As Beijing attempts to regulate and suppress the cryptocurrency boom, traders have been evading regulatory oversight by using over-the-counter trading desks.
According to a report on Monday published by Bloomberg, there has been a significant uptick in OTC platform usage since China announced its latest crackdown earlier this month, with China tightening restrictions prohibiting financial institutions and payment companies from providing services related to cryptocurrencies.
While exact volume data is hard to ascertain as Chinese OTC transactions are peer-to-peer and use third-party payment platforms, the exchange rate between China’s yuan and popular stablecoin Tether (USDT) is seen as a key gauge of local crypto market sentiment — with demand for USDT increasing during market downturns.
According to Bloomberg, USDT/CNY fell by as much as 4.4% after the Communist Party crackdown earlier this month but has since recouped more than half the loss. The recovery suggests that peak selling may have passed as the markets begin to consolidate.
One of the concerns driving China’s crypto crackdown is capital outflows, which have been seen to spur their latest moves to suppress the industry. Bloomberg speculated that OTC trading may not pose the same capital flight risks associated with typical exchanges, suggesting regulators may not be so heavy-handed in dealing with the sector.
“Because the yuan leg of [OTC] trades takes place entirely within China’s domestic financial system, the risk of large-scale capital outflows is low,” the report noted.
China’s shift to the OTC markets mirrors the situation in late 2017 when the state first imposed a ban on cryptocurrency exchanges. Chinese traders are still believed to represent a major share of global crypto trade today despite the crackdown, with analysts estimating China owned 7% of the world’s Bitcoin (BTC) and accounted for roughly 80% of trading before the 2017 clampdown.
The latest wave of government-imposed restrictions has also seen crypto mining operations targeted as China attempts to align its carbon neutrality goals. Several companies, including Huobi and OKEx, have halted their local mining operations and mining services for Chinese customers.
As a result, Bitcoin’s mining difficulty fell by 16% on Sunday to 21 trillion — its sharpest decline this year. Mining difficulty provides an estimate for the computing power required to produce new BTC.
The network automatically adjusts the difficulty around once a fortnight, responding to levels of competition among miners. The lower it falls, the less competition there is — suggesting that many have already powered down their rigs.