The Chinese government is ramping up its crackdown on crypto with a ban on virtually all trading activity in the country, including trades between different cryptocurrencies and any trades taking place on exchanges.
This comes just four months after the country banned the bulk of crypto mining activity. It also coincides with the country's rollout of a central bank digital currency, or digital yuan, which some argue will serve as an officially sanctioned replacement to private digital currencies.
While the move has sent shockwaves through global crypto markets and dragged down the price of major coins such as Ethereum and Bitcoin, many in the industry are making the case that crypto's demise is not yet a done deal in the world's second-largest economy.
Even as trading volume is likely to fall precipitously — several large exchanges have already effectively shut down in the country — crypto-holders could continue to hold and even exchange their holdings in the over-the-counter or off-exchange market.
"I do think you'll see people continuing to hold, and I do think you'll see people creatively liquidating, or just transferring the entire value of their wallets to someone else," said Adam Lowe, chief innovation officer at Arculus, which develops crypto wallet technology.
One way they could continue to exchange crypto, theoretically at least, is by selling passwords or keys to private wallets for a set value. While this is much less efficient than trading over highly centralized exchanges, investors in China who already have large investments in crypto have a clear stake in finding a way around new regulations.
"I think you're going to see people be incredibly creative," Lowe added. "You can look at any time a nation state has made something illegal that has very high demand, like the Prohibition era in the United States."
Chinese investors are also no strangers to navigating the edicts of the Chinese Communist Party (CCP).
"Chinese nationals were very early adopters of bitcoin for the reason that it helped them circumvent capital controls," said Ben McMillan, chief information officer at IDX Digital Assets, which provides research solutions in the crypto space. "The Chinese are very ingenious at kind of playing this cat and mouse game with the CCP."
Much depends on whether China continues to intensify its crackdown on crypto with regulations on the over-the-counter market and even wallets themselves.
"A lot of the folks I've talked to are looking very closely at what China does to the OTC markets," McMillan said. "Is this the end of the regulation, or do they continue to creep forward and start going after OTC markets, peer-to-peer transactions, or off-exchange transactions?"
It's no secret that the CCP is flexing its muscle in multiple aspects of Chinese life, from new bans limiting the amount of time kids can play video games to a wider crackdown on the tech industry. But even the most avid China-watchers are struggling to anticipate its next move.
"People see the ban in China as a loss of the market," Lowe said. "I think the market is just less open. It will still penetrate somewhat. It will just be significantly harder to get in and out of there."
'You Can't Put the Technology Back in the Box'
The most bullish in the crypto community, however, are taking the news of the ban in stride.
"I don't think any regulation or political agenda is existential to the space," said Brian Mosoff, CEO of Ether Capital, an asset manager with a focus on the Ethereum blockchain. "It may be bloody. It may cause a lot of short-term pain, but I don't think development in the space will stop. It may get quieter for a bit, but you can't put the technology back in the box."
Mosoff said he's confident crypto will simply move into other jurisdictions, where it will continue to thrive.
The ban also clarifies the regulatory stance of one of the biggest players in the world, which has been waffling on crypto for several years now, stirring up uncertainty among already volatile assets.
"The structural bull case for bitcoin is still intact, and to the extent that this removes some regulatory uncertainty from a very large player, specifically the CCP, that's not a bad thing going forward," McMillan said.
More important now to the broader crypto community is whether the U.S. follows China's lead. U.S. regulators such as SEC Chair Gary Gensler and Federal Reserve Chair Jerome Powell have both repeatedly called for new regulations, while at the same time commending innovations in the crypto space.
"We're really at this crossroads where it's time for regulators to decide how they're going to regulate the space, and if they're going to allow these businesses to continue or snuff them out. But I think that they recognize, at least in the west, the space is not going to stop," Mosoff said.
Looming over this crossroads is the role of central bank digital currencies.
While China is shutting down the private crypto market, it's also laying the foundations for its own digital yuan, which is currently being piloted in multiple cities.
"When you zoom out and look at the geopolitical picture here, China was very early and very aggressive at developing their own CBDC," McMillan said. "That's a point of pride for them. That's something they really want to get right. Their efforts there are directly contributing to the crackdown that we've seen."
Fed Chair Powell last week said the U.S. was exploring its own CBDC but was focusing on getting it right rather than moving quickly. He also signaled that he's thinking holistically about the entire digital currency ecosystem, rather than framing CBDCs as a potential crypto-killer.
"It's a fundamental mindset difference," Lowe said. "China wants to become the world's reserve currency, and they don't want any blockchain or bitcoin slowing them down. And I think that's the main driver for the ban, regardless of whatever they say."
Many in the crypto community share Lowe's sentiment, but whether China's goal is greater global economic power, or simply more efficient monetary policy within its own borders, the U.S. and China are increasingly taking radically different approaches when it comes to crypto.