurrency.
As He illustrated, “We don’t allow firearms in China, but we can still manufacture steel.” The regulatory framework permits the development of various applications without strict oversight until specific applications prompt regulatory responses.
Conversing with financial regulators hints that changes may be on the horizon.
He remarked, “I see some signals from financial regulators; they’re starting to discuss Bitcoin, suggesting we need to pay closer attention and conduct further research on digital assets.”
Could this shift lead to broader acceptance? Two years past, he would have claimed there was zero chance.
He now places the odds of acceptance at over 50% in the next three years.
