TLDR

• Local Chinese governments are selling seized cryptocurrency through private companies despite the national ban on crypto trading
• China held approximately 15,000 Bitcoin worth $1.4 billion at the end of 2023, with total holdings estimated at 194,000 BTC ($94,210.00) worth about $16 billion
• Crypto-related crimes in China have surged 10-fold to 430.7 billion yuan ($59 billion) in 2023
• Experts suggest the central bank should handle seized crypto by selling overseas or building a reserve
• The issue comes amid rising US-China tensions and Trump’s plans to regulate stablecoins and foster crypto innovation

China’s government authorities have found themselves in an awkward position. They’re sitting on billions of dollars worth of seized cryptocurrency but face a major obstacle: the country’s own ban on crypto trading.

Local governments across China are using private companies to sell confiscated digital assets in offshore markets. This practice allows them to convert the crypto into cash that helps fill public coffers during an economic slowdown.

The approach has raised concerns among legal experts. “A makeshift solution that, strictly speaking, is not fully in line with China’s current ban on crypto trading,” said Chen Shi, a professor at Zhongnan University of Economics and Law, in comments to Reuters.

Growing Crypto Crime

The issue has become more pressing as crypto-related crimes in China have exploded. Money involved in such crimes increased ten times to reach 430.7 billion yuan ($59 billion) in 2023, according to blockchain security firm SAFEIS.

Chinese authorities sued over 3,000 people for crypto-related money laundering last year. These cases span a wide range of illegal activities, from online fraud to money laundering and illegal gambling.

The surge in busted crypto crimes has coincided with a jump in local governments’ penalty and confiscatory incomes. These reached a record 378 billion yuan in 2023, representing a 65% increase over five years.

Liu Honglin, a lawyer who advises local governments on crypto matters, told Reuters that seized cryptocurrencies have become a major contributor to local finances in some cities. Digital coins are popular tools for criminals because they can be transferred easily and anonymously across borders.

How The Sales Work

The sales process involves private companies acting as intermediaries. One such company, Jiafenxiang, has reportedly sold cryptocurrencies worth more than 3 billion yuan in offshore markets since 2018.

This Shenzhen-based technology company has worked on behalf of several local governments. These include authorities in Xuzhou, Hua’an, and Taizhou cities in China’s eastern Jiangsu province.

The process works as follows: US dollar proceeds from crypto sales are exchanged into yuan through local banks. The money is then transferred into accounts belonging to local finance bureaus.

At the end of 2023, Chinese local governments held an estimated 15,000 Bitcoin worth $1.4 billion. Overall, China is believed to hold approximately 194,000 BTC worth about $16 billion, making it the second-largest national Bitcoin holder behind the United States.

Proposed Solutions

Experts have proposed several solutions to address this regulatory contradiction. Shenzhen-based lawyer Guo Zhihao believes China’s central bank should take charge of dealing with seized digital assets.

He suggests the central bank could either sell them overseas or build a crypto reserve. This idea mirrors former US President Donald Trump’s plan to create a national Bitcoin reserve.

Ru Haiyang, co-CEO at Hong Kong crypto exchange HashKey, echoed this suggestion. He noted that China might want to keep forfeited Bitcoin as a strategic reserve, similar to Trump’s approach.

Another proposal involves creating a crypto sovereign fund in Hong Kong, where crypto trading remains legal. This could help China maximize the value of seized cryptocurrencies through centralized management.

The debate around seized crypto has gained extra attention due to rising US-China trade tensions. Trump’s plans to regulate stablecoins and support growth in the crypto industry add further context to China’s dilemma.

Some industry observers suggest that China’s tariff response to US trade measures could result in a devaluation of the local currency. This might potentially drive more Chinese citizens toward cryptocurrency as a store of value.

As China grapples with this regulatory puzzle, the country’s large crypto holdings remain in an uncertain state. The outcome of these discussions could have far-reaching effects on both China’s approach to digital assets and the global crypto market.

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