Authorities in mainland China have arrested over 1,100 people involved in laundering illegal funds using cryptocurrencies according to the Chinese Ministry of Public Security. The arrests included 170 criminal groups that used crypto exchanges to convert illegally gained funds to digital currency. The funds would then be laundered and moved overseas in a series of anonymous transactions that conceals the identity of the parties involved and makes investigating the trail of the funds difficult.
China’s Payment & Clearing Association stated that cryptocurrencies “have increasingly become an important channel for cross-border money laundering.”
In April of this year China’s Central Bank (PBoC) announced a crackdown on money laundering that utilized cryptocurrency transfers. The announcement was followed by various banking associations issuing statements in May strongly encouraging their members to “resolutely not carry out or participate in any business activities related to virtual currencies.”
Although the Chinese Communist Party’s (CCP) stated intention is to stamp out money laundering activities, the larger purpose may also include discouraging its citizens from moving their savings to a more stable currency overseas so that funds stay in domestic accounts and investments.
Chinese funds and national security
The concept of a dual circulation economy that would rely more on a robust internal economy in order to safeguard China against international pressures and reliance on the outside world was discussed during the CCP’s Central Committee meeting on the five year plan covering 2021 to 2025 at the end of October last year. Included in the meeting were the topics of national security mentioning food supply, energy, strategic mineral resources, critical infrastructure, transportation, telecom, the Internet, and finance.
With $10 trillion in household savings and a savings rate 15 percent higher than the global average, the potential pool of China’s domestic investors could offset a drop in funds from international investments if political tensions increase with foreign governments that enact measures to restrict investments in China as we have already seen. At the end of 2020, a meeting was held by the China Securities Regulatory Commission (CSRC) discussing the topic of encouraging its citizens to increase investing in Chinese securities.
This was the second time in 11 months that the subject was broached in response to the heightened tensions with U.S. officials over investments in Chinese firms with links to the People’s Liberation Army (PLA) and related military entities. In response to the U.S. Treasury adding Chinese companies to its entities list and restricting investments in certain Chinese companies, China enacted its own regulations in January to review the source of foreign investments. The regulations scrutinize potential foreign ownership and control of entities that invest in Chinese companies both through direct and indirect investments under national securities concerns.
Digital wallets versus the digital yuan
Keeping Chinese savings in domestic accounts and investments would be a priority and taking measures to stamp out cryptocurrency is an important step. An approach to transferring funds from China is through the use of third payment platforms such as Alipay and WeChat Pay that can utilize online currency exchanges to convert funds to cryptocurrency.
On June 21, officials from banks and Alipay were reminded by the Party that transactions involving cryptocurrencies are prohibited in a move that can reinforce the restrictions on moving funds overseas. Currently the amount of funds that can be moved from China is currently capped at a strict $50,000 annually.
Digital wallets are used to make mobile payments on third party payment platforms, such as Alipay and WeChat Pay, and can make transfers to cryptocurrencies. These digital wallets have user data such as spending behavior and location of citizens. A regulation was passed in 2018 that allows the PBoC to utilize the data by routing these digital wallet transactions through a central clearing house.
The information, once held by the third party payment platform, is now accessible for the CCP to use to spy on citizen spending behavior and restrict cryptocurrency transactions. The crackdown on cryptocurrency transactions coincides with the rollout of the digital Yuan this year by the PBoC that would give China’s central bank total insight into its citizens’ financial transactions.