China Tightens Crypto Regulations with New Rules for Banks

China's foreign exchange regulator has introduced new rules requiring banks to identify and report risky trades, including those involving cryptocurrencies, further complicating efforts for mainland investors to trade Bitcoin and other digital assets.

According to the State Administration of Foreign Exchange's announcement last week, banks must monitor and flag "risky foreign exchange trading behaviours" such as underground banking, cross-border gambling, and illegal cross-border financial activities involving cryptocurrencies.

The rules, applicable to local banks across mainland China, mandate tracking these activities based on factors like the identity of individuals and institutions involved, the source of funds, and trading frequency.

Additionally, banks are required to implement risk-control measures targeting such entities and restrict certain services for them, the regulator stated.

These measures highlight Beijing's ongoing stringent approach to eliminating commercial cryptocurrency activities, including Bitcoin trading and mining, which are seen as threats to the country's financial stability.

"The new rules will provide another legal basis for punishing cryptocurrency trading," Liu Zhengyao, a lawyer at ZhiHeng law firm in Shanghai, wrote in a WeChat post last week. "It can be foreseen that mainland China’s regulatory attitude towards cryptocurrencies will continue to tighten in the future."

Under the new foreign exchange rules, the practice of using the yuan to purchase cryptocurrencies and then exchanging them for foreign fiat currencies may be classified as "cross-border financial activities involving cryptocurrencies," particularly when amounts exceed legally allowed limits, Liu noted.

"The new rules will make it increasingly difficult in the future to evade the country’s forex regulations through crypto," Liu added.

China’s crackdown on cryptocurrency activities dates back to 2017, when it banned initial coin offerings and shut down crypto exchanges. In 2021, the government intensified these measures by banning Bitcoin mining and declaring all crypto-related businesses illegal.

Despite a historic rally in Bitcoin prices, partly driven by Donald Trump’s crypto-friendly stance and his US election victory, calls to relax Beijing’s strict policies have gained little traction. The Chinese government has shown no indication of loosening its stance on digital assets.

In August, the Supreme People’s Court ruled that using cryptocurrency to transfer or convert criminal proceeds violates China’s criminal law, heightening legal risks for traders.

Last year, the Supreme People’s Procuratorate and the forex regulator called for tighter supervision of forex trading, particularly cases involving the tether stablecoin as an intermediary for yuan-to-foreign-currency exchanges.