China has been cracking down on cryptocurrencies since late 2017, viewing them as threatening its financial stability and sovereignty. Despite rumors of a possible policy change, there is no evidence that China will soon ease its crypto restrictions.
The Chinese authorities have long been wary of decentralized digital currencies, such as Bitcoin, that operate outside the control of the state. They believe that digital currencies pose a systemic risk to the financial system, as they can facilitate capital flight, money laundering, and illegal activities.
According to the Chainalysis Blockchain data platform, more than $50 billion worth of digital currencies left East Asian accounts in areas outside the region between 2019 and 2020. As China has an outsized presence in East Asian cryptocurrency exchanges, Chainalysis staff estimate that much of this net outflow of digital currencies was capital flight from China.
China imposes strict capital controls to limit the amount of foreign currency residents can buy or sell yearly. Digital currencies, however, can bypass these restrictions and enable people to transfer their wealth abroad more easily and anonymously.
China’s Evolving Crypto Tax Landscape
In addition to banning digital assets transactions and mining, China has also tried to regulate the taxation of crypto-related activities. In early January 2024, the Shanghai Municipal Tax Service published an online article explaining how personal income tax applies to digital currency transactions in China.
Shanghai Municipal Tax Service article, which censors later deleted, sparked speculation that China was preparing to ease its crypto ban. However, the article was not an official policy document and did not indicate any change in China’s’ stance on digital currencies.
According to Beijing-based lawyer Guo Zhihao, individuals who obtain virtual currencies from other players through online transactions and generate revenue by selling them at a higher price must pay income tax on such earnings. While China has denied legal tender status for digital currencies, it has not yet outlawed its attribution as property or a commodity.
China’s Distinctive Web3 Vision
Another common misconception involving China’s’ crypto policies is that China will relax its crypto restrictions because of its interest in Web3, the next generation of the internet that relies on blockchain technology and decentralized applications. However, China’s vision of Web3 differs from that of most of the world.
China aims to develop a Web3 ecosystem with Chinese characteristics, that is, under the supervision and guidance of the state. In late December 2023, China’s’ Ministry of Science and Technology announced its plans to release a Web3 strategy document focusing on innovation, security, and government obligations.
China wants to use Web3 to enhance its industries, such as energy, trade, and law, but not to empower non-state actors in the financial system. Therefore, China’s’ crypto crackdown is unlikely to change in 2024, as the country sees more risks than benefits from allowing the free flow of cryptocurrencies.
China’s’ crypto policies reflect its broader trend of increasing state intervention in the economy and society, as exemplified by the “common prosperity” campaign. China’s’ crypto investors and enthusiasts will face more challenges and uncertainties in the coming year.
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