China’s foreign exchange agency seeks tighter control over the digital asset industry

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China’s Supervision and Inspection Department of State Administration of Foreign Exchange (SAFE) has urged lawmakers to pass new rules to regulate digital assets in the country.

Huang Hui, the agency’s deputy director, made the call at the 2022 Financial Street Forum. In her keynote speech, Hui called for a broader classification of virtual currencies into sections like “illegal payment settlement, illegal securities, or illegal tokens.”

Although China has introduced a blanket ban on digital assets since last year, Hui remarks that a further classification of the asset class will help her agency improve its monitoring of illegal foreign exchange transactions. Hui’s department is concerned with the legality of foreign exchange and regularly collaborates with local law enforcement agencies to clamp down on illicit dealings.

“Regulatory issues of cryptocurrency, especially the cryptocurrencies pegged with U.S. dollar assets such as Tether, have a strong payment and settlement nature, but the regulatory framework has not yet been established,” said Hui.

According to the deputy director, the popularity of blockchain and stablecoins have continued to fuel the activities of underground banks in moving capital in and out of the country without the knowledge of regulatory agencies.

To taper its activities, the People’s Bank of China (PBoC) has heightened its attempts at creating a central bank digital currency (CBDC) in the hopes that it steers attention from virtual currencies. The central bank is also exploring its usage in cross-border transactions after participating in a pilot organized by the Bank for International Settlements (BIS).

China’s rocky relationship with digital assets

China did not always have a torrid relationship with virtual currencies, as during peak adoption cycles, the country accounted for nearly 70% of BTC’s hashrates. Apart from being a hub for miners, China contributed a chunk of global trading volumes, and digital asset exchanges thrived.

Things began to fall apart in the summer of 2021 when the government imposed a blanket ban on digital assets. The move led to the exit of digital asset miners to other friendly jurisdictions like the U.S. and Iran, while exchanges ceased their operations in mainland China.

Despite the negative stance towards the speculative uses of digital assets, Chinese authorities are embracing non-fungible tokens (NFTs) and the metaverse to improve the country’s digital economy. There is widespread speculation that some BTC miners might still be operating in the country, opting to go underground and masking their activities using VPNs and mining pools.

Watch: The BSV Global Blockchain Convention panel, Law & Order: Regulatory Compliance for Blockchain & Digital Assets