China introduces new Forex rules to tighten oversight of cryptocurrencies and target illegal cross-border transactions

On December 31, 2024, the Foreign Exchange Regulatory Commission of China Announce New rules aim to tighten control over cryptocurrency activities. These rules require banks to monitor and report risky trades, including those involving digital assets such as Bitcoin. State Administration of Foreign Exchange (SAFE) male Banks must identify high-risk transactions based on factors such as the identity of the individuals or institutions involved, the sources of their funds, and the frequency of transactions. The goal is to curb illegal financial activities such as underground banking, cross-border gambling and other illicit cryptocurrency transactions.

As part of these measures, financial institutions are expected to implement risk monitoring measures and limit services to entities deemed high risk. The regulatory move comes as China continues its crackdown on cryptocurrencies, which are seen as a threat to financial stability. According to For Liu Zhengyao, a Shanghai-based lawyer, the new rules will provide a legal framework to punish cryptocurrency trading. He explained that using the yuan to purchase crypto assets before converting them into foreign currencies will now be classified as cross-border financial activities, making it difficult to circumvent the country’s foreign exchange rules.

The Chinese government has long maintained a strict stance against digital assets. Since 2017, it has banned initial coin offerings (ICOs), closed cryptocurrency exchanges, and banned financial institutions from engaging in cryptocurrency activities. Government actions escalated in 2021 when Bitcoin mining was banned, and all cryptocurrency-related businesses were declared illegal. Despite these restrictions, China remains the world’s second-largest holder of bitcoin, owning about 194,000 bitcoins, worth approximately $18 billion. These assets were seized through law enforcement actions related to illegal activities, as China did not officially purchase Bitcoin.

Although some experts have indicated that China could eventually adopt a Bitcoin reserve strategy, there is no indication that the government will relax its regulations. The legal risks faced by cryptocurrency traders in China are also increasing. In August, the Supreme People’s Court ruled that the use of cryptocurrencies to transfer criminal proceeds violated China’s criminal law. Additionally, the government has increased oversight of stablecoins such as Tether, limiting their use in cross-border transactions.

China’s strict approach to cryptocurrency is in stark contrast to global trends, as digital assets gain more acceptance. Despite the potential economic opportunities offered by cryptocurrencies, China remains firm in its policy to maintain strict control over its financial system and limit the influence of cryptocurrencies in the country. The latest forex regulations are another step in Beijing’s efforts to restrict the use of cryptocurrencies and protect its financial stability.