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China’s Crypto Crackdown Reveals Capital Control LoopholesChinese 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).Photo by Christian Lue on UnsplashCombating capital outflowsThe 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 developmentThese 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-offInternationally, 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.

Arthur Hayes: Chinese monetary policy could ignite crypto marketArthur Hayes, Co-Founder of Seychelles-incorporated crypto exchange and derivatives platform BitMEX, suggests that China could inject a substantial amount of credit into its economy, potentially giving a boost to Bitcoin and the broader crypto market.Photo by Eric Prouzet on UnsplashPotential flood of yuan creditThe firebrand crypto OG outlined his thoughts on the matter in a blog post which was published on Monday. Hayes discussed how, although China has currently made credit expensive in order to hold back credit growth and inspire confidence in the economy, its monetary authorities might be gearing up to flood the economy with yuan credit, creating a favorable environment for cryptocurrencies.He outlined a series of factors contributing to this potential surge in Chinese credit. He pointed to the interplay between U.S. monetary policy and the Chinese yuan, emphasizing how recent U.S. actions are laying the groundwork for China to issue substantial credit, particularly to its struggling property sector.Describing U.S. policy as “weakening the dollar by issuing more Treasury bills,” Hayes noted the consequent decline of the dollar index (DXY) throughout November. He argued that the weaker dollar gives China the flexibility to increase yuan credit without significant depreciation, possibly even leading to yuan appreciation.If the Federal Reserve at a minimum holds rates and better still, starts to cut rates, China will be in a position to pursue the stimulus needed for its property market and for infrastructure spending.Hong Kong as the gateway to capital marketsAccording to Hayes, the global monetary dynamics set in motion by these factors could be advantageous for Bitcoin and the broader cryptocurrency market. He explained that the bulk of the financing will trickle down into speculation within the financial markets. If China starts printing yuan, the capital is likely to flow into global markets, supporting the prices of various risk assets.But how can this happen, given that speculation and crypto trading are prohibited in China? Hayes’ view is that Hong Kong is now China’s gateway to the global capital markets. Wealthy Chinese individuals now bank via Hong Kong. As we have seen, the autonomous Chinese territory has a workable regulatory framework in place and is now actively licensing crypto exchanges and brokers. Consequently Bitcoin and crypto, generally, could be among the risk assets benefiting from an influx of capital.Furthermore, the BitMex co-founder believes that as yuan credit becomes abundant, the global demand for dollar credit and liquidity may decrease. Given that the dollar is a primary funding currency, a fall in the price of credit could lead to a rise in fixed-supply assets like Bitcoin and gold in dollar terms.Hayes concluded what is a long and detailed blog post by stating:“I will continue moving money out of T-bills and into crypto because I want to get in now before it becomes apparent through the data that China’s money printer is going brrrrr.”He suggested that Chinese New Year, which occurs in mid-February of next year, could be the time in which that extra credit materializes in China. Hayes’ latest assertion comes on the back of a bold claim he made last month when he suggested that bitcoin could reach a unit price of $1 million by 2026.

South Korea, Chainalysis Collaborate to Thwart North Korea’s Crypto CrimesSpecial Representative for Korean Peninsula Peace and Security Affairs Kim Gunn from the Ministry of Foreign Affairs held a meeting with Investigations VP Erin Plante and Korea Country Manager Paek Yong-khi of Chainalysis, a New York-based blockchain analysis company, according to the Ministry’s press release.Photo by Pixabay on PexelsGrowing North Korean crypto theftsSpecial Representative Kim and the Chainalysis representatives discussed response measures against North Korea’s increasing virtual asset theft and money laundering activities. Both sides recognized the severity of North Korea’s illegal cyber activities, which not only jeopardize national security by funding nuclear and missile development, but also threaten the establishment of a healthy cryptocurrency ecosystem.Chainalysis has been tracking North Korea’s illicit virtual asset operations and providing analytical information to a range of organizations, including law enforcement agencies and financial authorities.Special Representative Kim expressed gratitude for the private sector’s role in analyzing and monitoring North Korea’s crypto theft and money laundering activities. Both parties concurred on the importance of public-private cooperation to strengthen countermeasures against illegal cryptocurrency activities as North Korea’s techniques have become increasingly sophisticated.Plante also appreciated the South Korean government’s initiative in thwarting North Korea’s illicit cyber activities. These measures include imposing independent sanctions on North Korean hacker organizations and tech personnel and establishing a working group with the United States to counter North Korean cyber threats.Korean police and ChainalysisIn addition to its collaboration with the Ministry of Foreign Affairs, Chainalysis has been working with another Korean government agency. It was recently reported that the Korea National Police Agency (KNPA) is intensifying its efforts to enhance its expertise in investigating digital asset-related crimes. To achieve this goal, the KNPA is encouraging its officers to obtain certifications provided by Chainalysis.