China has introduced new foreign exchange (forex) regulations, requiring banks to strengthen their oversight of financial activities related to cryptocurrencies.
The move is part of Beijing’s ongoing efforts to crack down on illegal financial activities related to digital assets, including underground banking, cross-border gambling and unauthorized financial transactions.
New supervisory 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 behavior” and closely monitor financial flows associated with digital currency transactions.
Notably, financial institutions are now required to observe patterns of activity suggesting illegal cross-border financial transactions, including the conversion of Chinese yuan into digital assets and subsequent exchanges for foreign currencies.
These rules are particularly aimed at individuals and entities that use digital currencies as a way to circumvent China’s strict capital controls.
Additionally, financial institutions must actively identify the origin of funds, evaluate transaction patterns, and take appropriate action to restrict or discontinue services to users suspected of violating these rules.
With these monitoring requirements, SAFE appears aimed at curbing the exploitation of digital assets as a loophole for unauthorized cross-border transactions.
Although this new rule may make cryptocurrency trading even more difficult in China, Liu Zhengyao, a lawyer at Shanghai-based ZhiHeng Law Firm, noted that these regulations aim to strengthen the government’s position to prevent cryptocurrency activities. digital technology to undermine financial stability.
He explained that Forex rules will make it increasingly difficult for individuals and businesses to escape China’s capital restrictions by using digital assets. In his words:
The new rules will provide another legal basis for punishing cryptocurrency trading. It can be predicted 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 historically leaned toward restriction and banning. 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 mining illegal. crypto-related activities.
The new Forex rules are a continuation of this regulatory trajectory, with authorities now focusing on financial intermediaries enabling digital currency transactions.
By holding banks responsible for monitoring and reporting risky transactions, the Chinese government aims to further isolate cryptocurrencies from the domestic financial ecosystem.
It is argued that these rules serve as a warning to individuals and institutions attempting to circumvent exchange controls using digital assets.
Activities involving the purchase of cryptocurrencies with yuan and their subsequent conversion into foreign currencies are now explicitly classified as cross-border financial activities under the new framework.
Going forward, the regulatory space in China is expected to continue to tighten, leaving little room for digital currency-related financial activities to operate without oversight.
Financial institutions will likely strengthen their compliance measures and traders will face increased challenges navigating the regulatory environment.
Featured image created with DALL-E, chart from TradingView
