China is discussing new rules for managing seized cryptocurrencies as cases involving illegal use of digital assets continue to grow.

This dialogue arises amid an increase in criminal cases involving cryptocurrencies in China, where trading of digital tokens is prohibited.

Blockchain security firm SAFEIS reported a significant rise in crypto-related crimes last year, with the total amount involved reaching 430.7 billion yuan (US$59 billion) in 2023.

These cases include fraud, money laundering, and illegal gambling.

Local governments now sell confiscated crypto via private firms and convert the proceeds to yuan, but this process lacks uniform regulation.

🔗 Source: Reuters

🧠 Food for thought

1️⃣ China’s regulatory paradox: banning crypto while exploiting its value

China’s approach to cryptocurrency has evolved into a pragmatic contradiction that reveals deeper tensions in governance.

Despite officially banning crypto trading and not recognizing digital tokens as legal assets, local governments are actively selling seized cryptocurrencies worth billions through private companies to boost public finances 1.

This contradiction mirrors China’s historical approach to digital currencies, maintaining strict controls while extracting economic value. For instance, while it banned Bitcoin exchanges in 2017, it simultaneously promoted blockchain technology in its national development plans 2.

The estimated 15,000 bitcoins (worth $1.4 billion) held by Chinese local governments demonstrates the scale of this regulatory gray area, making China the world’s 14th largest holder of Bitcoin despite its official stance against the cryptocurrency.

This pattern reflects a broader governance challenge where central government policy priorities, such as financial stability and control, conflict with local government needs for revenue streams in a slowing economy.

2️⃣ Asset seizure becomes critical revenue source amid economic pressures

The surge in crypto-related crime enforcement has created an unexpected financial windfall for Chinese authorities struggling with economic headwinds.

Local governments’ penalty and confiscatory incomes hit a record 378 billion yuan ($59 billion) in 2023—a 65% increase over five years—with seized cryptocurrencies becoming “a major contributor to local finances in some cities,” according to the article.