The history of crypto mainly revolves around China. Although it is true that the first cryptocurrency exchange was launched in Japan, the infamous Mt. Gox, but when it collapsed, all the power over crypto was handed off to the three main exchanges existing at that time:
- Huobi - Beijing based
- OkCoin - Beijing based
- BTC China - Shanghai-based
For users who were not based in China, Bitstamp and Bitfinex offered their services. Needless to say, both of those exchanges also had Chinese origins.
Bitfinex was the first exchange that enabled peer-to-peer lending and borrowing in crypto and fiat. It was also the first exchange that enabled users to borrow for margin trading; any collateral was permitted.
Crypto domination shifted insignificantly in 2013 when ICBIT was launched, founded by Russians. This was the first platform that enabled exchanging derivatives. They also invented inverse BTC/USD futures contracts. That year, futures trading resulted in a 200% yield, and it was incredible.
However, in 2014, Chinese Huobi, 796, OkCoin, BTC China, and the Hong Kong-based BitMEX took over the market again when they launched their versions of futures trading. They also introduced the so-called socialized loss system which protected the platform if individual traders went bankrupt. It was a significant improvement, especially considering the high volatility of crypto.
Tether, the biggest stablecoin based on the market cap, grew in popularity thanks to BitFinex. Chinese users and the exchanges needed to operate in USD without involving traditional banking systems. USDT was a perfect way to do so.
Binance also used to base all its trading pairs against USDT.
Chinese exchanges quickly took dominating positions in daily trading volumes. This was determined by the following factors:
- Bitcoin mining companies and those that manufactured Bitcoin mining equipment were located in China.
- The majority of all trading volumes was concentrated in China.
- Crypto was used mostly by individual users, which is why products were intuitive and appealing.
2016 was marked by the invention of perpetual swaps. This invention was made by BitMEX and immediately boosted the trading volumes of the exchange. Until now, they are one of the most traded instruments.
Deribit, from the Netherlands, initiated the crypto options trading. For now, this is the only exchange of non-Chinese origins that has initiated something significant in the crypto market.
Why China?
For ages, China has been a major economic power. Even with recessions, rebellions, and issues, the country was developing at a rapid rate. In 1820, China accounted for approximately one-third of the world’s GDP while at this time, the Industrial Revolution was just starting in Great Britain.
A series of economic reforms implemented in China in 1978 propelled the country to the ranks of the major economic powers in the world. The entire situation was beneficial for the development of new financial solutions.
Hong Kong was a window between China and Western Europe. When China reopened its doors to the world in 1970-1980, the importance of Hong Kong grew. There, goods and capital could be exchanged between two major powers in the world - China and Western Europe. This, in turn, made Hong Kong grow and flourish.
Again, why Hong Kong? This was a city open to the world while China was closed. Fr China, it was convenient to have this place open and benefit from what the outside world can give without letting them inside. Without it, Hong Kong would not be able to survive; its territory is small, it has no resources, no individual economy, and its only role was to serve as a portal between China and the world.
After some years passed, the Chinese government decided that crypto has no place in the country and repressions on crypto started. It forced the major crypto businesses to move to Hong Kong, including Huobi and OkCoin (later rebranded as OKX).
Binance, one of the biggest cryptocurrency exchanges, became famous for its wandering. Its CEO is of Chinese origin but holds a Canadian passport, and this enabled him and the company to “be everywhere and nowhere at once.” This allowed Binance to survive scrutiny in China and consolidate the Chinese diaspora and, thus, grow.
However, remember that Hong Kong, even if considered free, is a part of China. So, over time, it also became less friendly to cryptocurrency. This is why the major crypto businesses started moving to Dubai, which was welcoming to innovation, Singapore, a known hub for all the new technologies, and the Bahamas. During the COVID pandemic, Hong Kong became even more reserved.
What’s Up?
Now, something interesting is happening. For some reason, Hong Kong wants crypto back. It wants to legalize crypto trading. Furthermore, you know how it all happens: little by little other aspects become legal, and it ends in mainstream adoption.
Again, remember that Hong Kong is still a part of China, and without the mainland’s permission, nothing can happen there. So, this means that not only Hong Kong wants crypto back, but China does too, even though it is not so evident. Why, though? Would it not be easier just to close Hong Kong, just like it happened during the COVID pandemic?
This is not as easy as one may believe. It is about the eternal rivalry between China and Singapore. Closing Hong Kong and making it fade as a financial center would mean giving up the rivalry and offering the crown to Singapore.
Singapore was the fastest among Asian cities to open to international business during the COVID pandemic. While even Tokyo was closed to foreigners, Singapore was not. This is why many businesses moved there, and thus, money started flowing into Singapore. Singapore even opened a new visa scheme aimed at high-earning bankers and engineers. Meanwhile, the rest of the world was struggling to get over the lockdowns.
Soon after that, Hong Kong followed the same route. It started reviewing visa rules to attract foreign talent. Along with high-earning specialists, Hong Kong was aiming at graduates from top-ranking universities.
Soon after that, changes in relation to crypto were observed. Crypto is banned in Mainland China, but there are speculations that Hong Kong will permit buying and selling crypto soon. But where are guarantees that China will not change its mind? Well, the guarantees are in the main problem of the country - the US dollar problem.
China exports plenty of goods abroad and receives payments in US, and these US dollars will be used to purchase commodities or internal assets. This made China the second-largest treasuries holder after Japan.
However, dollars in treasuries do not literally belong to the country; they belong to the Western financial system, which is led by America. China rents these US dollars, not own them.
What if the US decides to freeze the USD held in a foreign country? Of course, it will most likely never happen because this would undermine the trust in the dollar. But what if it happens? How can China guarantee the safety of its assets in foreign currency? China holds too much US debt, and this is its weak side.
The government of the country understands this problem. Normally, they would buy more treasuries and reinvest the maturing treasuries in new treasuries. This year, China should have bought treasuries for almost $700 billion. But the country did not do it.
This is where crypto can solve the problem, at least to some extent. Bitcoin would help to recycle dollars into something other than buying the U.S. treasuries. However, permitting purchasing crypto in the country with CNY would weaken the national currency - that is why Hong Kong exists.
By permitting Hong Kong to accept crypto, moreover, by permitting it to create a vibrant crypto economy, Beijing gets two benefits:
- USD can be converted into Bitcoin and, thus, exposure to the U.S Treasuries will drop
- Beijing does not lose control over the financial situation in mainland China.
Bottom Line
China has always played one of the major roles in the development of the crypto industry. Now, the country has not left crypto, it is just waiting and checking which ways to adopt it are the right ones. It looks like the best option has been found, and thus, we will see the consequences soon.