On December 31, 2024, China's foreign exchange regulator name new rules that aim to tighten monitoring of cryptocurrency activities. These rules require banks to monitor and report risky trades, including those involving digital assets such as Bitcoin. State Administration of Foreign Affairs (SAFE) said that banks must identify high-risk transactions based on factors such as the identity of individuals or institutions involved, their funding sources, and the frequency of trades. The goal is to prevent illegal financial activities such as underground banking, cross-border gambling, and other illegal crypto transactions.
As part of these measures, financial institutions are expected to implement risk control procedures and restrict services to entities deemed high risk. This regulatory move comes as China continues its crackdown on cryptocurrencies, which are seen as a threat to financial stability. according to to Liu Zhengyao, a lawyer based in Shanghai, the new regulations will provide a legal framework to punish cryptocurrency trading. He explained that using yuan to buy crypto assets before converting them to foreign currencies would now be classified as a cross-border financial activity, making it more difficult to circumvent the country's forex regulations.
The Chinese government has long maintained a strict stance against digital assets. Since 2017, it has banned initial coin offerings (ICOs), closed cryptocurrency exchanges, and banned financial institutions from engaging in crypto activities. Government actions increased in 2021 when Bitcoin mining was banned, and all crypto-related businesses were declared illegal. Despite these restrictions, China is still the second largest owner of Bitcoin worldwide, owning about 194,000 BTC, with a value of about $18 billion. These funds were seized through law enforcement actions related to illegal activities, as China has not officially purchased Bitcoin.
Although some experts have suggested that China may eventually adopt a Bitcoin reserve strategy, there is no indication that the government will ease its regulations. Legal risks for cryptocurrency traders in China are also growing. In August, the People's Court ruled that using cryptocurrencies to convert criminal money violates Chinese criminal law. In addition, the government has increased oversight of stablecoins such as Tether, limiting their use in cross-border transactions.
China's tough approach to cryptocurrency stands in stark contrast to global trends, where digital assets are more widely accepted. Despite the potential economic opportunities of cryptocurrencies, China remains determined in its policy to maintain strict control over its financial system and limit the influence of crypto in the country. The latest forex regulations are another step in Beijing's efforts to limit cryptocurrency use and protect financial stability.
