China’s OTC Crypto Surge Hits $75 Billion Despite Government Crackdown

China’s OTC Cryptocurrency Brokers Surge Amid Economic Struggles

China’s over-the-counter (OTC) cryptocurrency market is seeing an extraordinary surge in activity, as evidenced by inflows that have surpassed $20 billion in each of the first three quarters of 2024.

This marks an unprecedented streak, according to estimates from Chainalysis, with total inflows reaching $75.4 billion during the nine-month period.

The surge highlights a growing appetite for alternative investments among Chinese investors, particularly in light of the country's sluggish equity and property markets.

China's Crypto Market Defies Regulatory Bans

Despite a strict ban on cryptocurrency trading imposed by the Chinese government three years ago, demand for digital assets continues to thrive.

This ban, enacted to prevent issues such as currency outflows and money laundering, has not fully deterred Chinese investors.

Instead, they have turned to OTC services to bypass traditional exchanges, allowing them to discreetly convert their yuan into tokens.

Another common method of crypto acquisition is through peer-to-peer (P2P) trading, where investors conduct transactions directly without a public order book, further avoiding government scrutiny.

Eric Jardine, Chainalysis' cybercrimes research lead, explained the complexities of the situation:

“Given the regulatory context in China, including the ban on trading and mining of cryptocurrency, these services invariably fall in a grey zone of the economy.”

Jardine suggested that Beijing’s enforcement of the ban may be more relaxed than initially expected.

Large Transfers Dominate China's OTC Market

One of the most striking findings from the Chainalysis report is the size of the transactions flowing through China's OTC brokers.

According to the data, about 55% of the total value received by these traders came from transfers exceeding $1 million.

However, it remains unclear whether these substantial transfers are being made by wealthy individuals or businesses conducting transactions on behalf of smaller clients.

Jardine noted that the current regulatory framework does not seem to be stifling the OTC market’s growth:

“Unless the regulatory situation in China becomes more favourable towards crypto, I would expect services such as these to continue to grow over time.”

Crypto in Cross-Border Transactions

Another indication of China’s persistent engagement with digital currencies comes from its use in international trade.

Russian commodities firms have reportedly been settling some cross-border transactions with Chinese clients using digital assets, according to unnamed sources familiar with these dealings.

These transactions demonstrate that despite the government’s regulatory barriers, digital currencies are still finding utility in international commerce.

Police Raids Highlight Illicit Crypto Activity

However, not all cryptocurrency activity in China remains under the radar.

A series of police raids in various regions, including Beijing, Jilin, and Chengdu, have revealed the role of digital assets in facilitating illegal foreign exchange transactions.

These raids, targeting billions of dollars in illicit dealings, suggest that crypto is being used to circumvent China’s stringent currency controls.

China’s Crypto Footprint in FTX Collapse

The influence of Chinese traders was also apparent in the fallout of the collapsed cryptocurrency exchange FTX.

Some creditors of the exchange were identified as Chinese citizens, further indicating the ongoing involvement of Chinese traders in the global crypto market, even as they navigate stringent domestic restrictions.

According to industry insiders, these traders have found creative ways to work around Beijing’s cryptocurrency ban, using alternative platforms and services to continue their trading activities.

While the future of cryptocurrency trading in China remains uncertain, these developments illustrate the adaptability of the market in circumventing regulatory hurdles.

The data points to a sustained interest in digital currencies, and the evolving methods used to access them indicate that China's crypto scene is far from diminishing.