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CHINESE REGULATORS LEARNT LESSONS IN P2P LENDING MARKET AND CRACK DOWN ON CRYPTO

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It was an interesting week in crypto. Besides the repeated rejection of Bitcoins ETFs by the SEC on Wednesday, the Chinese government announced several actions to even tighten its already blocking stance against cryptocurrencies. In specific the Chinese regulators

  • extended the ban on Chinese crypto trading platforms (originally issued back in September 2017);
  • are about to block also foreign crypto exchanges from offering trading services to Chinese investors;
  • issued a crypto warning emphasizing again the illegality of ICO, IFO, IEO and all sorts of token offerings;
  • requested WeChat, China’s biggest messaging app that has over 1 billion active monthly users, to ban the accounts of cryptocurrency investors, users and businesses, thereby more or less banning Chinese OTC crypto traders from conducting their business via WeChat.

The Chinese authority in charge of the execution of the measures is the National Fintech Risk Rectification Office, a government agency with the mission to deal with risks related to issues like peer-to-peer lending (P2P) and cryptocurrency trading.

The recent China crypto ban must be seen in context with the severe Chinese P2P lending crisis going on in China. P2P lending with an estimated volume of up to $1T is part of China’s vast shadow banking. It’s estimated that the P2P market in China comprises some 15 million people with a currently outstanding loan volume of $200B.

P2P lending is a method of debt financing that directly connects borrowers with lenders. The world’s first online lending platform, Zopa, was established in the UK in 2005. China’s online lending industry has seen rapid growth since 2007 with the local government refraining from regulation for quite a period. Within only few years the number of P2P lending platforms in China reached 3.800. Reasons for the high success of the p2p lending business in China were mainly financial demands of small-to-medium-sized companies that cannot be satisfied by the existing banking system accompanied by a promise of considerable higher interest return rates achievable compared to the low percentage rate for fixed deposits with regular banks for investors.

Partly induced by a slowing-down economy since 2015 the industry shows an increasing number of troubled platforms – with defaults by both borrowers and lenders – a high number of Ponzi scheme stories (the most famous one is Ezubao) and righteous scams. By the end of 2015, 1,031 out of a total of 3,448 Chinese lending platforms were considered problematic.

So the government had to come in: Since mid-2015, a series of announcements set the stage for China’s first regulatory instrument for online lending in August 2016.

In late 2017, the platforms were asked to register with local authorities by June 2018 with the main purpose of the regulations to restrict P2P lending platforms to be information intermediaries only, matching borrowers and investors. Under such regulations, the platforms are not allowed to pool funds from investors or grant loans to any client or provide any credit services, which most of the platforms were doing when they first started.

At the moment ripped-off private investors urge the Chinese government to bail out those platforms. Some of them are on the streets to protest or “维权” which is a common term means “defending their rights”. Those investors are utterly upset and a source of social unrest, and a danger for social stability. So although P2P lending is only a relatively small piece in China’s financial industry, there are still concerns that the collapse of these platforms could trigger systematic risks,

That said, it’s quite understandable that the Chinese government is rather reluctant with the new p2p crypto wave as evidently, the P2P and crypto market segments have much in common: although it is evident that p2p investors are mainly speculative and should be held responsible themselves for the losses, with private people losing their savings it could become a social and systematic risk as learned with the P2P lending business.

The issues as identified with the Chinese p2p platforms are quite similar to the suspected fraudulent trading habits discussed with the unregulated crypto exchanges at the moment (wash-trading,..).

Fortunately for the regulators, the crypto market is a bit behind P2P which give regulators a window of opportunity to learn from the P2P lessons.

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