China's Bitcoin Liquidation Plans Pressure Prices

Bitcoin is currently facing significant pressure due to reports indicating that China may be planning to liquidate large amounts of confiscated Bitcoin. This move could potentially exert downward pressure on the price of Bitcoin. Local Chinese governments have been engaging private companies to convert seized Bitcoin into cash, aiming to bolster public finances that are under strain from a slowing economy.

China's ban on Bitcoin and crypto trading creates a complex situation, as these liquidation efforts seem to contradict the existing regulations. Legal experts, senior judges, and law enforcement officials have called for clearer regulations to address this issue. Professor Chen Shi from the Zhongnan University of Economics and Law described these disposals as a temporary solution that does not fully align with China’s current ban on crypto trading. The urgency of creating a consistent framework for handling seized virtual currencies was highlighted during a seminar attended by various government officials earlier this year.

The lack of transparency in dealing with confiscated digital coins has raised concerns about corruption and further crypto-related crimes. The amount of money involved in Bitcoin and crypto-related crimes surged to 430.7 billion yuan in 2023, reflecting a tenfold increase. Additionally, 3,032 people were sued for Bitcoin and crypto-related money laundering last year, underscoring the scale of the issue.

Despite Beijing's prohibition on crypto trading and refusal to recognize digital tokens as legal tender or valid assets, local governments rely on proceeds from these forced liquidations. A Shenzhen-based technology company, Jiafenxiang, reportedly sold cryptocurrencies worth more than 3 billion yuan in offshore markets on behalf of various municipal authorities in China’s eastern Jiangsu province. The US dollar proceeds from these transactions were then exchanged for yuan and transferred to local finance bureaus.

Debate on potential reforms has intensified amidst heightened tensions between China and the US. Some legal analysts suggest that China’s central bank should consider a similar strategy for seized Bitcoin and crypto assets, either selling them overseas or building a crypto reserve. Others see lucrative opportunities for private firms that help local governments dispose of large crypto holdings, stressing the importance of robust guidelines and vetting procedures. A more centralized approach could help the country maximize the value of the seized cryptocurrencies, possibly through a crypto sovereign fund in a region where digital trading is permitted.

The potential for Beijing to retain some of these seized assets has fueled broader speculation. China’s local governments collectively held an estimated 15,000 Bitcoins, making the Chinese state one of the largest institutional Bitcoin holders worldwide. Part of China’s crypto holdings likely originates from the country’s crackdown on illicit activities, including the high-profile PlusToken Ponzi scheme, which led to the seizure of 194,775 Bitcoin. These tokens were transferred to the national treasury in November 2020, though it remains unclear whether the holdings have been sold or remain in China’s possession.