China tightens rules on banks to monitor crypto transactions

China enforces stricter rules requiring banks to monitor and report risky crypto transactions, aiming to curb illegal cross-border financial activities.

China has introduced new regulations requiring banks to monitor and report risky foreign exchange and cryptocurrency transactions, aiming to curb illegal cross-border financial activities. The State Administration of Foreign Exchange (SAFE) recently issued a notice instructing banks to track transactions involving underground banking, cross-border gambling, and illegal crypto-related activities.

These rules mandate banks to monitor the identities of individuals and institutions, track the sources of funds, and observe trading frequency. The increased scrutiny is expected to make it more challenging for Chinese investors to trade Bitcoin and other cryptocurrencies. All banks across China are required to comply, signaling a nationwide effort to enforce stricter financial oversight.

China has maintained a strict anti-crypto stance for years, viewing digital assets as a threat to financial stability. Lawyer Liu Zhengyao from ZhiHeng law firm noted that these new measures create an additional legal foundation for penalizing cryptocurrency trading. He warned that using the yuan to buy cryptocurrencies and then exchanging them for foreign fiat currencies could now be classified as illegal cross-border financial activity, especially if transactions exceed legal limits.

This crackdown reflects China’s ongoing effort to control cryptocurrency use within its borders. The government sees cryptocurrencies as tools that could potentially undermine the yuan and disrupt the country’s financial ecosystem. Despite this anti-crypto stance, China remains the second-largest government holder of Bitcoin, with over 190,000 BTC acquired through seizures tied to illegal financial operations.

The nation’s restrictive crypto policies date back to 2017, when it banned financial institutions from facilitating cryptocurrency transactions. In 2021, the People’s Bank of China (PBOC) officially declared all cryptocurrency trading activities illegal. Yet, loopholes and underground networks have allowed some level of trading activity to persist, prompting these latest regulations.

Interestingly, despite the harsh stance, there have been recent developments suggesting some flexibility. A Chinese court recently ruled that cryptoassets possess property attributes and are protected under Chinese law, but only when viewed as commodities, not as currency or business instruments. This distinction offers limited legal protection to crypto holders while maintaining the ban on using digital assets as financial instruments.

Meanwhile, Justin Sun, founder of the Tron blockchain, has advocated for a more progressive cryptocurrency policy in China. In July 2024, he suggested that China could benefit from a competitive approach to Bitcoin regulation, positioning itself strategically against the US. According to Sun, such a policy shift could positively impact the global cryptocurrency industry.

Despite these perspectives, the current trend indicates further tightening of crypto regulations in China. SAFE’s directive underscores the government's commitment to eliminating any financial activities it considers risky or destabilizing. As China continues to enforce stricter controls, the global crypto community watches closely to see whether these measures will effectively reduce illegal activities or drive them further underground.

For now, Chinese investors face a heavily restricted environment for cryptocurrency trading. The new regulations signal a firm stance from authorities, with financial institutions playing a crucial role in monitoring and reporting violations. While cryptoassets retain limited legal recognition in China, their use as financial tools remains firmly prohibited, and these latest rules make clear that any breaches will face serious consequences.