China Cracks Down on $429 Million Crypto-Based Underground Bank, Exposes Challenges in Digital Yuan Adoption

Chinese authorities recently dismantled a covert banking network engaging in unauthorized foreign exchange transactions using cryptocurrencies, amounting to approximately 2.95 billion RMB ($429 million USD). This illicit operation primarily converted Chinese yuan into Korean won, circumventing established currency exchange regulations.

The crackdown occurred in Jilin Province, where police arrested six individuals connected to the operation, highlighting the growing role of digital currencies in bypassing traditional financial oversight. According to official statements, this clandestine bank exploited the anonymity and decentralization of cryptocurrencies to facilitate these unlawful transactions.

Investigators found that the accused managed domestic bank accounts to receive and transfer funds, conducting over-the-counter cryptocurrency trades. These activities catered to various sectors including Korean purchasing agents, cross-border e-commerce businesses, and enterprises engaged in import-export activities. This setup enabled illegal currency exchange between the yuan and the won, in violation of regulatory standards.

This bust is part of a broader effort by Chinese authorities to clamp down on cryptocurrency-related activities. Despite bans on cryptocurrency and related mining operations, China continues to regulate the industry vigorously. The crackdown also comes amid challenges faced by China in promoting its Central Bank Digital Currency (CBDC), the Digital Yuan.

Efforts to pilot the Digital Yuan in various cities have been met with tepid public response, despite reporting billions in transactions. For instance, in some regions, a portion of state employees’ salaries is paid in Digital Yuan. Due to a lack of incentives and limited merchant adoption, they often convert their holdings back to cash.

The Digital Yuan struggles to compete with established digital payment platforms like Alipay and WeChat Pay, which dominate both online and offline transactions. Sammy Lin, a customer manager at a state-owned bank, noted that holding Digital Yuan offers no benefits, stating, “If I keep it, there’s no interest, and there aren’t many places I can use it.”

This sentiment underscores broader concerns about the practicality of the Digital Yuan and the need for more compelling use cases to ensure its widespread adoption.