VPN, Tether Help Chinese Traders Bypass Crypto Ban

Chinese traders are using virtual private networks (VPN) and stablecoins backed by foreign currencies to circumvent tighter restrictions on domestic cryptocurrency activity, according to a new report by the South China Morning Post (SCMP). The news follows a tidal wave of new restrictions by state authorities keen on stamping out digital currency trading.

Client-to-Client Trades

Industry observers say Chinese traders are relying on the decentralized nature of cryptocurrency transactions to fund their foreign accounts and steer clear of government regulations.

“[A]s long as a trading platform’s servers remain outside China, and transactions are conducted peer-to-peer and remain decentralised, it would be a huge challenge for the regulators to completely block access,” the SCMP said in its report.

To circumvent domestic controls, retail traders are converting yuan into Tether, a dollar-backed stablecoin that is widely traded on global exchanges. Two individuals who have both completed the KYC/AML procedure with an exchange can then simply swap fiat currency for tether.  The exchange oversees the trade and would step in only when transactions are not honored. According to sources quoted by SCMP, the money is usually transferred through bank accounts or third-party payment providers.

Once Tether is received, the trader can conduct a crypto-to-crypto trade on any exchange through a virtual private network. Although Chinese regulators have the power to shut down VPNs, reaching a consensus on the appropriate firewall is a lengthy process.

The War on Crypto

China’s cryptocurrency market has been under attack from regulators for at least the past year. This initially included blanket bans on domestic exchanges and initial coin offerings (ICOs) but has since been expanded to include access to foreign cryptocurrency accounts. In August, regulators shut down blockchain news websites and warned public hotels against hosting cryptocurrency events. At least eight crypto-focused online media outlets, some of which raised millions in venture capital, had their public accounts on WeChat blocked as part of a wider crackdown on the blockchain economy.

Mainland authorities also announced they will block access to 124 offshore cryptocurrency exchanges that continued providing services to Chinese citizens following the initial ban in September.

Amid a widening crackdown at home, Chinese investors have set their sights on more crypto-friendly jurisdictions overseas. Singapore is home to perhaps thousands of crypto investment funds set up by Chinese nationals. As Hacked previously reported, establishing a fund in Singapore costs less than $1,500 and takes just three weeks to complete.

Although China may have banned cryptocurrency trading, the country is on the leading edge of blockchain-based research and innovation. A central bank-sponsored research hub has already submitted dozens of cryptocurrency patents in an attempt to align blockchain technology with traditional financial applications.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi