Virtual Currency and Financial Crime in China: Risks and Regulatory Evolution

China's approach to cryptocurrency and financial crime has evolved into a complex web of stringent regulations, enforcement actions, and strategic policy shifts. As the world grapples with the dual-edged nature of digital assets-offering innovation while enabling illicit activities-China's regulatory framework has become a focal point for investors and policymakers alike. This analysis examines the risks posed by crypto-enabled money laundering and fraud in China, alongside the regulatory evolution from 2020 to 2025, to assess the implications for global and domestic investors.

Regulatory Evolution: From Ban to Strategic Control

China's regulatory stance on cryptocurrency has been marked by abrupt and decisive measures. In 2021, the government imposed a comprehensive ban on cryptocurrency trading, mining, and related financial services under the People's Republic of China (PRC) legal framework, citing environmental concerns and financial stability. This led to the mass exodus of mining operations and centralized exchanges to jurisdictions like Kazakhstan and Russia according to reports. By 2025, the PRC government maintained its prohibition, emphasizing that all crypto-related business remains illegal.

However, subtle hints of policy evolution emerged through Hong Kong's regulatory experiments. The 2025 Stablecoin Ordinance, managed by the Hong Kong Monetary Authority (HKMA) and Securities and Futures Commission (SFC), introduced a regulated framework for digital assets under the "One Country, Two Systems" model. This development has sparked speculation about potential softening in Beijing's stance, particularly as the PRC government simultaneously advances its digital yuan initiative to reduce reliance on the U.S. dollar.

Enforcement Actions: A Harsh Crackdown

China's enforcement actions in 2025 underscored its commitment to suppressing crypto-enabled financial crime. The People's Bank of China (PBOC) reaffirmed that crypto-related business remains illegal, with multi-agency efforts targeting trading, mining, stablecoins, and RWA tokenization. Penalties for AML/CFT violations in 2025 totaled over $1.1 billion, with crypto exchanges bearing the largest share of fines. Notable settlements included penalties against BitMEX and KuCoin for deficiencies in their AML and KYC programs according to enforcement reports.

The Supreme People's Court (SPC) further reinforced these policies by declaring crypto-related investment contracts invalid and unenforceable. Meanwhile, the Ministry of Public Security (MPS) intensified investigations into money laundering and illegal fundraising linked to cryptocurrencies according to official statements. These measures reflect China's broader strategy to preserve financial stability, control capital flows, and steer innovation toward state-backed digital solutions as reported by financial analysts.

AML Challenges: Gaps and Opportunities

Despite its aggressive enforcement, China's AML framework for crypto assets remains incomplete. The revised AML Law, effective January 1, 2025, lacks specific provisions tailored to crypto assets, unlike the EU's Markets in Crypto-Assets (MiCA) or the U.S. GENIUS Act.

This gap has created vulnerabilities, as the anonymous and decentralized nature of crypto assets facilitates illicit flows. For instance, the widespread use of mixing services and privacy coins has weakened the transparency of on-chain activities, complicating enforcement efforts.

To address these challenges, China is advised to expand AML obligations to crypto asset service providers (CASPs), such as custodial wallet operators and decentralized exchange (DEX) operators-a move already adopted in the EU and U.S. according to compliance experts. Additionally, real-name registration for platforms and users, along with enhanced Know Your Customer (KYC) and Know Your Transaction (KYT) mechanisms, could improve traceability as recommended by financial analysts. Extending enforcement to overseas platforms operating in China under the "effects jurisdiction" principle is another recommended step according to regulatory research.

Global Context and Investment Implications

China's regulatory trajectory mirrors global trends in crypto AML enforcement. In 2025, global penalties for crypto-related AML/CFT violations exceeded $1.1 billion, with exchanges and money transmitters as primary targets. The U.S. Department of Justice's (DOJ) focus on illicit actors in digital asset spaces and the UAE's stricter personal liability laws for managers highlight the intensifying global regulatory environment according to industry reports.

For investors, the risks in China's crypto sector are multifaceted. The outright ban on domestic crypto activities and the threat of severe penalties for non-compliance create a high-risk environment for foreign and local firms. However, the potential for policy evolution-particularly through Hong Kong's regulatory experiments-offers a glimmer of opportunity for investors seeking exposure to China's digital asset ecosystem.

Conclusion: Navigating a High-Risk, High-Stakes Landscape

China's regulatory and enforcement actions against crypto-enabled financial crime present significant risks for investors. The combination of strict domestic bans, aggressive penalties, and evolving global standards necessitates a cautious approach. While the PRC government's focus on state-backed digital solutions like the digital yuan suggests a long-term strategy to control the financial system, the persistence of illicit activities through decentralized channels underscores the need for robust compliance measures.

Investors must remain vigilant, monitoring policy shifts in both the PRC and Hong Kong while factoring in the global regulatory landscape. For now, the risks of engaging in China's crypto sector-whether through direct investments or exposure to cross-border platforms-remain substantial, requiring a careful balance between innovation and compliance.