China Ramps Up Crackdown on Crypto Trading as SAFE Introduces Stringent New Regulations

China’s State Administration of Foreign Exchange (SAFE) has recently introduced stringent new regulations that require banks to identify and report risky transactions

China has introduced new regulations that require banks to identify and report risky transactions, including those involving cryptocurrencies, as part of a broader effort to reduce financial activities and tighten its grip on cryptocurrency trading.

The directive, issued by the State Administration of Foreign Exchange (SAFE) last week, mandates local banks to monitor and flag “risky foreign exchange trading behaviors,” such as underground banking, cross-border gambling, and illegal cross-border financial transactions involving cryptocurrencies.

Banks are now required to track these activities based on factors including the identity of the individuals and institutions involved, the source of funds, and the frequency of transactions. They must also implement risk-control measures and restrict specific services for flagged entities.

The move is expected to significantly hinder mainland Chinese investors seeking to trade Bitcoin and other digital assets.

According to Liu Zhengyao, a lawyer at ZhiHeng Law Firm in Shanghai, the new regulations provide a stronger legal basis for penalizing crypto-related activities.

“The regulatory attitude towards cryptocurrencies in mainland China is likely to continue to tighten in the future,” said Liu.

He added that using yuan to purchase cryptocurrencies and then exchanging them for foreign fiat currencies could now be classified as “cross-border financial activities involving cryptocurrencies,” especially if the amounts exceed legal limits.

China's crackdown on cryptocurrency activities began in 2017, when it banned initial coin offerings and shut down crypto exchanges. In May 2021, the People's Bank of China (PBOC) declared all crypto-related businesses illegal, including Bitcoin mining and trading.

Despite these strict measures, China has not indicated any intention to relax its policies on digital assets. In fact, the Supreme People's Court recently ruled that using cryptocurrency to transfer or convert criminal proceeds violates China's criminal law, further heightening legal risks for traders.

Interestingly, China itself holds a significant amount of Bitcoin, with estimates suggesting it has over 190,000 BTC, making it the second-largest government holder of Bitcoin after the United States. These assets were acquired primarily through the confiscation of illegal trade activities.

In contrast to China's strict stance, there are calls for a more forward-looking approach to cryptocurrency policy. Justin Sun, the founder of the Tron blockchain, urged China to make further progress in this area in July 2024, suggesting that competition between China and the US in Bitcoin policy could benefit the entire industry.

However, the legal status of cryptocurrencies in China remains complex. While a Chinese court has ruled that crypto-assets have “property qualities” and are not prohibited under Chinese law as commodities, this protection does not extend to their use as currencies or business instruments. This nuanced approach reflects the ongoing tension between regulatory oversight and the potential benefits of cryptocurrency in China.