China has introduced new foreign exchange (forex) regulations, requiring banks to increase scrutiny over cryptocurrency-related financial activities.

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This move is part of Beijing’s ongoing efforts to clamp down on illegal financial activities linked to digital assets, including underground banking, cross-border gambling, and unauthorized financial transactions.

New Monitoring Measures by Chinese Banks

The State Administration of Foreign Exchange (SAFE) announced the updated rules last week, emphasizing the need for banks to report “risky foreign exchange trading behaviors” as well as closely monitor financial flows associated with digital currency transactions.

Notably, financial institutions are now obligated to observe patterns of activity that suggest illegal cross-border financial dealings, including the conversion of Chinese yuan into digital assets and subsequent exchanges for foreign currencies.

These rules are particularly aimed at individuals and entities using digital currencies as a means to bypass China’s strict capital controls.

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Additionally, financial institutions must actively identify the origin of funds, evaluate transaction patterns, and take appropriate measures to restrict or halt services for users suspected of violating these rules.

With these monitoring requirements, SAFE seems to be aiming to curb the exploitation of digital assets as a loophole for unauthorized cross-border transactions.

While this new rule might make crypto trading even harder in China, Liu Zhengyao, a lawyer from Shanghai-based ZhiHeng law firm, noted that these regulations are designed to reinforce the government’s stance on preventing digital currency activities from undermining financial stability.

He explained that the forex rules will make it increasingly difficult for individuals and businesses to evade China’s capital restrictions using digital assets. In his words:

The new rules will provide another legal basis for punishing cryptocurrency trading. It can be foreseen that mainland China’s regulatory attitude towards cryptocurrencies will continue to tighten in the future.

Impact on Cryptocurrency Activities in China

China’s approach to crypto regulation has consistently leaned towards restriction and prohibition. The country first banned initial coin offerings (ICOs) and shut down crypto exchanges in 2017, followed by an intensified crackdown in 2021, which included banning Bitcoin mining and declaring all crypto-related activities illegal.

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The new forex rules represent a continuation of this regulatory trajectory, with authorities now focusing on the financial intermediaries enabling digital currency transactions.

By holding banks accountable for monitoring and reporting risky trades, the Chinese government aims to further isolate cryptocurrencies from the nation’s financial ecosystem.

It is argued that these rules serve as a warning for individuals and institutions attempting to circumvent foreign exchange controls using digital assets.

Activities involving the purchase of cryptocurrencies with yuan and subsequent conversion to foreign currencies are now explicitly classified as cross-border financial activities under the new framework.

Looking ahead, it is expected that the regulatory space in China will continue to tighten, leaving little room for digital currency-related financial activities to operate without oversight.

Financial institutions will likely increase compliance measures, and traders will face heightened challenges in navigating the regulatory environment.

Featured image created with DALL-E, Chart from TradingView