Executive Summary:

• Despite the Chinese Communist Party’s restrictions on decentralized virtual currencies, the PRC has maintained a significant underground cryptocurrency industry, with investors posting $1.15 billion in gains in 2023.
• PRC investors are driven to digital assets by practical considerations amid limited traditional investment opportunities and a weakening economy. The ease of bypassing restrictions, such as using VPNs and financial tech platforms for transactions, has facilitated continued investment in cryptocurrencies by retail investors.
• While the PRC has imposed restrictions to preserve financial stability and address environmental concerns, the decentralized nature of cryptocurrencies challenges comprehensive enforcement. However, an increase in cryptocurrency-related crime could prompt more stringent measures from Beijing.
• Cryptocurrency transactions are not illegal in the PRC. However, a rise in digital asset crimes, including money laundering and scams, poses potential risks that could lead to further regulatory actions to combat illicit activities in the burgeoning sector.

The People’s Republic of China (PRC) has developed a thriving underground cryptocurrency industry. This has occurred despite the Chinese Communist Party (CCP) restricting many activities involving decentralized virtual currencies. In 2023, investors in the PRC posted significant crypto investment gains totaling $1.15 billion. This puts them at fourth in the world after their counterparts in the United States, United Kingdom, and Vietnam (SCMP, March 17). While this figure was a significant decrease from the $5 billion that PRC investors made from digital assets in 2021 (the previous iteration of this survey), the numbers are consistent with broader fluctuations in the mercurial crypto market.

Data compiled by blockchain research firm Chainalysis show that the PRC’s crypto market recorded an estimated $86.4 billion in raw transaction volume between July 2022 and June 2023. Within this figure, the proportion of large retail transactions (defined as those within the range $10,000-$1 million) is 3.6 percent—nearly twice the global average (MoneyDJ, January 26).

PRC retail investors have flocked to digital assets for practical reasons rather than out of an underlying affinity for the concept of decentralized digital currencies. Traditional investment opportunities in the country have worsened significantly amid a weak economy (Coinlive, January 25), while Beijing’s restrictions can be overcome with relative ease—by using a VPN to access crypto websites or apps banned in the PRC, for instance. Additionally, crypto exchanges like OKX and Binance still offer trading services for PRC-based investors and guide them to use fintech platforms such as Ant Group’s Alipay and Tencent’s WeChat Pay to convert renminbi (RMB) into stablecoins with dealers, so that they can trade cryptocurrencies.

Bans such as those that the PRC government has tried to impose were never likely to work. According to Caroline Malcom, head of public policy at Chainalysis, this is because of “the decentralized nature of cryptocurrencies and the fact that they can be transferred end-to-end and traded on global exchanges makes it difficult for any government to completely eliminate them” (Blockcast.it, May 9, 2023).

However, there is a risk that Beijing’s restrictions on the crypto market may become more draconian if it perceives a marked threat to financial stability. The recent uptick in PRC-linked cryptocurrency crime might prompt such a crackdown.

Crackdowns Have Not Precluded New Risks

Previous cryptocurrency crackdowns in the PRC have occurred amid broader turbulence in the global market for digital assets. In 2017, Beijing banned initial coin offerings (ICOs)—a means of fundraising for early-stage crypto projects—amid a global surge in related fraudulent activity. Such fraud at the time was severe. A study published by ICO advisory firm Statis Group in mid-2018 found that more than 80 percent of ICOs that occurred in 2017 were identified as scams (CoinTelegraph, July 13, 2018).

The tough restrictions imposed in 2021 had a different focus. Curbs on domestic exchanges and trading sought to preserve systemic financial stability while a bull market raged. At the same time, Beijing cracked down on crypto mining in part because of the strain it puts on the electrical grid as well as heavy carbon emissions, which could compromise the PRC’s environmental goals. A directive issued by the National Development and Reform Commission (NDRC) in September 2021 offers some insight into Beijing’s related thinking about mining. The document called for the “orderly exit of existing mining projects,” which it said would “promote the optimization of industrial structure, and help achieve carbon peak and carbon neutrality goals as scheduled” (NDRC, September 3, 2021).

Since 2021, the PRC has not initiated a substantial new crackdown on digital assets. If anything, Beijing’s attitude toward cryptocurrency could be interpreted as moderating slightly given its quiet acquiescence of Hong Kong’s push to become a leading hub for digital assets. In January 2023, Huang Yiping, a former adviser to the People’s Bank of China, said in a commentary that “banning cryptocurrencies may be practical in the short term, but whether it is sustainable in the long term deserves in-depth analysis,” adding that long-term restrictions on digital assets could cause China to miss out on “opportunities for the development of some important digital technologies.” (Sina.cn, January 29, 2023).

Crypto Seen as a Safe Investment

Demand for cryptocurrency in the PRC has risen because other investment opportunities are lacking. With uncertainty about the country’s economic prospects growing, PRC investors are eager to invest offshore and some see Bitcoin as a safe haven like gold (TechNews.tw, January 26). Investment opportunities that were previously reliable are failing to deliver attractive returns. For instance, despite steady IPO activity, the PRC’s stock exchanges in Shanghai, Shenzhen, and Beijing have all been struggling. In January, Shenzhen’s ChiNext Composite Index fell 20 percent, while the Shanghai Composite Index hit its lowest point since 2018 (VOA Chinese, February 9). Furthermore, the blue-chip CSI Index fell 35 percent in the 36 months to December 2023. According to Morgan Stanley, earnings at listed companies are likely to miss forecasts for a tenth straight quarter, pushing down valuations (Bloomberg, January 24). Though Beijing is reportedly preparing to inject about RMB 2 trillion into the market in an effort to stabilize the situation, that may not be enough to lift investor sentiment. The property market has also been experiencing a slump. Once seen as a safe asset that would appreciate significantly, especially in the PRC’s first tier cities, that is no longer the case. Consequently, property investment declined about 9.6 percent in both 2023 and 2022 (Reuters, January 16).

In contrast, the crypto bear market that characterized 2022 and most of last year has ended, with major cryptocurrencies surging in value over the past six months. As of March 27, Bitcoin has jumped 160 percent to $68,509 while Ethereum has risen 118 percent to $3,477.

Meanwhile, Hong Kong, the traditional offshore financial center for the PRC, is vying to become a cryptocurrency hub just as investor interest in the mainland is surging (Lexology, November 13, 2023). It is unclear to what extent, if any, Beijing intends to use the city as a testing ground for an eventual relaxation of restriction on digital assets in the mainland, but mainland investors will naturally be a big focus for Hong Kong in the crypto sector, just as they are in other segments of the financial services industry.

Restricted But Not Illegal

The PRC has imposed many restrictions on cryptocurrency transactions but they are not illegal in the country. Instead, plucky retail investors operate in a gray area. A Fujian Province court explained this issue in an analysis published in September 2023:

“Virtual currency transactions that do not involve illegal financial activities are not administratively illegal. Although the civil act of buying and selling virtual currency can be deemed invalid because it harms the country’s financial order, the virtual currency itself is not an illegal item,” the court said, adding that based on various Supreme People’s Court civil judgements since 2022, “under the current legal policy framework, virtual currencies held by relevant entities in China are still legal property and are protected by law” (Sina.cn, September 1, 2023).

The Xiamen City court further explained how the PRC sees decentralized digital currencies, emphasizing that it has not recognized them as legal tender or allowed them to be used for payments due to “considerations such as protecting the renminbi’s status as legal tender and combating crime.” However, the exchange value of cryptocurrencies “objectively exists due to legal recognition and legal circulation in overseas markets and cannot be eliminated.” (Sina.cn, September 1, 2023).

Binance, the world’s largest cryptocurrency exchange in terms of daily trading volume, provides an additional perspective on Beijing’s digital asset policies. In a June 2023 Chinese-language post on its official website, Binance notes that Beijing in 2013 prohibited financial institutions from conducting Bitcoin-related business and ordered them not to circulate the mercurial digital asset as currency. Then in 2017, it banned ICOs and in 2021 enacted its toughest crypto controls to date, shutting down domestic exchanges, banning trading by residents, and restricting mining (the process by which cryptocurrency is created). “The purpose of these regulatory measures is to maintain financial order, prevent financial risks and protect the interests of investors,” Binance said (Binance.com, June 25, 2023). If cryptocurrency and its technology are not illegal in the PRC, related transactions and business activities are nevertheless “subject to strict regulatory restrictions.” With that in mind, PRC citizens and companies “should abide by relevant laws and regulatory policies” to avoid landing themselves in trouble with the authorities, Binance said (Binance.com, June 25, 2023).

New Risks

Crime involving digital assets appears to be on the rise. In February, the Supreme People’s Procuratorate (SPP) cited a jump in cybercrime involving blockchain, the paramount technology underlying cryptocurrency. Ge Xiaoyan (葛晓燕), Deputy Prosecutor-General of the SPP, said that from January to November 2023, the Procuratorate pressed charges against 280,000 individuals in cybercrime cases, an annual increase of 36 percent. Additionally, Zhang Xiaojin (张晓津), the director of the Fourth Procuratorate of the SPP, warned of investment scams involving cryptocurrency (Supreme People’s Procuratorate, February 23). This is despite the global cryptocurrency market seeming to have recovered from the bearish sentiment that characterized 2022–2023.

While the alleged criminal activity occurred between 2014 and 2017, an overseas Chinese woman residing in the United Kingdom, Wen Jian (雯簡), was recently implicated in a $6.3 billion fraud case in which Bitcoin was converted into cash and property to conceal the cryptocurrency’s origins. Though Wen was not involved in the underlying scam, which allegedly defrauded 130,000 Chinese investors, a London court on March 20 found her guilty of one count of money laundering. Prosecutors say the scheme’s mastermind is a Chinese woman named Qian Zhimin, who uses the alias of Zhang Yadi (張雅迪) (HK01, March 21).

Meanwhile, Chinese gangs are reportedly using cryptocurrency to launder profits from drug dealing – fentanyl in particular – and illicit gambling and often have been able to evade authorities thanks to the decentralized nature of digital assets. In October 2023, the U.S. Department of the Treasury’s Office of Foreign Assets Control sanctioned a network of individuals and firms based in China that were involved in the production and distribution of fentanyl and ingredients used in other drugs. Some of them used cryptocurrency wallets to send and receive funds. For their part, Chinese police said in January that they had investigated more than 800 cases of suspected cryptocurrency crime, shut down five underground banks involved in processing payments, and discovered about $4 billion in funds based on blockchain data (RFI, February 3, 2024).

The scale of this uptick in crime involving digital assets means that Beijing is likely to respond with more than just police investigations. Money laundering related to the use of digital assets is currently the “most urgent and most necessary” issue for the PRC to tackle at a legal level, Yan Lixin, executive director at the China Center for Anti-Money-Laundering Studies at Fudan University in Shanghai (The South China Morning Post, February 15). The question is whether measures will involve further restrictions on digital assets in the mainland.

Conclusion

Cryptocurrency is becoming an increasingly popular choice for retail investors in the PRC amid a prolonged economic slowdown and a loss of confidence in traditional investments like the stock market and residential property. Despite significant restrictions on certain related activities, holding cryptocurrency is not banned in China, and investing in it is not illegal—an important distinction that is often overlooked when Beijing’s so-called “crypto ban” is discussed.

That said, rising cryptocurrency crime involving Chinese citizens poses a threat to social stability and could prompt a third major crackdown on digital assets in the PRC if it continues unabated. For now, Beijing is moving to address gaps in its Anti-Money Laundering Law to better tackle illicit crypto flows. The current law dates to 2006, well before cryptocurrency existed. The revised law, which does not yet have an expected passage date, should provide additional insight into whether a third crypto crackdown is likely (NPC Observer, accessed March 26).