China recently dropped the news that the country is banning crypto-related activities, and it is not sparing those people and companies providing services to overseas exchanges as well.

The country’s top authorities — including the central bank as well as its judicial, public security and banking authorities — released a joint notice on Sept. 24 to announce the stepped-up ban, reflecting the nation’s toughest rules yet against the crypto industry. However, its full legal ramifications remain unclear as to how far Chinese investigations and law enforcement could reach.

Many industry players were swift to react to the new restrictions. Crypto exchange Huobi, for example, stopped registering new customers in mainland China and said it plans to retire all mainland China user accounts by the end of this year.

David Lesperance, a Canadian immigration and tax advisor who works with many Chinese clients, said China has made clear it wants to have complete control over its people, no matter where in the world they are at.

“In order to accomplish this, [the Chinese government] needs to do certain things. One major part is to control all economic activity and wealth of the Chinese population — currently underway with development of digital yuan (e-CNY),” Lesperance wrote in an email to Forkast.News. “Along with the ability to immediately identify, [the government] can easily and instantly seize the assets of anyone who is not deemed sufficiently ‘Chinese minded’; or is a potential threat; or whose assets are coveted by the various members of the government.”

The following Forkast.News interview with Lesperance has been edited and condensed.

Why did China outlaw cryptocurrency transactions?  

The announcement making cryptocurrency transactions in China illegal is a much-anticipated move to eliminate any potential competition to the government’s new incoming sovereign digital currency, the digital yuan. It is part of an all-encompassing series of actions by the Chinese government to have complete control over the lives of its citizens. Those who are rightfully worried about being at the mercy of the Chinese government are acting quickly to make sure that they have robust backup plans to protect their family’s wealth and freedom.

In making the digital yuan the sole means of financial transaction in China, several things have to happen. First, there needs to be a movement from paper money to digital financial transactions, which was already well underway in China. Second, China needs to bring the digital yuan system online as soon as possible. Lastly, the country has to eliminate any potential competing digital currencies — this is the main motivation behind this major move against crypto!

Are those regulations good or bad for the crypto market? How does it help or hurt investors?

China’s crypto ban will effectively divide that country’s cryptocurrency holders into two camps. One group will act to get their crypto assets and themselves an escape plan to avoid the complete control of the Chinese government. Another group will not act and will be sentencing themselves to being under the thumb financially and physically of the central government authorities.

They could wait for the Chinese government to offer to swap their crypto assets for digital yuan. A direct analogy is when President Roosevelt banned gold in the U.S. and then fixed a conversion price to the U.S. dollar. Until that offer comes in, the Chinese crypto asset holder could be stuck with a highly volatile asset which they cannot sell or use.

How does this ban affect Chinese nationals who have crypto assets in Chinese and/or overseas exchanges or in cold wallets? What is the next potential move by the Chinese government?  

The key to understanding this ban is to see how it fits into the overall actions and plans of the current Chinese government. The most successful response is to “anticipate the predictable.” While crypto transactions were banned on Sept. 24, the next obvious move would be to make the possession of cryptocurrency other than the digital yuan illegal. This move would be accompanied by a period in which Chinese cryptocurrency holders with crypto assets would be allowed to “swap” their crypto for digital yuan, at rates set by the Chinese government. Those with assets in Chinese exchanges, cold wallets or overseas crypto exchanges would then be told to do the swap. If they were found to hold any crypto assets, such as in cold wallets or overseas exchanges, then they could be subject to criminal sanction.

It is also a safe assumption that prior to issuing last week’s ban, the Chinese government could be gathering as much information as possible on which Chinese nationals might be holding cryptocurrency. This information could come from sources such as Chinese exchanges, like looking at who bought cold wallets and who is bragging on social media and email/electronic communication between China and overseas crypto exchanges. After the ban, they could then cross-reference this database against those who potentially do the voluntary swap and focus on those who are on the first list but not the second. This hunt for offenders could well be boosted by a whistleblower reward program.

How do you think this kind of notice/ban could or should affect Hong Kong, legally speaking? If I were a crypto trader or exchange in Hong Kong, should I worry? 

Worry? FTX has already decamped from Hong Kong to the Bahamas! It would be foolish for any trader or exchange to believe that Hong Kong is a safe haven.

Under what circumstances do you think the Chinese government would chase after those working for overseas exchanges? How about overseas Chinese — what does Canada’s Chinese community think of these new strictures against crypto? Do they believe it affects them? 

Overseas Chinese need to consider the possible leverage that the Chinese government may have over them. This might include the cancellation of their Chinese passports. It is worth remembering that all passports, including China passports, are the property of the issuing government and can be issued or cancelled at their whim. If the overseas Chinese do not have an alternative passport, then they could find themselves stranded and possibly unable to renew their foreign residence, work or student permits. Other possible levers of control could include a loss of one’s “hukou” — which is China’s household registration system — or Exit Permit restrictions on family members

I think that most overseas Chinese in Canada and elsewhere have not thought through the potential impact of this crypto transaction ban on them. However, once further clarification from the government and exchanges comes out, I am sure they will be as horrified as crypto holders in China are right now. 

According to the new notice, people or companies working or providing services to overseas crypto exchanges could be subject to legal investigations. How likely is it that the Chinese legal and public security departments will actually reach overseas to chase down Chinese nationals who are crypto traders or work for overseas crypto companies? 

Overseas Chinese working in overseas crypto exchanges are in the same position as overseas crypto holders in understanding the potential leverage that the Chinese government may have over their lives. Non-Chinese crypto exchange founders and employees should also not risk traveling to China or Hong Kong until they prove to the Chinese government that their exchange is fully compliant with the new rules.

As for extra-territorial enforcement of domestic laws, this is something that the U.S. has been doing for years. In the past few years, China has also done this on certain occasions. Therefore, the selection of safe locations is very important in the design of backup plans.