Despite China’s official ban on cryptocurrency trading and mining, underground crypto activity has surged, reaching a staggering $75.4 billion in the nine months leading up to June 2024. A recent report by blockchain analytics firm Chainalysis reveals that Chinese investors continue to trade cryptocurrencies through underground markets, defying the ban imposed in 2021.
The report highlights the growing popularity of over-the-counter (OTC) cryptocurrency services in China, allowing investors to discreetly exchange the yuan for digital tokens. These OTC platforms, operating in the shadows of the regulated financial system, attracted inflows exceeding $20 billion per quarter over the nine-month period.
This surge in underground crypto trading comes at a time when China’s traditional investment sectors, including equities and real estate, are underperforming. Faced with limited growth opportunities in these sectors, investors are turning to cryptocurrency as an alternative store of value and a potential source of financial growth.
Eric Jardine, a cybercrime research expert at Chainalysis, noted that China’s loose enforcement of the crypto ban may be contributing to the rise of this underground market. He explained, “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.”
The growth of underground crypto trading contrasts sharply with neighboring Hong Kong’s approach. While China has maintained a strict stance on cryptocurrency, Hong Kong pivoted towards becoming a crypto hub in late 2022, allowing regulated digital asset trading within its jurisdiction.
Jardine predicts that unless China’s regulatory stance on cryptocurrencies changes, the underground market will likely continue to grow. He added that about 55% of the total value traded by China’s OTC platforms comes from transfers worth more than $1 million, indicating that wealthy investors are playing a significant role in fueling the underground crypto market.
As China’s economy grapples with challenges in its traditional sectors, the underground crypto market offers a glimpse into how investors are finding alternative ways to preserve and grow their wealth. The ongoing rise of underground trading showcases the resilience of cryptocurrency in the face of regulatory crackdowns.
