Police raids in China to stem billions of dollars in illicit foreign-exchange transactions have highlighted the continuing use of cryptocurrencies there, despite Beijing’s prohibition of digital-asset trading.

Alleged cases involving crypto flagged in May alone include an underground bank tied to 13.8 billion yuan (US$1.9 billion or RM8.98 billion) of illegal transfers, a gang implicated in about two billion yuan of unauthorised conversions, and unlawful money changers that in some cases transacted more than one billion yuan.

The claimed busts - spanning Beijing, the northeastern province of Jilin and Chengdu city in the southwest - were flagged by municipal authorities and state media. They add to signs that Chinese demand still plays a major role in digital-asset markets more than two years after Beijing proscribed crypto transactions.

The ban reflected worries about money laundering, currency outflows, and environmental harm from energy-intensive bitcoin mining. But Chinese citizens are still thought to covet digital assets, whether as alternative investments amid falling property prices, or as a way of skirting overseas transfer limits.

‘Porous’ curbs

“A significant amount of crypto activity remains in China,” said Chengyi Ong, the Asian-Pacific policy head of Chainalysis Inc. “This may be in part because the ban is porous or loosely enforced, but is also attributable to the decentralised and often peer-to-peer nature of crypto activity.”

Figuring out where digital-asset traders are based is challenging since software can mask locations. Chainalysis scrutinises blockchains and estimates about US$86 billion of crypto flowed into China in the 12 months through June 2023 - significantly down from pre-ban levels but still substantial globally.

A report about the case involving 13.8 billion yuan of transfers was publicised by Chengdu city’s Public Security Bureau via WeChat, the social media platform. There were 193 arrests for activities dating back to early 2021, according to the post, which added that the Tether stablecoin was used to help illegally send funds abroad.

The gang accused of two billion yuan of illicit transfers acquired digital tokens in over-the-counter trading to help convert Chinese yuan into South Korean won, according to a WeChat post by the Public Security Bureau of the Panshi city in the Jilin province.

Underground gangs

In the example of unlawful money changers with some transactions exceeding one billion yuan, Beijing police claimed to have broken up 11 underground gangs across the country, some using virtual currencies to conceal their activity. That’s based on a Xinhua report carried by state broadcaster CCTV.

Last year, there were many glimpses of Chinese crypto trading activity, for instance from the creditor profile of the collapsed FTX exchange, citizens who said they used crypto platforms, and depictions by industry insiders of workarounds to Beijing’s restrictions. 

Digital-asset trading is allowed in Hong Kong, which pivoted in late 2022 towards creating a crypto hub. But few if any commentators see Beijing easing up on the official curbs on the mainland. Regulations also prevent Chinese citizens from readily accessing crypto investments in Hong Kong.

“What we have seen over the years is that bans are generally not effective in stamping out crypto activity, but may conversely create informal grey markets that are harder to track and ring-fence against illicit activity,” Ong said.

  - Bloomberg