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China's Confusing Tunes on Crypto Regulation

China is officially worried about US banks' crypto exposure, but at the same time, Chinese banks working out how to support Hong Kong crypto firms.

Image: Ewan Kennedy / Unsplash

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A deputy governor of China's central bank said on Friday that the country would increase its regulatory monitoring of the digital economy because new technology, especially new forms of finance, should not be accepted and recognised without question.

Xuan Changneng, a deputy governor of the People's Bank of China (PBOC), warned attendees at the annual Boao Conference in Hainan province that digital currencies and freshly generated cryptocurrencies may pose more difficulties than they solve.

He did not detail any plans for increased monitoring.

Xuan said, "the digital economy has changed the format of financial services, but it has not changed the financial model itself," Xuan said.

He said that cyclical swings in the sector, micro-credit risks and liquidity risk mismatches "still exist."

"Risks and fraud associated with cryptocurrency, including the two American banks who ran into troubles after providing many services for cryptocurrency from taking deposits to settlement, showed that regulators should respect rules when innovating regulation," Xuan said.

That comes on the heels of news that Chinese banks are courting cryptocurrency companies in Hong Kong despite the mainland ban.

A Bloomberg report earlier this week showed that once Hong Kong welcomed the beaten cryptocurrency industry, a surprising source of possible support emerged: China's state-owned banks.

Noelle Acheson, former head of research at CoinDesk, tweeted, "so, on the one hand, we have China officially worried about US banks' crypto exposure, and on the other, we have Chinese banks working out how to support Hong Kong crypto firms... not a conspiracy theorist, but it's almost like they're mocking now?"

Chinese authorities have recently tightened their oversight of the fintech industry as part of a larger effort to prevent financial instability.

To strike a balance between financial innovation and security, authorities began tightening regulations on the financial arms of internet platform enterprises in late 2020, following years of fast development.

Concerned that cryptocurrency speculation might undermine China's economic and financial order, the country's officials prohibited trading and mining of cryptocurrencies later in 2021.

"Cryptocurrencies lend themselves to risks relating to fraud and unlawful transactions," Xuan said, adding that the United States had "failed" at regulating cryptocurrencies.

On Thursday, US Treasury Secretary Janet Yellen stated that the investigation into possible systemic risks posed by digital assets initiated by the Biden administration before the demise of cryptocurrency exchange FTX is ongoing.

China has its own digital currency, the yuan (renminbi), but it has yet to see much adoption.

The Chinese government announced earlier this month that it would establish a new regulatory body to consolidate oversight of the financial services industry.

According to industry experts, this move was made to close gaps in regulation caused by the existence of multiple agencies responsible for overseeing different aspects of China's $57 trillion financial sector.

The duties of the China Banking and Insurance Regulatory Commission, as well as those of the central bank and the securities regulator, will be absorbed by the National Financial Regulatory Administration.

"The quality of regulatory oversight over the digital economy will be improved," PBOC's Xuan said.

"In this era, the demands on financial regulators are higher," he added.

On the same panel at the Boao Forum, Vice Finance Minister Liao Min expressed concern about the potential for future digital financial infrastructure fragmentation.

He said China should participate "seriously" in international efforts to coordinate and cooperate on setting standards.

To further enhance the effectiveness of international transactions, the deputy managing director at the IMF, Li Bo, suggested that central banks worldwide consider digitising their reserves.

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