China’s central bank has intensified its campaign against virtual currencies, signalling a renewed wave of regulatory tightening aimed at containing financial risks, safeguarding capital controls, and asserting the primacy of the state-backed monetary system. In a statement following a high-level regulatory coordination meeting, the People’s Bank of China reaffirmed that all virtual currency activities remain illegal and warned of a recent resurgence in crypto-related speculation driven by global market volatility, foreign stablecoin expansion, and domestic loopholes that continue to attract illicit activity.

The central bank’s warning illustrates how China views the crypto ecosystem not merely as a financial phenomenon but as a potential threat to economic governance, monetary sovereignty, and national security. With global interest in cryptocurrencies rebounding and stablecoins becoming more deeply integrated into international payment flows, the PBOC is doubling down on surveillance and enforcement—particularly after observing renewed underground mining activity and informal cross-border crypto channels emerging within the country.

While China banned cryptocurrency trading in 2021 and outlawed industrial-scale bitcoin mining, the central bank now argues that new forms of stablecoin usage and speculative trading are reintroducing systemic vulnerabilities. The bank’s expanded focus reflects both domestic policy objectives and a broader geopolitical concern that foreign-issued digital currencies could undermine China’s capital controls or compete with the digital yuan, the central bank’s own sovereign digital currency initiative.

Rising Crypto Activity Prompts Renewed Regulatory Urgency

According to officials familiar with the central bank’s internal assessments, the PBOC believes that renewed global crypto enthusiasm has filtered into mainland China through informal online communities, overseas platforms accessed via VPNs, and peer-to-peer trading networks. These channels, while officially illegal, have experienced periodic spikes in transaction volumes whenever major cryptocurrencies rise in price or global liquidity improves.

The central bank views this behaviour as a macro-financial risk for several reasons:

• Volatility-driven contagion:
  Crypto markets remain prone to dramatic price swings. Even small pockets of domestic exposure could trigger household losses, create social media-fuelled backlash, or fuel speculative bubbles at the margins of China’s household finance sector.
• Unmonitored capital flows:
  Cryptocurrencies offer a channel for circumventing capital controls. The potential for illegal outbound transfers raises red flags for policymakers committed to maintaining stability in the balance of payments.
• Regulatory arbitrage:
  China’s extensive fintech crackdowns in recent years—including actions against peer-to-peer lending, online micro-credit, and unregulated digital finance—have significantly reduced domestic avenues for speculation. Crypto, however, presents a parallel and harder-to-monitor ecosystem.

It is within this context that the PBOC emphasised the need to “intensify efforts” to identify newly emerging risks. Officials argue that speculative behaviour is resurfacing precisely because global crypto prices have rallied, and underground channels in China remain operational despite enforcement campaigns.

This dynamic has forced regulators to adopt a forward-looking stance. Rather than reacting only to large-scale breaches, the central bank aims to cut off risk as it develops, aligning its approach with broader national objectives of financial security and capital control integrity.

Stablecoins Emerge as the Primary Regulatory Flashpoint

In its latest regulatory guidance, the PBOC singled out stablecoins as an area of “particular concern,” reflecting the central bank’s view that these instruments pose greater structural risks than speculative cryptocurrencies like bitcoin or ether.

Stablecoins are digital tokens designed to maintain a fixed value, typically pegged to the US dollar. Globally, they are used for payments, trading, and transferring money across borders with low fees and near-instant settlement. While stablecoins play a vital role in international crypto markets, Chinese regulators view them through the lens of monetary sovereignty and financial crime prevention.

The PBOC outlined several reasons why stablecoins require heightened scrutiny:

• Weak customer identification frameworks:
  The bank argues that major global stablecoin issuers do not operate with sufficient know-your-customer (KYC) and anti-money-laundering controls to satisfy China’s standards.
• Potential for illicit transfers:
  Stablecoins can support fast, pseudonymous transactions that bypass banks and official payment systems. This makes them attractive for illegal cross-border transfers, tax evasion, fraud, and underground lending schemes—issues Beijing has aggressively targeted for over a decade.
• Impact on currency control and monetary policy:
  A widely adopted foreign currency-pegged stablecoin could introduce a parallel monetary system inside China’s digital economy, undermining capital controls and complicating monetary transmission.
• Competition with the digital yuan:
  China is one of the world leaders in developing a sovereign digital currency. Large-scale stablecoin adoption could fragment digital payment infrastructure and reduce the digital yuan’s future relevance.

These concerns help explain why the central bank, despite banning crypto trading years ago, continues to issue new warnings. Stablecoins dominate crypto trading overseas, and regulators fear that any leakage of their usage into China could erode existing financial safeguards.

Illegal Mining Resurfaces, Indicating a Broader Enforcement Challenge

Despite Beijing’s sweeping bans on bitcoin mining in 2021, underground mining activity has made a quiet resurgence. Industry data and accounts from miners point to operations re-emerging in certain energy-rich provinces, especially in regions where excess hydro or coal power remains inexpensive. Some miners now disguise their operations as data centres, cloud computing facilities, or AI server farms, exploiting gaps in local enforcement.

From the PBOC’s perspective, the re-emergence of mining poses several risks:

• Energy diversion and carbon compliance issues
  China has pledged major emissions reductions, and unauthorised mining undermines energy allocation targets—particularly during periods of grid stress.
• Financial opacity
  Mining generates crypto assets that can be moved offshore quickly, bypassing transaction reporting systems.
• Regional governance challenges
  Local governments sometimes overlook mining operations due to economic incentives such as job creation or revenue from increased electricity consumption.

The central bank’s latest statements indicate that mining may be included in broader crackdowns on virtual currency-related financial activities. While the PBOC does not directly regulate energy usage, its emphasis on “coordinated vigilance” suggests deeper collaboration across ministries and provincial regulators.

The Digital Yuan as a Strategic Counterbalance

China’s aggressive stance on virtual currencies is closely linked to its advancement of the digital yuan (e-CNY), an official central bank digital currency (CBDC) that offers programmable features, controlled data flows, and state-backed legal tender status. The digital yuan is seen as the only legitimate counterpart to cash in a digital future.

The PBOC’s warnings against stablecoins and other crypto instruments reflect a strategic goal: to cultivate an environment where the e-CNY can operate without competition from decentralised or privately issued digital currencies.

The digital yuan initiative has expanded swiftly in recent years, with trials in dozens of cities and integration into public transport, retail, and government services. Authorities hope that limiting alternative digital currencies will accelerate adoption and solidify the digital yuan as the backbone of China’s currency system.

To support this objective, China has also strengthened oversight of mobile payments giants such as Alipay and WeChat Pay, ensuring that all digital payment channels remain anchored within the state’s regulatory perimeter. Cryptocurrencies—especially stablecoins with global circulation—represent the only major digital payment systems outside this architecture, which is why regulators see them as a systemic challenge.

Hong Kong’s Divergent Approach Highlights China’s Strategic Caution

While mainland China has banned crypto trading, Hong Kong has adopted a regulated framework for digital assets, including stablecoins. However, the city has yet to issue any licences to stablecoin issuers, underscoring how China is monitoring developments without allowing immediate cross-border spillovers.

Hong Kong’s approach serves as a controlled experiment that China can observe from a safe distance. Its regulatory sandbox allows policymakers in Beijing to track how stablecoin rules evolve, how issuers comply, and how financial institutions manage risks. If successful, Hong Kong’s model could inform future mainland policies—but not before the PBOC concludes that such assets can be reconciled with capital control and anti-money-laundering requirements.

PBOC’s Stance Reflects Wider Global Trends but Applies China’s Unique Framework

While China’s crackdown is severe by global standards, it aligns with a broader international movement toward tighter crypto regulation. Policymakers worldwide are increasingly concerned about stablecoin risks, crypto-linked bank runs, illicit finance, and the systemic implications of decentralised markets.

What distinguishes China’s stance is its integration of financial, political, and national security objectives. For Beijing, crypto regulation is not simply about preventing market volatility—it is about asserting control over data flows, capital movements, and the evolution of digital payment infrastructure.

By reaffirming its commitment to crack down on virtual currencies and spotlighting stablecoins as a critical vulnerability, China’s central bank is signalling that crypto’s resurgence will not be tolerated. The country aims to ensure that the future of its digital economy remains firmly within the state’s regulatory framework, anchored by the digital yuan and protected from the uncertainties of private digital currencies.

(Adapted from MarketScreener.com)

Categories: Economy & Finance, Regulations & Legal, Strategy