The People's Bank of China has once again intensified its oversight of Bitcoin trading platforms. In response to the crackdown, many domestic Bitcoin exchanges have either shut down or moved their operations overseas, while over-the-counter (OTC) trading has made a noticeable resurgence. The central bank emphasized that even if these platforms relocate abroad, they are still subject to regulatory scrutiny. Recently, one such platform was found to be operating illegally and was subsequently shut down.
In recent months, the Chinese government has taken further steps to tighten regulations on virtual currency trading, both domestically and internationally. As domestic exchanges were forced to close, some operators shifted their activities to OTC transactions or rebranded themselves under different names, often continuing to facilitate trades between RMB and digital currencies in a more covert manner.
According to reports from the People’s Bank of China, new regulatory actions are being implemented, including the removal of websites associated with virtual currency exchanges and the suppression of related commercial activities. These measures target both domestic and foreign ICOs and cryptocurrency trading platforms. The central bank has also warned that any entity found violating these rules will face strict penalties, and further regulatory actions may follow depending on the situation.
Efforts to curb OTC trading have also been ramped up. Authorities are working to block access to overseas trading platforms and their mobile applications. This move aims to prevent individuals from circumventing domestic restrictions by using international services.
Looking back, on September 4, 2017, seven key ministries issued an announcement banning ICO activities and requiring all virtual currency exchanges to halt operations within China by September 30. Since then, the majority of domestic platforms have either exited the market or significantly reduced their activity. According to data, the share of RMB-based virtual currency trading dropped from over 90% of global volume to less than 1%.
However, despite these efforts, OTC trading has seen a sharp increase. A report released by the National Internet Financial Security Technical Expert Committee in November 2017 revealed that OTC transactions had surged after the crackdown. During the last two weeks of November alone, three major overseas OTC platforms—LocalBitcoins, Paxful, and CoinCola—processed over 680 million yuan in Bitcoin transactions.
OTC trading involves direct, private negotiations between buyers and sellers, often bypassing traditional exchange mechanisms. This method has existed long before the rise of centralized exchanges and remains popular among users seeking anonymity or flexibility.
Monitoring efforts have identified 21 C2C OTC platforms supporting Bitcoin-RMB trades, with most active during late October and November 2017. These platforms now offer a wide range of virtual currencies and support various payment methods, including Alipay and bank transfers.
A user who accessed one such platform described the process: buyers place orders for specific amounts of Bitcoin, and the platform locks the seller's funds until the transaction is confirmed. Once the buyer pays via agreed methods, the seller releases the Bitcoin, and the platform collects a small fee for the service.
Many of these platforms are hosted outside China, particularly in Hong Kong, the U.S., and Japan. They operate through different models, such as pure OTC platforms, wallet apps integrated with OTC functions, or hybrid models combining on-site and OTC trading. Some have even created hidden channels to facilitate RMB-to-Bitcoin conversions, effectively enabling on-floor trading under the guise of OTC transactions.
In response to these developments, the China Internet Finance Association issued a warning in January 2023, cautioning investors about the risks of using overseas platforms. It highlighted potential dangers such as market manipulation, money laundering, and system vulnerabilities. The association also noted that some domestic entities continue to organize illegal trading activities, offering services like market makers and guarantees, which remain in violation of current policies.
Regulatory pressure is expected to continue. Authorities have already begun cracking down on Bitcoin mining operations and have removed tax incentives for miners. Additionally, payment institutions were instructed to stop providing services to digital currency traders. With the central bank signaling that it will not hesitate to take action against any non-compliant entities, the future regulatory landscape for virtual currencies in China appears increasingly restrictive.
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