China’s furtive bitcoin trade is heating up again, worrying regulators

SHANGHAI (Reuters) – Bitcoin’s 300% rise in prices since October has revived China’s gray market for cryptocurrency trading, putting regulators on alert for financial risks and capital outflows as volatility increases.

FILE PHOTO: A small toy figure is seen on representations of the virtual Bitcoin currency displayed in front of a picture of the Chinese flag in this slide, April 9, 2019. REUTERS / Dado Ruvic / Illustration

China shut down its local cryptocurrency exchanges in 2017 and stifled a speculative market that had accounted for 90% of global bitcoin trading.

Onshore investors now trade bitcoin on platforms owned by Chinese exchanges that have moved abroad, including Huobi and OKEx. Once-dormant Chinese trade chat rooms on social media have become livelier.

“I have come to look for investment opportunities,” said Paris Chang, who opened an account last month on the Binance cryptocurrency exchange.

Removed concerns about volatility and recent sales, he said: “This market is for the big hearts.”

China-focused cryptocurrency exchanges are not licensed on the mainland, but individuals can easily open accounts and shop online if they upload information about their Chinese identity cards.

Exchanges such as Binance and MXC block the use of the yuan and only allow trading between cryptocurrency pairs, such as bitcoin versus the dollar-linked stable coin tether (USDT).

But Chinese investors can use peer-to-peer markets to buy USDTs in yuan, with bank card payments or online transfers. This process does not violate Chinese law.

But Chinese individuals appear to be moving capital abroad under official quotas to get their USDTs, under the guise of making medical or other legitimate purchases, a source told Reuters. The gap enables investors to get around China’s strict capital controls.

China’s security watchdog called on its regional agencies last week to adopt stricter oversight of cryptocurrency trading, said the source, who has direct knowledge of the matter but has no right to speak to the media.

He added that foreign-registered exchanges are outside Beijing’s powers.

China Securities Regulatory Commission (CSRC) did not respond to a request for comment.

Huang Mengqi, a lawyer at the Beijing DHH Law Firm, said that the inability of regulators to control offshore cryptocurrency exchanges could blind them to potential risks.

“You can not stop people from trading bitcoin, because Chinese law recognizes the value of virtual assets. Everything with value should be allowed to change hands, says Huang.

However, the absence of data and investor information on these exchanges complicates China’s money laundering efforts and blunts the effectiveness of capital controls, the lawyer said.

In 2020, $ 17.5 billion of digital assets flowed from Chinese stock exchanges to foreign arenas, 53% more than the previous year, indicating an increase in capital flight from China, says consulting firm PeckShield in its report on money laundering.

Changhao Jiang, co-founder and CTO of Cobo, a Chinese cryptocurrency custodian and digital wallet provider, saw a jump in business this year.

“China is still a very large market for cryptocurrencies,” said Jiang, whose company’s mission is to “make it easy to own and use cryptocurrencies.”

Edited by Vidya Ranganathan and Jacqueline Wong