China’s stepped-up cryptocurrency ban continues to send shockwaves beyond its borders, with many companies and people worried about the legal implications and how far Chinese investigations and law enforcement could reach.

The recent notice jointly issued by 10 agencies, including China’s central bank as well as its judicial, public security and banking authorities, signals “a consensus has been reached by multiple government organs,” said Zhang Xiaoxiao, founder of ChainAudit — a consultancy to China’s public security departments on economic criminal activities — in an interview with Forkast.News.

In addition to banning all crypto-related activities, including crypto mining, the notice specifies that both people and companies providing services to overseas exchanges could be subject to investigation by Chinese law enforcement.

Following the release of the notice, cryptocurrency-related businesses will undoubtedly face different forms of crackdowns, Zhang said. But as to how law enforcement agencies will carry out investigations and chase down activities China deems to be illegal, he added, “we have to wait for more judicial documents to be put out.”

The notice, reflecting China’s toughest rules yet against crypto, is likely also a warning aimed at ordinary Chinese.

“Part of it is going to be a scare tactic just to stop people investing in and using crypto,” Paul Haswell, a partner at the law firm Pinsent Masons in Hong Kong, told Forkast.News.

China’s new crypto bans do not criminalize the ownership of crypto, legal experts said. But with the threats of penalties for people who sell crypto, the lives of Chinese nationals who hold crypto will undoubtedly get more complicated.

David Lesperance, a Canadian immigration and tax advisor who works with many Chinese clients, predicts that the new clampdowns will effectively divide 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,” Lesperance told Forkast.News. “Another group will not act and will be sentencing themselves to being under the thumb financially and physically of the central government authorities.” 

Targeting overseas exchanges and mainland China users

Within overseas Chinese communities and crypto companies that employ Chinese nationals, one cause for alarm in last week’s notice is how people and companies providing services to overseas crypto exchanges that are perfectly legal in those jurisdictions could still find themselves subject to an investigation and being in violation of the mainland’s new anti-crypto law.

Industry reactions were swift. 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.

One top-20 crypto exchange, which has around 25% to 30% of its users in China, will pause onboarding new Chinese users, but existing users won’t be affected at this point, a company executive told Forkast.News in an email. The executive asked to withhold the company’s name because of the political sensitivities.

BitMart, another crypto exchange, said that it was banning account registration for mainland China, and it will stop serving all users there starting from Nov. 30. Crypto exchange BiKi has also ceased new user registration for those on the mainland on Sunday, it said in a Tuesday statement, adding that it will close its deposit function and will only allow its withdrawal function until Nov. 30.

Urszula McCormack, a financial regulatory lawyer at King & Wood Mallesons, an international law firm headquartered in Hong Kong, told Forkast.News in an interview that there already has been a growing awareness among crypto-related companies — whose businesses can easily cross national borders — to be compliant, but China’s intensifying clampdowns on crypto are now bringing the legal issues into sharper focus.

“We are starting to see a growing level of understanding,” McCormack said. “Also among those who are providing data centers and who are also providing other types of services and infrastructure, developers for that area are taking note of what the surrounding regulatory environment is like.”

McCormack noted that some multinationals are structured with separate business divisions that don’t necessarily interact with one another.

“That’s why this joint announcement is important,” McCormack said. “Because when we look at things like information services, the information services themselves may not be caught by this announcement, but when you bundle them with a platform that provides all sorts of products and services, that’s where you know you’re right in the mix of being the focus of this regulatory review.”

Possibility of cross-border investigation

While organizations and their employees that facilitate cryptocurrency trading within the country could bear legal responsibilities, lawyers say that as a practical matter, Chinese nationals living overseas who trade in crypto but do not work for crypto companies likely should not lose sleep over whether mainland law enforcement will be coming after them. 

“If I put on [my] thinking cap of the way that Chinese law would operate, then yes they may be committing a crime, but the odds of them actually facing any penalty for that would be negligible,” Haswell said.

Lily Z. King, COO of a Singapore-based crypto custody and asset management platform, recently wrote in a Forkast.News commentary: “I have some expat friends in crypto chat groups, and some of them are in a panic now, asking whether they are committing a crime by using local internet to do crypto transactions.” 

“This is certainly an overreaction,” said King, a lawyer. “Only those who promote crypto assets to Chinese people and facilitate crypto transactions will likely be the key targets of this crackdown.”

But Zhang, of ChainAudit, noted that Chinese authorities could be more committed to stamping out crypto activities than one might think. 

Chinese authorities have chased individuals, beyond the mainland’s borders, over suspected criminal activities such as corruption and fraud. It is not inconceivable that Chinese law enforcement can selectively go after other Chinese nationals abroad that they believe to be engaging in criminal behavior related to crypto, to make an example out of them.  

Spillover concerns

The legal minds consulted by Forkast.News were split over what kind of spillover effect that China’s anti-crypto policies, the harshest yet, could have on Hong Kong.

“Those who are in Hong Kong may be wondering whether it is the best place to be,” Haswell said. “There is] a bit of a battle as to who could have crypto dominance in Asia, and Hong Kong would have been a great place to have it. But every time something like this happens over in the mainland, that opportunity falls further and further away.” 

“So you’ve got Singapore, Korea, Japan all taking different approaches,” Haswell added. “Those who are in Hong Kong may be wondering whether it is the best place to be or whether they should be trying to get out to go somewhere else.”

But others believe there are still many legal and policy boundaries between Hong Kong and mainland China.

“We don’t expect to see any change to the current trajectory of the Hong Kong proposals for reforms in relations to implementing a FATF compliant framework for virtual asset service providers,” McCormack said. “We have an existing framework that’s administered by the [Hong Kong Securities and Futures Commission] in relation to some providers, and we fully expect to see that the regulatory regime will grow and still provide some scope for activity within Hong Kong.”

Peculiar timing

China dropped the bombshell announcement of its latest crypto ban just as its central bank was closing in on the finish line in the development of China’s new digital currency, the e-CNY.

Just two weeks ago, Fan Yifei, a deputy governor of the People’s Bank of China (PBOC), the central bank, said the infrastructure construction for e-CNY, which is expected to be officially unveiled during the Beijing Winter Olympics, has entered a “sprint stage,” according to a PBOC statement.

“I would be surprised if it was purely a coincidence,” Haswell said. “It’s gearing up to move people across to the digital renminbi, which is very much in China’s interest … They want a smooth roll-out. They want a currency that they control.”

China’s crypto ban, Lesperance added, was “a much-anticipated move to eliminate any potential competition to the government’s new incoming sovereign digital currency, the digital yuan.”

Ningwei Qin contributed to reporting.