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Chinese authorities have shut down an underground bank that facilitated illegal currency exchange between the Chinese yuan and South Korean won, using cryptocurrency as a medium.
Police announced on local social media QQ that the operation — which involved transactions worth at least 295.8 million USD — was uncovered in Jilin province, Northeast China, leading to the arrest of six suspects.
The Mechanics of the Illegal Operation
According to the report, the criminal group exploited the inherent features of cryptocurrency, such as anonymity and decentralization, to conduct illicit foreign currency exchange activities.
They used domestic bank accounts to receive and transfer funds while engaging in over-the-counter (OTC) cryptocurrency transactions. OTC transactions occur directly between two parties, without the involvement of a centralized exchange, making them harder to trace and regulate.
The operation allegedly catered to various entities, including South Korean purchasing agents, cross-border e-commerce platforms, and import-export trade companies, helping them exchange funds between the Chinese yuan and South Korean won.
By using cryptocurrency as an intermediary, the criminal group aimed to circumvent China’s strict capital control policies and facilitate illegal currency exchange.
China’s capital control
China has long maintained tight capital control policies to regulate the flow of money in and out of the country. These policies are designed to prevent capital flight, maintain financial stability, and protect the value of the Chinese yuan.
However, some individuals and businesses have resorted to using cryptocurrencies as a means of bypassing these regulations.
Cryptocurrencies, such as Bitcoin (BTC) and Ethereum (ETH), offer a decentralized and pseudonymous way of transferring value across borders without relying on traditional financial institutions. This has made them an attractive tool for those seeking to evade capital controls and engage in illegal financial activities.
The Chinese government has been increasingly vigilant in cracking down on the use of cryptocurrencies for such purposes. In 2017, China banned initial coin offerings (ICOs) and shut down domestic cryptocurrency exchanges to curb speculative trading and prevent financial risks.
Since then, authorities have continued to monitor and suppress many crypto-related activities, including money laundering, fraud, and illegal currency exchange.
Implications and Future Outlook
The bust of this underground financial service in Jilin province highlights the ongoing efforts by Chinese authorities to combat illegal financial activities and maintain control over capital flows. As cryptocurrencies gain more mainstream attention and adoption, governments worldwide are grappling with the challenges of regulating these decentralized assets and preventing their use for illicit purposes.
China’s stance on cryptocurrencies has been one of the most stringent among major economies. While the country has embraced blockchain technology, the underlying technology behind cryptocurrencies, it has taken a hard line against the use of cryptocurrencies themselves.
Despite this, local regulators do not push cryptocurrencies completely out of their jurisdiction. It seems that Chinese authorities are for the most part opposed to the decentralized and uncensorable ways of using cryptocurrency.
The act highlights this that after Hong Kong fund managers sought approval for spot Bitcoin and Ethereum ETFs in mid-April, they saw them be approved just days later. Earlier this month, both those products became available on the local stock exchange.
