Chinese authorities have reportedly disrupted a large underground banking operation that allegedly used crypto to help clients circumvent the country’s strict capital controls.
According to Chinese state media reports on Dec. 24, foreign exchange regulators in Qingdao uncovered an underground banking scheme. The scheme facilitated over $2.2 billion worth of transactions for clients across 17 provinces, allowing them to bypass China’s limits on exchanging foreign currencies.
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The underground crypto network helped people evade restrictions
Under Chinese law, individuals are restricted to exchanging no more than $50,000 worth of foreign currency each year unless they obtain special permits. The underground network allegedly helped people get around these strict capital controls by using cryptocurrency trading platforms abroad.
Xu Xiao, an inspector from the Qingdao branch of the State Administration of Foreign Exchange, explained that the illegal scheme worked by first purchasing cryptocurrencies, and then selling them through overseas trading platforms to obtain foreign fiat currencies like US dollars.
According to the report, investigators seized around $28,000 worth of cryptocurrencies on site, including Tether, Litecoin, and others. However, the entire operation is estimated to have moved over 15.8 billion yuan ($2.2 billion) through thousands of bank accounts.
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China has banned all cryptocurrency trading and mining activities since 2021. Chinese Authorities have justified the crackdown by stating that crypto was being used to facilitate criminal activities like money laundering.
However, some experts believe China’s strict capital controls are the real motivation behind the crypto ban. The Chinese government imposed tight foreign exchange regulations in 2016. These required banks, companies, and people to comply with a ‘closed’ capital account policy that severely limits the flow of money in and out of the country.
Crypto advocates argue that the technology promotes financial freedom. On the other hand, China views it as a threat to its ability to closely manage cross-border fund flows. The crackdown highlights the tension between anti-money laundering regulations and maintaining strict control over the movement of money.