On September 24, 2021, the People’s Bank of China’s (PBOC) published a Q&A on its website stating, according to English translations of the original text, that all digital currency services for trading, order matching, token issuance and derivatives of virtual currencies are strictly prohibited. The Q&A stated further that overseas virtual currency exchanges that use the internet to offer services to domestic residents are also considered illegal financial activity, and employees working in China for overseas crypto exchanges will be investigated.

The statements by the PBOC are the latest in a series of notices, statements and demands about the illegality of cryptocurrency related activities by the Chinese government and financial industry associations. The following are some examples. In early December 2013 the PBOC, the Ministry of Industry and Information Technology, the China Bank and Insurance Regulatory Commission and the China Securities Regulatory Commission issued a joint notice that Bitcoin is considered a virtual commodity which does not have the same legal status as currency, andBbitcoin should not be used as currency in the market. In 2017, the National Internet Finance Association of China issued a notice and the PBOC, joined by seven ministries, issued a joint notice that all initial coin offering activities must cease operations immediately. In May 2021, the National Finance Association of China, the China Banking Association, and the China Payment and Clearing Association, which are industry self-discipline associations, issued a joint statement reiterating the risk of speculation in virtual currency and emphasized that virtual currency transactions are illegal financial activities. In May 2021, the Financial Stability and Development Commission of the State Council publicly demanded a cessation of Bitcoin mining activities. In response, local governments in several Chinese districts, such as Yunnan, Neimenggu, Xinjiang and Sichuan, separately issued notices for all Bitcoin mining operations to be shut down during the first half of 2021. Local governments in other Chinese districts have subsequently issued similar notices.

Reports were that Chinese-based companies accounted for approximately 70% of global Bitcoin mining capacity prior to May 2021. Chinese residents also constituted one of the largest markets for cryptocurrency trading activity, though these activities have increasingly been performed by companies that moved out of or were established outside of China.

Against the backdrop of these crackdowns on cryptocurrency activities, the Chinese government has been developing a sovereign digital currency and several major Chinese cities, including Shanghai, Chengdu and Beijing, have deployed pilot programs for the Digital Chinese Yuan.

Author

Christopher Murrer is an associate in the International Tax and Wealth Management practice groups of Baker McKenzie Zurich. He joined the Firm after practicing for seven years as a domestic tax and estate planning attorney in New York and Washington, DC.