The Risks of Unregulated Virtual Currency Investments in China

In 2025, China’s regulatory landscape for virtual currencies remains a patchwork of contradictions. While the mainland enforces a near-total ban on cryptocurrency trading and mining, Hong Kong has emerged as a cautious hub for digital asset innovation. This duality creates a fertile ground for unregulated overseas investments, exposing individuals and institutions to significant legal and operational risks.

Legal Gaps in Mainland China: A Gray Zone for Personal Ownership

A pivotal shift occurred in November 2024 when the Shanghai High People’s Court classified Bitcoin and other cryptocurrencies as virtual commodities, granting them legal status as personal property [3]. This ruling overturned prior prohibitions on individual ownership but left critical gaps: business activities such as trading, mining, and exchange operations remain illegal [1]. The result is a legal gray zone where ownership is permitted but practical use—such as converting digital assets into fiat currency—is constrained by foreign exchange controls and enforcement risks [3].

For instance, the revised 2025 Anti-Money Laundering (AML) Law lacks specific provisions for cryptocurrencies, leaving regulators unable to define obligations for crypto asset service providers (CASPs) like custodial wallets or decentralized exchanges (DEXs) [1]. This omission undermines efforts to track illicit flows, as cross-chain transactions and privacy coins like Monero enable rapid, untraceable transfers [2].

Hong Kong’s Stablecoin Framework: A Gateway with High Barriers

Hong Kong’s Stablecoins Bill, enacted in May 2025, aims to position the city as a digital asset hub by licensing stablecoin issuers and enforcing strict capital reserve requirements [3]. However, the framework’s high compliance costs—such as identity verification for large transactions—favor large institutions over smaller players, limiting market diversity [3]. While this creates a regulated environment, it also incentivizes investors to seek unregulated alternatives, particularly given the mainland’s restrictions.

The JPEX scandal in 2024, where an unlicensed virtual asset platform defrauded users of $228 million, underscores the risks of inadequate oversight [4]. Hong Kong’s new rules may mitigate such cases, but they do not address the broader issue of cross-border enforcement gaps.

Enforcement Challenges: Seizing Assets in a Decentralized World

China’s enforcement of crypto regulations faces systemic hurdles. Judicial authorities lack clear procedures for seizing, converting, or repatriating digital assets, particularly those stored on overseas exchanges [1]. For example, law enforcement agencies often rely on third-party platforms for asset liquidation, which introduces risks of high fees, inconsistent cooperation, and potential misconduct by intermediaries [1].

The decentralized nature of blockchain further complicates matters. Elliptic’s 2025 report estimates that $21.8 billion in illicit crypto funds were laundered via cross-chain methods, exploiting jurisdictional loopholes [3]. Privacy coins and decentralized finance (DeFi) protocols exacerbate these challenges, as transactions are pseudonymous and often untraceable [2].

U.S.-China Dynamics: A Geopolitical Layer of Risk

The U.S. Treasury’s 2025 outbound investment screening rule, which restricts U.S. investments in Chinese semiconductor and AI sectors, adds another layer of complexity [1]. While not directly targeting crypto, this regulation signals heightened scrutiny of cross-border financial flows, potentially complicating overseas digital asset transactions for Chinese entities. Meanwhile, the U.S. and China’s competing visions for stablecoins—Washington’s GENIUS Act versus Beijing’s offshore yuan-backed stablecoin initiatives—highlight the geopolitical stakes in shaping the future of digital finance [3].

Conclusion: A Call for Caution

For investors navigating China’s fragmented regulatory environment, the risks of unregulated overseas digital asset exposure are profound. Legal ambiguities, enforcement limitations, and geopolitical tensions create a volatile landscape where even compliant actors face unintended consequences. As Hong Kong’s stablecoin framework matures and mainland policies evolve, stakeholders must prioritize due diligence and risk mitigation strategies. The absence of a harmonized global regulatory framework for crypto assets ensures that enforcement gaps will persist, making prudence a necessity rather than an option.

**Source:[1] Lessons for China from Global Crypto AML Regulation [https://www.o2k.tech/blog/crypto-aml-lessons-for-china][2] Cryptocurrency and Money Laundering [https://www.scirp.org/journal/paperinformation?paperid=140794][3] China Shifts Stance: Personal Ownership of Bitcoin and ... [https://www.coinreporter.io/2025/03/china-shifts-stance-personal-ownership-of-bitcoin-and-crypto-now-permitted][4] The JPEX scandal: a test case for Hong Kong's new [https://www.frontiersin.org/journals/blockchain/articles/10.3389/fbloc.2024.1492739/full]