Underground Crypto Trading in China Reaches $75 Billion

TLDR

• China’s OTC crypto brokers see record inflows despite ban
• Inflows topped $20 billion per quarter for 9 months to June 2024
• Total inflows reached $75.4 billion over this period
• 55% of value comes from transfers over $1 million
• Demand driven by weak equity and property markets in China

In a surprising turn of events, China’s underground cryptocurrency market is experiencing unprecedented growth, despite the country’s official ban on digital asset trading.

According to a recent study by Chainalysis, over-the-counter (OTC) cryptocurrency brokers in China have attracted record-breaking inflows, totaling $75.4 billion over a nine-month period ending in June 2024.

The study reveals that inflows topped $20 billion in each of the three quarters leading up to June, marking a record streak since data collection began in 2021.

This surge in cryptocurrency interest comes at a time when China’s traditional equity and property markets are underperforming, pushing investors to seek alternative investment options.

OTC services have become a popular method for Chinese investors to discreetly swap yuan for digital tokens without using public cryptocurrency exchanges.

These services operate in a legal gray area, as China imposed a ban on cryptocurrency trading and mining in 2021. The continued growth of this underground market suggests that enforcement of the ban may be less strict than initially thought.

Eric Jardine, the cybercrimes research lead at Chainalysis, commented on the situation, saying,

“Given the regulatory context in China, including the ban on trading and mining of cryptocurrency, these services invariably fall in a gray zone of the economy.”

He added that the loose enforcement of the crypto ban might be contributing to the growth of these services.

One notable aspect of the study is the size of individual transactions. Chainalysis reports that approximately 55% of the total value received by China’s OTC traders comes from transfers worth more than $1 million.

However, the data does not specify whether these large transfers are from wealthy individuals or businesses acting on behalf of smaller customers.

The growth of China’s underground crypto market is occurring against the backdrop of a struggling economy. With weak performance in traditional investment sectors, Chinese investors are turning to cryptocurrencies as an alternative store of value and potential growth opportunity.

Hong Kong, which operates under the “one country, two systems” principle, has taken a different approach to cryptocurrencies. The city pivoted towards creating a crypto hub in late 2022, allowing digital asset trading within its jurisdiction.

This contrast highlights the complex relationship between mainland China’s strict regulations and Hong Kong’s more open approach to the crypto industry.

As China’s economy continues to face challenges, the underground crypto market shows no signs of slowing down. Jardine predicts that

“Unless the regulatory situation in China becomes more favorable towards crypto, I would expect services such as these to continue to grow over time.”