China’s Nationwide Crackdown on Cryptocurrencies Fails to Block Cross-Border Money Laundering

June 15, 2021 Updated: June 15, 2021

The Chinese Communist Party (CCP) on June 9 launched a nationwide campaign to prevent cross-border money laundering using virtual currencies (cryptocurrencies). This is the fifth time for such action and part of the CCP’s recent efforts to prevent capital flight and guard against financial risks.

The People’s Bank of China (PBoC), China’s central bank, said on June 1 that revisions to the Anti-Money Laundering Act were included in the legislative work plan of the Standing Committee of the National People’s Congress, and that it is soliciting public opinion before June 30. The statement stressed that revisions to the act are an inevitable requirement for preventing and controlling financial risks for China’s economy.

As early as April 23, the PBoC made a decision to “crack down on the cross-border gambling capital chain,” to stop cross-border money laundering and transfer activities using cryptocurrencies from the source.

On May 18, the CCP’s National Internet Finance Association, China Banking Association, and China Payment & Clearing Association, echoing the central bank’s decision, jointly issued a statement asking their members to “resolutely not carry out or participate in any business activities related to virtual currencies.”

The three trade associations cover almost all payment and transfer tools in China, including bank cards and rechargeable phone cards, as well as third-party payments such as Alibaba’s Alipay and Tencent’s WeChat Pay.

On May 21, the Financial Stability and Development Committee issued policies to guard against financial risks, including containing bitcoin mining and trading. The committee is the CCP’s top decision-making body on financial affairs.

To carry out a propaganda offensive supporting the crackdown policy, the party mouthpiece Xinhua News Agency published six lengthy investigative reports across 10 days that started on May 20.

China expert Shi Shan told The Epoch Times: “The CCP’s escalating campaign against virtual currencies may indicate that capital flight [from China] is still quite serious, or it may be that these campaigns have not really worked.”

Since October last year, the CCP has carried out five similar operations that involved 15,000 criminal gangs and 311,000 arrests.

In the fourth round on April 2, authorities said they seized more than 15,000 phones and bank cards, valued at more than $2.09 million.

The results of the crackdown have been modest compared with the amount of outflow disclosed by the authorities. The report said more than 1,100 people were arrested on suspicion of money laundering, involving more than 170 groups, but did not give details of how much money was involved.

Liao Jinrong, director of the International Cooperation Bureau of the Ministry of Public Security, confirmed in September 2020 that among capital outflow from China, cross-border gambling alone amounted to more than $166.7 billion a year.

Difficulties Curbing Capital Outflow

ThePaper.cn, a state news outlet, quoted an industry source as saying that in addition to cracking down on virtual currency mining, the authorities are likely to restrict over-the-counter (OTC) cryptocurrency transactions and may introduce further measures like intensifying investigations on irregular bank transfers as they attempt to stop money leaving the country. However, the outflow of capital has proven difficult to block completely.

Sino Global Capital said in a 2020 report that “OTC trading is a fairly large market in China, much larger than people think,” and that most trading platforms also offer a range of OTC options.

The world’s largest cryptocurrency trading platforms, Binance, Huobi, and OKEx, were all founded in China and backed by Chinese capital. Due to the CCP’s renewed restrictions, these platforms are now mostly run outside China.

Binance moved its servers and staff out of China and has made every effort to grow in the U.S. market since September 2017, when the CCP introduced laws to rigorously regulate cryptocurrency trading. However, the majority of its users, who mostly engage in over-the-counter (OTC) cryptocurrency trade, are still from China.

In addition, according to the 2020 Annual Digital Currency Anti-Money Laundering Report released by blockchain security company PeckShield, the value of unregulated cross-border virtual currency trading with China reached $17.5 billion in 2020, up 51 percent from $11.4 billion in 2019, and continues to grow rapidly.

Tether (USDT), the most widely used cryptocurrency pegged to the U.S. dollar, has refused to be regulated by U.S. authorities because it doesn’t want to disclose the personal information of its biggest users. These users account for 80 percent of all OTC transactions in virtual currencies.

Tether’s trade peaked at more than $200 billion in a 24-hour period on May 19, and still stands at $71 billion on June 13.