China’s Crypto Crackdown Reveals Capital Control Loopholes
Chinese authorities have been stepping up their efforts to crack down on cryptocurrency-related crimes, and with that, uncovering how digital currencies are being used to bypass strict capital controls imposed by Beijing.
China may be a few years into a crackdown against the use of cryptocurrencies but despite that, their use and particularly their use for illicit purposes continue. That’s according to a report on Wednesday by the South China Morning Post (SCMP).
Combating capital outflows
The rising trend of capital outflows has prompted Chinese authorities to take action. Two prominent cases illustrate the extent of these illegal activities and the value of assets seized.
In Jingmen, a city in Hubei province, police disclosed details of an online gambling case involving digital currencies used to evade regulation. The case has implicated over 50,000 individuals and a turnover of billions of dollars. Although the specific virtual currency was not mentioned, authorities revealed that they had frozen multiple accounts with a combined value of $160 million.
Meanwhile, in Shanxi province, police solved a money laundering case linked to 380 million yuan worth of USDT, the US dollar stablecoin issued by Tether. China’s State Administration of Foreign Exchange is responsible for monitoring cross-border capital flows. Accordingly, it has taken steps to curb these illicit activities. Late last month, it fined ten firms in order to maintain order in the forex market.
Digital yuan development
These recent cryptocurrency cases have exposed loopholes in China’s capital control system. Crypto mining and trading have long been banned by Chinese regulators. As an alternative, China has been actively developing its own central bank digital currency (CBDC), known as the digital yuan or e-CNY. 2023 has seen a raft of measures taken by various regional administrators throughout China to bring about further e-CNY adoption.
However, the ban on cryptocurrencies and the launch of the e-CNY have driven many miners and traders underground or to overseas locations such as Hong Kong, which ironically, is vying to become a cryptocurrency hub. The continued depreciation of the yuan against the US dollar has intensified capital outflow pressures.
Chinese bonds sell-off
Internationally, fund managers have been selling significant amounts of Chinese securities since 2021. That goes against the current regional trend which sees emerging Asian markets experiencing substantial inflows of funds during the same period, according to the Institute of International Finance.
That market activity has been in response to Chinese policies and escalating US-China tensions. An Atlantic Council report highlights that international institutional investors have been net sellers of approximately 1 trillion yuan in Chinese bonds since early 2022.
China’s efforts to control capital outflows and stabilize the yuan’s value face ongoing challenges, as cryptocurrency-related crimes persist. While the crackdown exposes weaknesses in the country’s capital control system, it also underscores the difficulty authorities will have globally in trying to control digital currency use.
