May 21, 2021 05:30 AM

Analysis: Does China Plan an Even Tougher Crypto Crackdown?

Bitcoin nosedived as much as 30% to $30,000 Wednesday, though it mounted a recovery Thursday.
Bitcoin nosedived as much as 30% to $30,000 Wednesday, though it mounted a recovery Thursday.

Amid the ongoing cryptocurrency rout this week, a joint notice issued Tuesday by three Chinese financial self-regulatory bodies underscored the investment and legal risks involved with trading in virtual currencies, adding to downward pressure on prices.

The three industry organizations — the National Internet Finance Association of China, the China Banking Association and the Payment & Clearing Association of China — said a number of actions involving cryptocurrency trading are unlawful. Bitcoin, the largest cryptocurrency, fell as much as 30% to $30,000 Wednesday, hitting the lowest level since the beginning of February.

The joint statement also informed investors of risks in cryptocurrency transactions, including fictitious assets, business failures and speculation. China’s judicial rulings confirm that contracts involving virtual currency transaction are not protected by law. That means investors have to bear losses caused by investments in virtual currencies.

The agencies’ statement triggered market speculation on whether China will strengthen its supervision of virtual currencies. It made clear that trading in virtual currencies is a violation of relevant laws and regulations, including the exchange of legal currencies for cryptocurrencies and exchanges between different virtual currencies.

Xiao Sa, a legal expert, told Caixin that the most significant impact on the industry might be the exchange of legal currencies and cryptocurrencies. There is no lawful channel for virtual currency exchanges in China, indicating that exchanges’ over-the-counter (OTC) trading is the only approach for the digital currencies.

However, OTC transactions can be used for money laundering. Prudent countermeasures have been taken. OTC traders added requirements for buyers to provide screenshots of their bank statements over the previous three days to prove that there had been no new transfers to accounts for 48 hours. Although efforts have been made to prevent money laundering, the illegality inherent in this kind of exchange service is not concealable.

The joint announcement also warned institutions of the risk of violating laws and regulations when they deal in Bitcoin. As institutions act as information intermediaries and price-makers, carry out initial coin offerings or trade in virtual currency derivatives they are in violation of regulations. Such virtual currency-related businesses may also be involved in illegal fundraising, illegal issuance of securities, illegal selling of tokens and other criminal activities.

In reality, there have been a number of cases showing an absence of explicit regulations on virtual currency-related businesses for traditional financial and payment institutions. The statement issued this week bars some specific practices while demanding a strengthening of institutions’ sense of social responsibility. They cannot, for example, use virtual currencies to price products and services, undertake virtual currency-related insurance services or include virtual currencies in insurance liabilities.

Institutions are not allowed to provide virtual currency-related services directly and indirectly — such as virtual currency registration, trading, clearing and settlement — let alone the issuance of virtual currency-related financial products.

The ban on indirect services will have significant implications, Xiao said. The regulation of visual currencies will go deep, indicating that policies will cover almost all possible violations. It is also intended to prevent financial institutions from cooperating with unlicensed operations for virtual currency services. Even though financial institutions may not actively participate, the ban on indirect involvement creates compliance obligations requiring that financial institutions actively screen currency-related services.

Contact editor Bob Simison (

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