Bloomberg: The recovery is just an illusion; China's crypto regulation enters a deep winter

“The problem has never been Hong Kong’s regulatory framework, but whether China will tolerate the circulation of yuan-denominated tools outside its control.”

Digital Frustration

Last year, more and more crypto commentators believed that China might be turning a corner on digital assets.

Since the head of the People’s Bank of China (PBOC), Pan Gongsheng, outlined a vision where the yuan could challenge dollar dominance, the word “recovery” has been repeatedly mentioned.

However, on February 7, the music stopped.

During the latest round of crypto crashes, China tightened restrictions on cryptocurrencies and the tokenization of real-world assets (RWA), banning domestic entities from issuing digital tokens overseas and prohibiting the issuance of yuan-pegged stablecoins abroad without approval, citing concerns over monetary sovereignty.()

Angela Ang, head of Asia-Pacific policy and strategic partnerships at blockchain intelligence firm TRM Labs, said, “China’s considerations on stablecoins are at best tentative, and in recent months, that attitude has become increasingly cold.”

Ang pointed out that the PBOC’s statement “definitively ended any hopes of issuing offshore yuan stablecoins in the near future — definitely not in Hong Kong, and possibly not elsewhere either.”

For Hong Kong, which has been dedicated to building a digital asset hub, this is a significant setback. In June last year, Christopher Hui, Secretary for Financial Services and the Treasury of Hong Kong, even refused to rule out the possibility of pegging the city’s stablecoins to the yuan under regulatory requirements. But it can be inferred that he would now definitely close that door himself.

Source: Artemis Analytics

As Ang said, this was foreshadowed long ago. As early as August last year, China had informed local brokers and other institutions to stop publishing research reports and hosting seminars promoting stablecoins, in an attempt to curb market enthusiasm.

Patrick Tan, legal counsel at blockchain intelligence firm ChainArgos, said that last week’s announcement “eliminated the uncertainty hanging over the private issuance of yuan-pegged stablecoins.” He added, “Issuers now clearly understand where the red lines are.”

Companies applying for licenses now have to compromise and pursue stablecoins pegged to the Hong Kong dollar (HKD).

Bloomberg previously reported that up to 50 companies planned to apply for stablecoin licenses in Hong Kong last year. According to a Financial Times report in October, including tech giants Ant Group and JD.com, but after Beijing’s intervention, they had to halt their stablecoin plans.

Neither Ant Group nor JD.com responded to requests for comment.

As of Tuesday, Hong Kong had granted licenses to 11 crypto exchanges and allowed 62 companies to trade digital assets for clients. The list includes CMB International Securities Ltd., Guotai Junan Securities (Hong Kong), and TFI Securities and Futures Ltd., among other institutions with Chinese backing.

But there are concerns that if access to the yuan is blocked, all these efforts could ultimately fail.

Tan said, “The issue has never been about Hong Kong’s regulatory framework, but whether China will tolerate the circulation of yuan-denominated tools outside its control. Capital controls and free stablecoins are fundamentally incompatible.”

Source: Coinglass

The open interest in Bitcoin perpetual futures has failed to recover from the decline that began in October, highlighting a lack of confidence behind the recent rally. Data from Coinglass shows that current open interest has fallen about 50% from its peak in October.

Key Data: $3.3 billion

According to Bloomberg Intelligence, since the crash in early October, investors have withdrawn approximately $3.3 billion from U.S. Ethereum spot ETFs, with outflows exceeding $500 million so far this year. The assets under management in Ethereum ETFs are now below $13 billion, the lowest since July last year.

Industry Perspective

“The market is consolidating around what is truly effective. Even crypto-native venture capital firms with large amounts of idle capital are shifting heavily toward fintech, stablecoin applications, and prediction markets. Everything else is struggling to gain attention.”

— Santiago Roel Santos, founder and CEO of crypto private equity firm Inversion.

Crypto-native VCs are focusing on better-performing sectors, such as stablecoin infrastructure and on-chain prediction markets, and expanding into adjacent industries.