China’s crypto crimes expose capital-control loopholes

  

 China’s crypto crimes expose capital-control loopholes

    The degree to which cryptocurrencies continue to help people circumvent China’s capital controls is unclear, but recent big busts show they have not gone away since Beijing deemed them illegal.

    China is determined to keep the yuan’s value stable, but a rise in capital outflows continues to weigh on the yuan.


Chinese police appear to have stepped up their crackdown on cryptocurrency-related crimes in recent months – and their big seizures in a few prominent cases show how people are using virtual currency to bypass Beijing’s strict controls over the yuan.

With the yuan having gradually depreciated against the US dollar this year, reaching a rate of 7:1 for the fourth time since 2019, capital outflows have been on the rise. A higher yuan number means it takes more yuan to buy a US dollar, and the yuan is currently about 6.5 per cent weaker than it was a year ago.

On Tuesday, police in Jingmen, Hubei province, discussed an online gambling case in which virtual currencies were widely used to avoid regulation. It was said to involve 400 billion yuan (US$55.4 billion) worth of total turnover circulation, and more than 50,000 people.

Police did not say which virtual currency was used but said they had already managed to freeze multiple accounts with a combined value of US$160 million.

In a separate case on Monday, police in the central province of Shanxi said they had busted a money-laundering case involving 380 million yuan worth of USDT, a stablecoin issued by Hong Kong-based company Tether to mirror the price of the US dollar.

The State Administration of Foreign Exchange, the nation’s forex regulator, has implemented a variety of measures to monitor cross-border capital flows.

It also fines violators – 10 firms or individuals were fined in late June – to “help maintain the forex market order”.

The recent virtual currency cases, however, shed light on loopholes in China’s capital control system.

Chinese regulators have long banned the mining and trading of cryptocurrencies such as bitcoin and Ethereum, citing their perceived threats to the financial system.

And for the past few years, Beijing has been rolling out its central bank digital currency – known as the e-yuan, or e-CNY – with a series of ongoing pilot programmes across the country. This is China’s official currency in digital form, with the same value, transferable like cash using an app.

Many cryptocurrency miners or traders have subsequently gone underground or moved overseas, including Hong Kong, which could become a cryptocurrency hub.

The persistent depreciation of the yuan this year, due to its widened yield differential with the US dollar, has added to the capital outflow pressure.

Foreign investors sold Chinese debt for the sixth consecutive month in June, even as emerging Asia saw strong inflows of funds, according to the Institute of International Finance.

A total of US$1.59 billion was removed from China’s debt last month, compared with US$4.19 billion in May, its data showed.

Chinese equities posted US$1.93 billion worth of inflows from overseas funds in June, the IIF said, compared with May inflows of US$126 million.

Foreign fund managers have also been selling vast amounts of Chinese securities over the past two years in response to Chinese policies and mounting US-China tensions, according to an Atlantic Council report last month.

“International institutional investors have been net sellers of about 1 trillion yuan of the country’s bonds since early 2022,” the report said.