China’s new crypto-related forex regulations aim to strengthen trade oversight.

Introduction

On December 31, reports surfaced that China has introduced revised foreign exchange (forex) regulations aimed at tightening its stance toward cryptocurrency. These measures, which came into effect after a year-long review process, include monitoring and flagging risky forex trading activities involving crypto assets. The new rules impose stricter oversight on cross-border gambling, underground banking operations, and illegal cross-border financial activities tied to crypto. Chinese regulators are also emphasizing the importance of tracking these transactions based on the identity of individuals and institutions involved, as well as their sources of funds and trading frequency.

The introduction of these rules is part of a broader effort by China to combat illicit financial activities (IFAs) and reduce energy consumption associated with cryptocurrency mining. The country has previously banned crypto-related activities, citing concerns over security risks, environmental impact, and money laundering. However, the new regulations represent a significant escalation in its anti-crypto stance.

Background on Crypto in China

China’s relationship with cryptocurrencies is marked by both legal ambiguity and restrictions. Since 2019, the Chinese government has banned crypto transactions altogether, citing concerns over energy consumption and environmental impact. The country also prohibited financial institutions from dealing with digital assets or engaging in crypto mining activities. Despite these prohibitions, China remains one of the world’s largest holders of Bitcoin (BTC), with an estimated 194,000 BTC held as of December 2023.

Regulatory Changes

The new foreign exchange rules aim to further consolidate China’s position as a global economic power while reducing its exposure to crypto-related risks. Under the updated regulations, banks must monitor and report any risky forex trading activities involving crypto assets. This includes identifying transactions that may be linked to cross-border gambling or illegal cross-border financial flows. Regulatory authorities are also expected to flag suspicious activity based on patterns of behavior observed in individuals, businesses, and institutions.

The rules impose additional scrutiny on cross-border trading operations involving crypto. For example, any attempt to transfer crypto across borders will now require banks to report the transaction as part of their regular forex monitoring processes. This move is seen by many experts as an escalation in China’s anti-crypto efforts, which have been increasingly targeted over the past several years.

Legal Expert Opinions

Liu Zhengyao, a lawyer at ZhiHeng law firm, has expressed support for the new rules, stating that they will provide another layer of tools for punishing crypto trading activities. "The new rules will make it more difficult for residents to buy digital assets," Liu said in an interview with The South China Morning Post. He emphasized that the Chinese regulatory framework is becoming increasingly complex, with regulators using various tools to target illicit activities.

Zhangpeng Zhao, the former CEO of Binance, has also weighed in on the situation. "China’s approach seems to be becoming more aggressive," Zhao said during a recent interview at the Bitcoin MENA event in Abu Dhabi. He argued that the country is unlikely to stop its anti-crypto efforts any time soon and that it will continue to tighten its regulatory stance.

China’s Bitcoin Holdings

Despite its anti-crypto stance, China remains one of the world’s largest holders of Bitcoin. According to data from BitcoinTreasuries, China held approximately 194,000 BTC as of December 2023, with a value of about $18 billion at the time of reporting. This position is partly attributed to the fact that Chinese officials have not invested in crypto assets themselves, despite their country’s vast financial resources.

The majority of China’s Bitcoin holdings were acquired through asset seizures linked to illicit activities. For example, authorities have reportedly seized large sums of cash from individuals and businesses involved in money laundering and other illegal operations. The proceeds of these seizures are then used to purchase Bitcoin on the black market or through official channels, despite the country’s strict anti-crypto laws.

Future Implications

The new foreign exchange rules are likely to have a significant impact on the cryptocurrency ecosystem in China. While some experts believe that the measures will slow down cross-border trading and make it more difficult for individuals and businesses to engage in crypto activities, others argue that the rules are simply an evolution of China’s existing regulatory framework.

China’s anti-crypto efforts are unlikely to change significantly in the near term, given the country’s long history of repression on the cryptocurrency front. However, the introduction of these new rules is likely to put further pressure on companies and individuals operating in the crypto space within the country.

Conclusion

The new foreign exchange regulations introduced by China represent a significant escalation in its anti-crypto efforts. While some experts believe that these measures will make it more difficult for residents to engage in crypto activities, others argue that they are simply part of an increasingly complex regulatory framework aimed at targeting illicit financial flows. As the country continues to tighten its grip on the cryptocurrency space, the implications for individuals and businesses operating within China’s borders will likely become increasingly complex.