China's new forex rules require banks to tighten scrutiny on cryptocurrency trades

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China’s foreign exchange regulator released new rules that require banks to flag risky trades, including those involving cryptocurrencies, which would make it more difficult for mainland investors to buy and sell bitcoin and other digital assets.

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Banks are expected to monitor and report “risky foreign exchange trading behaviours”, including underground banks, cross-border gambling and illegal cross-border financial activities involving cryptocurrencies, according to last week’s announcement by the State Administration of Foreign Exchange.

The rules, applicable to local banks across mainland China, also require them to track such activities based on the identity of the institutions and individuals involved, source of funds and trading frequency, among other factors.

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In addition, banks are required to put in place risk-control measures that cover those entities and restrict provision of certain services to them, the regulator said.

The latest rules reflect how Beijing continues to exercise draconian regulation to root out commercial cryptocurrency activities, such as bitcoin trading and mining, as the digital asset is considered a threat to the country’s financial stability.

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Chinese regulators remain against activities related to bitcoin and other cryptocurrencies. Photo: Shutterstock alt=Chinese regulators remain against activities related to bitcoin and other cryptocurrencies. Photo: Shutterstock>

“The new rules will provide another legal basis for punishing cryptocurrency trading,” Liu Zhengyao, a lawyer at ZhiHeng law firm in Shanghai, wrote in a WeChat post last week. “It can be foreseen that mainland China’s regulatory attitude towards cryptocurrencies will continue to tighten in the future.”

The practice of using the yuan to buy cryptocurrencies before exchanging the digital asset for various foreign fiat currencies can be considered “cross-border financial activities involving cryptocurrencies” under the new forex rules, especially if the amount exceeded the legally allowed value, according to Liu.

The new rules will make it “increasingly difficult in the future to evade the country’s forex regulations through crypto”, Liu said.

Beijing first banned initial coin offerings and ordered crypto exchanges to shut down in 2017. It ramped up this crackdown in 2021, when bitcoin mining was banned and all crypto-related businesses were declared illegal.