China has tightened its grip on cryptocurrency trading with new foreign exchange regulations aimed at combating illicit activities involving digital assets. The rules, reported by the South China Morning Post on December 31, mandate banks to monitor and flag risky foreign exchange transactions tied to crypto assets, making it harder for residents to engage in digital currency trading.

The regulations require banks to scrutinize activities based on individual and institutional identities, sources of funds, and trading frequency. This includes monitoring activities such as underground banking, cross-border gambling, and unauthorized international financial operations involving crypto.

Legal experts suggest this move further solidifies China’s strict anti-crypto stance. Liu Zhengyao of ZhiHeng law firm noted that using yuan to purchase cryptocurrencies before converting them into foreign currencies could now be classified as cross-border activity, making it harder for citizens to bypass these rules. China’s anti-crypto policies have been in place since 2019, with officials citing environmental concerns and energy consumption as primary reasons for the crackdown.

Interestingly, despite its strict measures, China holds the second-largest Bitcoin reserves globally, with 194,000 BTC valued at around $18 billion. However, these holdings stem from asset seizures linked to illicit activities rather than market purchases.

Changpeng Zhao, former Binance CEO, suggested that China might adopt a Bitcoin reserve strategy in the future, emphasizing the country’s potential for swift policy shifts if it chooses to embrace crypto. For now, Beijing’s regulatory approach remains “draconian,” further isolating its crypto market from global trends.