China weighs options for managing seized criminal crypto cache

China is currently deliberating on managing and dealing with the billions of dollars in cryptocurrency confiscated due to illicit activities.

Though trading in crypto is nationally banned in China, local governments have teamed up with private companies to sell these digital assets.

The lack of standardized regulations has pushed local governments to make plans for the disposal of cryptocurrencies.

According to transaction and court documents seen by Reuters, local governments have been using private companies to sell seized digital coins in exchange for cash to replenish public coffers strained by a slowing economy.

Such disposals are “a makeshift solution that, strictly speaking, is not fully in line with China’s current ban on crypto trading,” said Zhongnan University of Economics and Law professor Chen Shi.

Local governments cash in on crypto seizures amid soaring crime

The debate comes as crimes involving crypto are increasing in China. In 2023, cash linked to illicit crypto activities skyrocketed to nearly 431 billion yuan — or almost $59 billion. That is a 10-fold increase over the previous year.

That same year, more than 3,000 people faced prosecution for money laundering connected to cryptocurrencies. These cases are overwhelming China’s court system and putting pressure on the police.

More crypto crime, of course, has meant more money for local governments. Revenue from penalties and asset seizures hit 378 billion yuan last year, a record and a 65% jump from five years prior.

That sudden flow of crypto wealth is raising serious concerns. Some local governments are becoming worryingly reliant on these digital windfalls to cover their expenses. It’s a risky trend that could distort budget priorities and create unhealthy financial dependencies.

One firm, Jiafenxiang, has reportedly sold 3 billion yuan worth of digital assets since 2018 in cities in Jiangsu province.

Liu Honglin, a lawyer who advises local governments on crypto-related issues, notes that digital coins — easily transferable and anonymous across borders — are increasingly popular tools for criminals.

Experts advocate for centralized management of seized crypto assets in China

Lawyers like Guo Zhihao argue that China’s central bank should oversee all confiscated digital assets. And instead of just dumping the coins on the market, the government could stockpile them in a national reserve.

This thought is also reflected in the more current strategy by President Donald Trump, who has positioned himself behind the construction of a United States strategic Bitcoin reserve.

But mainland China could learn from Hong Kong’s more open and regulated crypto framework, said HashKey co-CEO Ru Haiyang — Hong Kong’s largest licensed crypto exchange. He even suggests a “sovereign crypto fund” hosted in Hong Kong.

Winston Ma, ex-managing director at China Investment Corporation, seconded this. He argues that centralized management would ensure China derives maximum value from seized crypto and prevent abuse and inefficiency.