China’s over-the-counter (OTC) cryptocurrency brokers are witnessing unprecedented inflows, reflecting a growing demand for alternative investments amid a sluggish economy marked by weak equity and property markets. According to a study by Chainalysis Inc., inflows exceeded $20 billion in each of the three quarters leading up to June, establishing a record streak and resulting in a cumulative total of $75.4 billion for the nine-month period.
These figures suggest a persistent appetite for cryptocurrencies in China, despite the government’s ongoing three-year ban on digital asset trading due to concerns over currency outflows and money laundering. OTC services provide a discreet avenue for converting yuan into digital tokens without the need for transactions on public exchanges. Additionally, peer-to-peer trading offers another covert method for investors to exchange assets directly.
“Given the regulatory context in China, including the ban on trading and mining of cryptocurrency, these services invariably fall in a gray zone of the economy,” said Eric Jardine, cybercrimes research lead at Chainalysis. He noted that Beijing’s prohibition of crypto trading may not be strictly enforced.
Large Transfers Dominate OTC Activity
Chainalysis revealed that approximately 55% of the total value received by Chinese OTC traders originates from transactions exceeding $1 million. However, the data does not clarify whether these transfers are conducted by wealthy individuals or businesses acting on behalf of smaller clients.
“Unless the regulatory situation in China becomes more favorable toward crypto, I would expect services like these to continue to grow over time,” Jardine added.
Evidence of ongoing cryptocurrency activity in China is apparent through various developments. Reports indicate that Russian commodities firms and Chinese clients have utilized digital assets for settling certain cross-border transactions, according to anonymous sources familiar with the matter. Additionally, recent police raids aimed at curbing billions of dollars in illicit foreign-exchange transactions have underscored the role of cryptocurrency in these activities, with operations spanning Beijing, Jilin province, and Chengdu city.
Enforcement Challenges Persist
Despite Chinese authorities tightening anti-money laundering laws and cracking down on crypto-related crimes, experts highlight the challenges in enforcing these bans due to the borderless nature of the cryptocurrency industry. “We have seen Chinese authorities move to crack down on crypto-enabled crime, but the reality is that these bans are difficult to enforce,” noted Angela Ang, senior policy adviser at blockchain intelligence firm TRM Labs.
While digital asset trading is permitted in Hong Kong, which has shifted its focus to becoming a crypto hub since late 2022, analysts do not anticipate any easing of official restrictions in mainland China. Regulations further complicate access for Chinese citizens to crypto investments in Hong Kong.
In a recent bid to support the economy, China’s central bank announced a series of policy measures, including efforts to stabilize the struggling stock market. Whether these initiatives will reduce the underground demand for cryptocurrency remains to be seen, especially as Bitcoin has surged approximately 140% over the past year, contrasting sharply with a 10% decline in China’s benchmark CSI 300 equity index during the same timeframe.
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