In China, a cat-and-mouse game to rein in crypto

Working as a middleman in China’s underground financial system, Chen would routinely accept more than $100,000 in cash and then swap it for the cryptocurrency tether using overseas trading platforms. He knew not to ask too many questions about where the cash came from—but he assumed a lot of it wasn’t clean.

“The money is dirty,” he told his wife, according to testimony he delivered later as a witness in a Chinese court case that was part of the government’s efforts to clamp down.

The role of traders such as Chen in facilitating Chinese crypto transactions is largely invisible to the outside world. But a Wall Street Journal examination of court cases and Chinese government notices sheds new light on how they operate—and how they are fueling Chinese demand for crypto despite government efforts to rein it in.

In some cases, criminal groups are trading crypto to launder ill-gotten gains, boosting crime syndicates beyond China’s borders, including ones trafficking fentanyl, U.S. prosecutors say. In other cases, middle-class urbanites are using it to secretly move money out of the country, in violation of government rules designed to restrict the flow of money across China’s borders.

The activity is exceedingly difficult to stamp out and undercuts Beijing’s image of strict control over the economy and financial industry.

The total scale of crypto activity in China is unknown. After China sought to limit access to mainstream crypto exchanges in 2021, many users turned to over-the-counter trading and peer-to-peer networks that are tougher to track.

Blockchain data firm Chainalysis estimates $95 billion flowed to China-based over-the-counter brokers it analyzed from late 2023 through mid-2024, more than double the level of the same period two years earlier.

The rising interest has made China an important source of crypto activity globally, though it remains behind the U.S. in overall crypto adoption, according to Chainalysis. Even so, if demand keeps rising, it could support prices for crypto assets such as bitcoin, which has soared in value to more than $100,000 recently.

Finding workarounds

On the messaging app WeChat and other online forums, users teach one another how to surreptitiously sign up for accounts on popular trading platforms. Trading yuan for tether, whose value is pegged to the U.S. dollar, appears to be especially popular.

Once a person has traded yuan for tether, bitcoin or other virtual currencies, it can then be converted into foreign currencies and reinvested in overseas property or stocks, sidestepping capital controls that cap individual purchases of foreign exchange at $50,000 a year.

Crypto users and industry participants say that Chinese nationals are still able to open accounts and trade crypto on exchanges such as OKX and Binance despite the government’s restrictions. While the platforms’ websites are blocked in mainland China, users can access them via virtual private networks, or VPNs, which are commonly used by urbanites to get around government internet rules.

“Access to OKX services is restricted in the PRC,” an OKX spokesperson said in response to questions, referring to the People’s Republic of China. The spokesperson added that OKX ensures compliance in all jurisdictions and cooperates with regulators and law enforcement globally.

Binance didn’t respond to requests for comment. In the past, Binance has said its website is blocked in China and isn’t accessible to China-based users.

Workarounds also exist for users who run into problems such as failing to pass trading platforms’ “know your customer” checks. Such checks, which are standard practice in the financial industry, seek to determine customers’ identities and at times their sources of funds.

To pass the tests, China-based users can register shell companies in offshore jurisdictions, such as the Cayman Islands or British Virgin Islands, and set up institutional trading accounts on the platforms instead, said Jack Ding, a Beijing-based crypto-regulations specialist at Duan & Duan Law Firm. He has also been representing Chinese creditors against the failed crypto exchange FTX in its chapter 11 proceedings.

Many Chinese are also connecting through messaging apps such as Telegram to trade crypto via informal peer-to-peer networks that don’t involve the exchanges.

‘Avoid getting involved’

China has tried to curtail the activity by prosecuting big traders to scare off others. In one Chinese county, authorities have begun going door to door to warn local residents against trading crypto.

The message from officials, according to state media: “Stay rational, avoid getting involved.”

Chinese officials worry about the transactions because of their potential links to money laundering and other illicit activity. They also worry that outflows could put pressure on the value of the yuan and complicate Beijing’s efforts to reinvigorate a weakened economy just as President Trump is promising to take aim at China’s lucrative export sectors.

In the coastal province of Jiangsu, near Shanghai, one crypto-trading ring managed to change the equivalent of at least $150 million from Chinese yuan into Australian dollars over about 18 months before several of the people operating it were prosecuted in late 2023 for running illegal business operations.

First, the Chinese money handlers collected funds from customers looking to transfer currency offshore. Then they bought tether and transferred the virtual currency to brokers in Australia, who simultaneously paid the clients back overseas using Australian dollars.

More than 90% of clients were looking to move the equivalent of at least $400,000 offshore per transaction, prosecutors said recently, well in excess of China’s $50,000 annual cap. People involved in running the operation were sentenced to as much as seven years in prison.

In late 2023, state media said 74 people were arrested in connection with another trading ring, involving more than $2 billion in the underground banking system, with much of the money being turned into tether, according to state media.

A low-level employee at a textiles company was behind the crypto-trading ring, police said. Investigators identified cash flows of nearly $700 million via bank cards linked to him.

“This was obviously inconsistent with his status,” one police official said, according to the state media account.

In response to questions, China’s central bank said that the opacity of crypto trading, its low costs and the speed of cross-border transfers presented major challenges for fighting money laundering, but that the government was expanding efforts to combat the problem.

China will “maintain a high-pressure stance against the use of cryptocurrencies in money laundering and for the illegal transfer of funds,” the central bank said.

Widening appeal

For many young Chinese, crypto is appealing at a time when there are few good options to build wealth at home amid a weak economy. While some are tapping crypto to move money offshore, others buy it as an investment, hoping it will protect their wealth if the yuan falls in value.

“In China, cryptocurrencies represent a kind of fintech innovation that is widely perceived as new, trendy and innovative among the younger generation,” said Maggie Hu, an assistant professor at the City University of New York’s Baruch College.

Chen Xin’s case sheds light on how small-time brokers help make the trading possible.

The operation began in 2022, when Chen started accepting cash from clients and in exchange provided them with tether, he recalled in court testimony, as part of a case against several others involved in the network who were convicted of facilitating online criminal activities. He testified as a witness but wasn’t named as a defendant.

Chen said in the testimony that he teamed up with another broker, and that each of them ran accounts on OKX and Binance. He said one big customer, named Fang Rengan, routinely asked Chen to prepare more than $100,000 worth of tether on behalf of other clients.

In his own witness testimony, Fang said he was working on behalf of a casino in Cambodia. He said he didn’t know many details about the casino, which wasn’t named in the court documents, except that it had money it needed to convert into crypto. Like Chen, Fang wasn’t listed as a defendant in the case.

Casinos targeting Chinese gamblers have sprung up in Cambodia, the Philippines and Myanmar in recent years, in some cases operating in violation of local or Chinese laws. The illicit ones need to launder the money they earn, with crypto serving as one option.

Fang recruited others who received yuan transfers from the casino into their personal bank accounts. These people would then withdraw the cash—at times the equivalent of tens of thousands of dollars each—and give it to representatives of Fang, who would hand it over to Chen. Known as layering, the tactic helps obfuscate the source of the funds from police.

After receiving the cash, Chen would then transfer the equivalent amount of tether to the bosses of the casino, completing the deal. He earned a commission for his efforts.

Chen’s wife quizzed him about his activities, according to the court testimony. But the couple had little money of their own and Chen figured it was best to push on.

“To put it bluntly, it was money laundering,” Chen said in the court testimony.

The Journal was unable to determine the location of Chen or Fang, or whether they had lawyers. It couldn’t be learned whether they were punished for their roles in the crypto network.

Tether, the company behind the cryptocurrency, said it was committed to combating illicit activity and that it complies with requests from global regulators and law enforcement.