China's Crypto Dilemma: 194,000 Bitcoin Seized, $16 Billion Value

Chinese authorities are grappling with the challenge of managing approximately 194,000 Bitcoin, valued at around $16 billion, which has been seized in various operations. The complexity arises from the country's ban on crypto trading, which complicates the process of converting these digital assets into cash. Local governments have resorted to using private companies to sell the confiscated cryptocurrencies in offshore markets, thereby circumventing the national ban and generating much-needed revenue during an economic slowdown.

This practice has raised concerns among legal experts, who view it as a temporary solution that does not fully comply with China's crypto trading restrictions. The issue has become more urgent as crypto-related crimes have surged, with the amount of money involved in such activities increasing tenfold to 430.7 billion yuan ($59 billion) in 2023. The rise in crypto crimes has led to a significant increase in local governments' penalty and confiscatory incomes, reaching a record 378 billion yuan in 2023, a 65% increase over five years.

Seized cryptocurrencies have become a significant contributor to local finances in some cities, as digital coins are favored by criminals for their ease of transfer and anonymity across borders. The sales process involves private companies acting as intermediaries, with one such company, Jiafenxiang, reportedly selling cryptocurrencies worth more than 3 billion yuan in offshore markets since 2018. This Shenzhen-based technology company has worked on behalf of several local governments, including authorities in Xuzhou, Hua’an, and Taizhou cities in China’s eastern Jiangsu province.

At the end of 2023, local governments held an estimated 15,000 Bitcoin worth $1.4 billion. Overall, China is believed to hold approximately 194,000 BTC worth about $16 billion, making it the second-largest national Bitcoin holder behind the United States. Experts have proposed several solutions to address this regulatory contradiction. One suggestion is for China’s central bank to take charge of dealing with seized digital assets, either by selling them overseas or building a crypto reserve. This idea mirrors former US President Donald Trump’s plan to create a national Bitcoin reserve.

Another proposal involves creating a crypto sovereign fund in China, where crypto trading remains legal. This could help China maximize the value of seized cryptocurrencies through centralized management. The debate around seized crypto has gained extra attention due to rising US-China trade tensions. Trump’s plans to regulate stablecoins and support growth in the crypto industry add further context to China’s dilemma. Some industry observers suggest that China’s tariff response to US trade measures could result in a devaluation of the local currency, potentially driving more citizens toward cryptocurrency as a store of value.

As China grapples with this regulatory puzzle, the country’s large crypto holdings remain in an uncertain state. The outcome of these discussions could have far-reaching effects on both China’s approach to digital assets and the global crypto market. The situation highlights the need for a coherent national strategy to manage seized cryptocurrencies, balancing the need for revenue with the country's regulatory framework.