China Forces Banks to Report Crypto Activities in Bid to Protect Financial Stability

China Tightens Scrutiny on Cryptocurrency Transactions

China has ramped up its crackdown on cryptocurrency trading with the introduction of stringent regulations requiring banks to monitor and report risky foreign exchange transactions.

This move, announced by the State Administration of Foreign Exchange (SAFE), signals Beijing's continued effort to exert control over digital assets.

Banks Ordered to Flag Suspicious Transactions

Under the new regulations, all Chinese banks must closely monitor foreign exchange activities.

Transactions linked to underground banking, cross-border gambling, and illegal cryptocurrency trading now fall under heightened scrutiny.

Banks are instructed to evaluate transactions by identifying parties involved, tracking the origins of funds, and assessing trading patterns.

SAFE emphasised that these measures aim to strengthen oversight of activities perceived as threats to financial stability.

China’s State Administration of Foreign Exchange (SAFE)

Local banks are also mandated to establish risk-control mechanisms and restrict access to services for flagged entities.

Cryptocurrency Activities Face Legal Challenges

The new rules offer another tool for authorities to clamp down on crypto trading.

Liu Zhengyao, a lawyer at Shanghai's ZhiHeng law firm, explained on WeChat,

“The new rules will provide another legal basis for punishing cryptocurrency trading. It can be foreseen that mainland China’s regulatory attitude towards cryptocurrencies will continue to tighten in the future.”

Liu also highlighted the increasing legal risks for those using yuan to purchase cryptocurrencies and subsequently exchange them for foreign fiat currencies, stating that such actions might now be treated as "cross-border financial activities involving cryptocurrencies."

This classification comes with stringent limitations, particularly when transaction amounts exceed legal thresholds.

A Decade of Restrictive Policies

China's crackdown on cryptocurrencies has been evolving since 2017.

That year marked the ban on initial coin offerings and the closure of domestic cryptocurrency exchanges.

The restrictions intensified in May 2021 when the People’s Bank of China (PBOC) declared all crypto-related transactions illegal.

Despite its official stance, China has managed to amass a significant Bitcoin reserve of over 190,000 BTC through asset seizures linked to illicit activities.

Source: Bitcoin Treasuries

This positions the country as the second-largest government holder of Bitcoin globally, following the United States.

Source: Bitcoin Treasuries

Debate Over Cryptocurrency’s Role in China

While the regulations reflect China’s cautious and restrictive approach to cryptocurrencies, some industry players advocate for a shift in perspective.

Justin Sun, the founder of the Tron blockchain, called for China to revisit its policies, stating in July 2024,

“China should make further progress in this area. Competition between China and the US in Bitcoin policy will benefit the entire industry.”

On the legal front, Chinese courts have acknowledged the "property attributes" of cryptoassets, recognising their legality for personal ownership.

However, this protection is limited; cryptocurrencies are not allowed as a medium of exchange or a business instrument under Chinese law.

Balancing Regulation and Potential Opportunities

Although mainland China remains firm in curbing cryptocurrency-related activities, the government has shown some flexibility in recognising the broader implications of digital assets.

For instance, the People’s Bank of China’s 2024 Financial Stability Report highlighted Hong Kong's leadership in cryptocurrency regulation and underscored the importance of developing robust global frameworks.

Beijing’s cautious yet firm stance underscores a broader effort to manage risks while acknowledging the financial sector's evolving landscape.

For now, the tightening grip on crypto trading reaffirms China’s prioritisation of stability over rapid adoption of digital assets.