In a significant escalation of its anti-cryptocurrency policies, China’s foreign exchange regulator has unveiled a series of stringent measures designed to enhance the oversight of digital asset transactions.

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The State Administration of Foreign Exchange (SAFE) has mandated that banks and financial institutions closely monitor cryptocurrency-related activities and report any transactions that are deemed high-risk.

This policy reinforces China’s firm and long-standing opposition to digital currencies like Bitcoin, which the government views as a potential threat to financial stability and a conduit for illegal financial flows.

Chinese banks will enhance KYC and trade surveillance

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The newly announced regulations require banks to scrutinize transactions based on various criteria, including the identity of the individuals or organizations involved, the origin and flow of funds, as well as the regularity and volume of trades.

The overarching aim of these guidelines is to clamp down on illicit activities that exploit cryptocurrencies, such as underground banking networks, cross-border gambling, and unauthorized crypto-based capital transfers. By compelling financial institutions to strengthen their risk-management systems, China is signaling its determination to block loopholes that could undermine its tight control over the financial system.

Under these new directives, banks are expected to enhance their internal surveillance procedures, flagging transactions that display unusual patterns. Additionally, they must apply more restrictive policies towards clients or entities classified as high-risk based on prior trading behavior or inconsistencies in financial records. This proactive measure seeks to prevent the growth of a shadow financial market powered by cryptocurrencies, which could otherwise destabilize China’s regulated banking sector.

China banned ICOs and Bitcoin mining

China’s opposition to cryptocurrencies is not new, but these updated forex regulations add another layer to an already comprehensive crackdown. In 2017, China prohibited initial coin offerings (ICOs) and systematically shut down domestic cryptocurrency exchanges.

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By 2021, the government escalated its anti-crypto campaign further by banning Bitcoin mining, a move that led to the exodus of miners to other countries. Despite these restrictions, China still holds approximately 194,000 Bitcoin, valued at around $18 billion. These holdings were largely acquired through the confiscation of assets in cases involving illegal activities, rather than through official purchases by the state.

On the other hand, the election of Donald Trump as President of the United States could change Chinese policy regarding crypto. Former Binance CEO Changpeng “CZ” Zhao suggested that China may adopt a strategic Bitcoin reserve. Speaking at the Bitcoin MENA conference in Abu Dhabi, Zhao said smaller countries would likely lead the way in adopting Bitcoin reserves, with larger nations, including China, following suit later.

Zhao, who grew up in China, acknowledged the unpredictability of the country’s stance on crypto, citing the government’s lack of transparency. However, he described the establishment of a Bitcoin reserve as “inevitable,” stating, “They have to do it at some point because it’s the only ‘hard’ asset.”

Chinese ‘Crypto Dad’ removed from public office

In November 2023, the former head of China’s central bank digital currency research institute was expelled from the Communist Party of China and removed from public office on grounds of corruption involving cryptocurrency and abuse of regulatory power for personal gain.