Understanding Cryptocurrency from China: Key Concepts, Data Points, and User Risks
China's relationship with cryptocurrency is one of the most complex stories in global digital finance. On the surface, China maintains strict bans on most crypto activities. Beneath the surface, millions still use and trade crypto, while the country simultaneously advances its own digital currency, the e-CNY, and supports select blockchain infrastructure. This guide provides a clear, data-driven overview of cryptocurrency in the Chinese context β covering the regulatory framework, market realities, mining, risks, and what users need to know.
π¨π³ The Regulatory Framework: 42ε·ζ and Beyond
China's approach to cryptocurrency has been consistently restrictive since 2013, but the regulatory landscape evolved significantly in 2026 with the issuance of a landmark document known as 42ε·ζ (Document No. 42).
The Evolution of Crypto Regulation in China
China's regulatory stance on cryptocurrencies has developed through several key phases:
- 2013: The People's Bank of China (PBOC) and four other ministries issued a notice clarifying that Bitcoin is a specific virtual commodity and cannot be used as currency[reference:0].
- 2017: The "94 Notice" banned initial coin offerings (ICOs) and shut down domestic cryptocurrency exchanges.
- 2021: The "9Β·24 Notice" (237ε·ζ) declared all cryptocurrency-related business activities illegal financial activities[reference:1].
- 2026: 42ε·ζ superseded 237ε·ζ, expanding the regulatory scope and introducing new categories[reference:2].
42ε·ζ: The 2026 Regulatory Overhaul
On February 6, 2026, eight major Chinese regulators jointly issued Document No. 42 (ιΆεγ2026γ42ε·), which took immediate effect[reference:3]. This document represents the most comprehensive update to China's crypto regulatory framework to date[reference:4].
Key Provisions of 42ε·ζ
- Virtual currencies are not legal tender: Bitcoin, Ethereum, Tether, and similar virtual currencies do not have the same legal status as fiat currency and should not circulate as money[reference:5].
- All crypto-related business activities are illegal: Currency exchange, token trading, pricing services, and token issuance are strictly prohibited[reference:6].
- Expanded extraterritorial reach: Offshore entities and individuals are explicitly prohibited from providing crypto-related services to entities or individuals in China in any form[reference:7].
- RWA tokenization banned in China: Real-world asset (RWA) tokenization activities are prohibited under the principle of "strict prohibition domestically, strict supervision overseas"[reference:8].
- Stablecoin restrictions: Without approval, no entity β whether inside or outside China β may issue RMB-linked stablecoins outside of China[reference:9].
- Mining bans reaffirmed: Virtual currency "mining" remains strictly prohibited[reference:10].
- Name restrictions: Business registrations cannot contain terms like "virtual currency," "cryptocurrency," "crypto asset," "stablecoin," or "RWA"[reference:11].
β οΈ "Strict Prohibition Domestically, Strict Supervision Overseas"
The 2026 Notice establishes a clear principle: crypto activities are banned within China, and Chinese entities are prohibited from circumventing the ban through overseas structures. This effectively closes the "escape hatch" that some projects previously used[reference:12].
Regulatory Agencies and Enforcement
The 2026 Notice was jointly issued by the People's Bank of China, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Public Security, the State Administration for Market Regulation, the National Financial Regulatory Administration, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange[reference:13]. This multi-agency approach signals the seriousness of the regulatory intent.
π¨π³ The Market Reality: Underground Trading and OTC Activity
Despite the comprehensive bans, cryptocurrency activity in China has not disappeared. Instead, it has moved underground, adapting to the regulatory environment through sophisticated methods.
The Scale of Underground Crypto Activity
Recent data paints a picture of a thriving underground market:
- OTC inflows: According to Chainalysis estimates, Chinese over-the-counter (OTC) crypto brokers received over $20 billion per quarter in the three quarters leading up to June 2026, with cumulative inflows reaching $75.4 billion. This represents the highest level since 2021[reference:15].
- User base: Analysts estimate there are still approximately 59 million crypto users in China as of 2025, representing roughly 10% of the global crypto user base[reference:16].
- OTC trading volume: OTC crypto trading volume linked to China reached $23.7 billion in 2024[reference:17].
- Large transactions: About 55% of Chinese OTC traders received total value from transfers exceeding $1 million.
How the Underground Market Works
Since formal exchange trading is banned, crypto trading in China has pushed into informal or underground channels[reference:19]:
- Peer-to-peer (P2P) platforms: Traders use messaging apps and private groups to arrange trades[reference:20].
- Stablecoins as settlement: Participants rely heavily on stablecoins like USDT to settle deals, avoiding the scrutiny of traditional banking systems[reference:21].
- Encrypted communication: Middlemen use encrypted communication tools and route funds through multiple personal accounts to obscure transaction trails[reference:22].
- VPNs: Users employ VPNs to bypass geographic restrictions and access global exchanges[reference:23].
The Middlemen Ecosystem
Recent court cases in China highlight how intermediaries enable a thriving cryptocurrency trade despite the government ban[reference:24]. These middlemen β often acting as OTC brokers β help buyers and sellers bypass official financial channels[reference:25]. They charge fees for their services, which include matching counterparties, handling escrow arrangements, and converting yuan into cryptocurrencies[reference:26].
π The Cat-and-Mouse Dynamic
The relationship between regulators and crypto traders in China is described as a "cat-and-mouse" game[reference:27]. As enforcement intensifies, middlemen employ increasingly sophisticated methods to evade scrutiny, suggesting the crackdown may not be fully curbing demand[reference:28].
π¨π³ Cryptocurrency Mining in China: Banned but Persistent
China was once the global center of Bitcoin mining. While the government has banned the activity, Chinese mining operations have not disappeared entirely.
China's Mining Share in 2026
Despite the official ban, China still accounts for approximately 12% of the global Bitcoin hashrate as of 2026[reference:29]. Combined, the United States (37.4%), Russia (16.9%), and China (12%) represent about 65% of total network computing power[reference:30].
In terms of daily production, China mines an estimated 95.49 BTC per day, ranking behind only the United States among major mining jurisdictions[reference:31].
Regional Mining Activity
Despite the ban, mining activity continues in specific regions:
- Sichuan: Seasonal hydropower advantages make this province attractive for mining operations[reference:32].
- Xinjiang: Regulatory raids have caused measurable but temporary hashrate declines[reference:33].
- Inner Mongolia: In April 2026, the region closed down all its cryptocurrency mines, citing failure to meet annual energy consumption targets[reference:34].
The Nature of Chinese Mining
Chinese mining is characterized as dispersed and extralegal, contributing to both resilience and unpredictability[reference:35]. The 2026 Notice reaffirms the ban on "mining" activities, with the National Development and Reform Commission continuing to strictly control and rectify such activities[reference:36].
π Mining Concentration Shifts
North American dominance in Bitcoin mining is declining, with more new BTC flowing to China[reference:37]. This reflects a geographical shift in hashrate concentration and has implications for supply structure and miner behavior.
π¨π³ The Digital Yuan (e-CNY): China's Official Cryptocurrency
While China has banned decentralized cryptocurrencies, it has aggressively developed its own central bank digital currency (CBDC) β the digital yuan, or e-CNY. This represents a fundamentally different approach to digital currency.
Digital Yuan 2.0: The 2026 Upgrade
In January 2026, the digital yuan underwent a major upgrade from version 1.0 ("digital cash") to version 2.0 ("digital deposit currency")[reference:38]. Key features include:
- Interest-bearing: Wallet balances now earn interest at savings deposit rates and are covered by deposit insurance[reference:39].
- M1 inclusion: The e-CNY is now included in the M1 money supply measure[reference:40].
- Programmable money: The 2.0 version supports smart contract capabilities[reference:41].
- Carbon credit integration: Shanghai has launched a "Carbon Inclusion" mini-program that converts users' carbon footprints into digital yuan credits[reference:42].
International Expansion
On June 16, 2026, the Digital Yuan International Operations Center signed direct participant service agreements with 26 financial institutions in Shanghai[reference:43]. The service now covers Hong Kong, Macau, Singapore, Laos, Thailand, the UAE, Qatar, Brazil, and other regions[reference:44].
Cross-Border Use
The multi-CBDC bridge (mBridge) project has seen significant activity. From June 2024 to the end of 2025, cumulative transaction volume reached approximately RMB 477.8 billion ($66 billion), with the digital yuan accounting for about 96% of transaction value among participating currencies[reference:45].
π Key Distinction
The digital yuan is not a cryptocurrency in the decentralized sense. It is a centrally issued and controlled digital currency, fully backed by the Chinese government. It represents the official, regulated alternative to decentralized cryptocurrencies in China.
π¨π³ Blockchain Infrastructure and Compliant Projects
While China bans decentralized cryptocurrencies, it supports blockchain technology as an infrastructure layer and has developed select compliant projects.
Conflux: China's Compliant Public Blockchain
Conflux Network (ζ εΎε ¬ιΎ) is described as China's only public blockchain that hasθ·»θΊ«δΈη第δΈζ’―ι ("entered the world's first tier") and the only one that meets regulatory requirements while serving the Belt and Road Initiative[reference:46].
- Global reach: Conflux has been operating stably for over five years, covering more than 60 countries across five continents[reference:47].
- Performance: The mainnet has undergone 8 major upgrades and 42 version iterations, achieving throughput of 15,000 TPS[reference:48].
- Interoperability: It connects with 28 mainstream public blockchains[reference:49].
Distributed Digital Identity
In June 2026, the Cyberspace Administration of China released draft regulations on "Promoting Interoperable Application of Distributed Digital Identity"[reference:50]. This aims to support the national blockchain network's foundational service capabilities and promote cross-platform interoperability of digital identities across various sectors[reference:51].
RWA Tokenization: A Glimmer of Legitimacy
The 2026 Notice opens a potential legal pathway for RWA tokenization of Chinese assets through regulated offshore channels[reference:52]. While RWA tokenization is prohibited within China, entities may conduct such business offshore after obtaining approvals from relevant authorities[reference:53].
β οΈ The RWA Dilemma
While the 2026 Notice mentions a pathway for offshore RWA tokenization, the specific procedures for obtaining approvals remain unclear[reference:54]. This creates uncertainty for projects seeking to operate in this space.
π¨π³ China's Crypto Landscape: A Comparison Table
The table below summarizes the key components of China's cryptocurrency and digital asset landscape, comparing their legal status, adoption, and characteristics.
| Category | Legal Status | Adoption Level | Key Characteristics |
|---|---|---|---|
| Decentralized Cryptocurrencies (BTC, ETH, etc.) | β Banned (business activities illegal) | High (underground) | ~59M users; traded via OTC/P2P; ~12% global hashrate[reference:55][reference:56] |
| Stablecoins (USDT, USDC) | β Banned (now explicitly regulated) | High (primary settlement tool) | Used extensively in underground trading; RMB-linked stablecoins prohibited without approval[reference:57] |
| RWA Tokenization | β οΈ Banned domestically; offshore pathway exists | Emerging | "Strict prohibition domestically, strict supervision overseas"[reference:58] |
| Digital Yuan (e-CNY) | β Fully legal and government-backed | Growing rapidly | CBDC; interest-bearing; programmable; international expansion underway[reference:59] |
| Cryptocurrency Mining | β Banned | Persistent (12% global hashrate) | Dispersed, extralegal; concentrated in Sichuan, Xinjiang[reference:60] |
| Compliant Blockchains (Conflux) | β Supported | Growing | Regulatory-compliant infrastructure; Belt and Road focus[reference:61] |
Note: Legal status and adoption levels change rapidly. This table reflects the situation as of mid-2026. Always verify current regulations from official sources.
π¨π³ A Practical Scenario
π Scenario: A Chinese Resident Considering Crypto Trading
Li is a tech-savvy individual living in mainland China. He has heard about cryptocurrency and is considering buying some Bitcoin. He wants to understand the risks and practical considerations.
What Li needs to know:
- Legal status: Cryptocurrency trading is illegal in China. Any crypto-related business activity is considered illegal financial activity[reference:62]. Participating in such activities could expose Li to legal consequences.
- Practical obstacles: Major exchanges are blocked. Li would need to use a VPN and access offshore exchanges, then arrange OTC trades through middlemen or P2P platforms[reference:63].
- Risks: Li faces multiple risks: legal (potential criminal liability), financial (scams, counterparty risk in OTC trades), and operational (account freezes, loss of funds)[reference:64].
- Tax implications: As a Chinese tax resident, Li is required to declare any crypto-related income to Chinese tax authorities[reference:65].
- Alternative: The digital yuan (e-CNY) is a fully legal, government-backed digital currency that Li can use without legal risk[reference:66].
Outcome: Li decides not to pursue crypto trading due to the legal risks and practical obstacles. He explores using the digital yuan instead, which offers a regulated and secure digital payment option.
This is a hypothetical scenario for educational purposes only. It is not legal or financial advice. Laws and regulations change; always consult official sources and qualified professionals.
π¨π³ Common Mistakes
β Assuming the Ban Means No Activity
Many assume that because China has banned crypto, there is no crypto activity. In reality, an estimated 59 million users remain active through underground channels[reference:67].
β Believing OTC Trading Is Safe
OTC trading carries significant risks: scams, counterparty default, and legal exposure. The 2026 Notice explicitly prohibits such activities[reference:68].
β Confusing the Digital Yuan with Cryptocurrency
The digital yuan is a centrally issued CBDC, not a decentralized cryptocurrency. They operate on fundamentally different principles and legal frameworks.
β Overlooking Tax Obligations
Chinese tax residents are required to declare crypto-related income[reference:69]. Many users mistakenly believe their activities are hidden from tax authorities.
β Ignoring the Extraterritorial Reach of Regulations
The 2026 Notice explicitly prohibits Chinese entities and individuals from conducting crypto activities overseas[reference:70]. Offshore structures do not provide immunity.
β Assuming RWA Tokenization Is a Loophole
While RWA tokenization has an offshore pathway, it requires approvals that are not yet clearly defined[reference:71]. It is not a simple workaround.
π¨π³ Practical Checklist
β Before Engaging with Cryptocurrency in the Chinese Context
- Understand the legal status: Cryptocurrency trading is illegal in China. Participating may have legal consequences[reference:72].
- Know your tax obligations: Chinese tax residents must declare crypto-related income to tax authorities[reference:73].
- Be aware of the extraterritorial reach: Offshore structures do not exempt you from Chinese regulations[reference:74].
- Consider the digital yuan: The e-CNY is a legal, regulated digital currency that avoids legal risks[reference:75].
- Understand OTC risks: OTC trading involves counterparty, fraud, and legal risks[reference:76].
- Stay informed: Regulations change. Follow official sources like the PBOC and CSRC for updates[reference:77].
- Beware of scams: The underground nature of the market attracts fraudulent schemes[reference:78].
- Consult professionals: Seek advice from qualified legal and tax professionals for your specific situation.
β οΈ Risk Warning: The Realities of Crypto in China
This guide is for educational purposes only and does not constitute legal, financial, or tax advice. The cryptocurrency landscape in China involves substantial risks.
- Legal risk: Cryptocurrency trading is illegal in China. Participation may result in criminal liability, including fines or imprisonment[reference:79].
- Financial risk: The underground market is rife with scams, counterparty default, and price manipulation. There is no consumer protection[reference:80].
- Tax risk: Chinese tax residents are required to declare crypto income. Failure to do so may result in penalties[reference:81].
- Enforcement risk: Authorities continue to intensify enforcement efforts, and the regulatory landscape is subject to change[reference:82].
- Operational risk: Exchanges may freeze accounts, and VPN-based access can be unreliable[reference:83].
- Asset loss risk: If funds are sent to the wrong address or a fraudulent platform, they cannot be recovered.
Always consult qualified legal and financial professionals before making any decisions. Laws and regulations change frequently β this information is based on the situation as of mid-2026 and may not reflect current rules. Verify all information from official sources.
π¨π³ Frequently Asked Questions
Is cryptocurrency legal in China?
No. Cryptocurrency trading and related business activities are illegal in China. The 2026 Notice (42ε·ζ) reaffirms that virtual currencies do not have legal tender status and that related business activities constitute illegal financial activities[reference:84].
Can I buy Bitcoin in China?
While technically possible through underground channels (OTC, P2P, VPNs), buying Bitcoin in China is illegal and carries significant legal, financial, and operational risks[reference:85]. It is not recommended.
What is the digital yuan (e-CNY)?
The digital yuan is China's central bank digital currency (CBDC). It is fully legal and government-backed. In 2026, it was upgraded to version 2.0, which includes interest-bearing features and smart contract capabilities[reference:86].
Is cryptocurrency mining allowed in China?
No. Cryptocurrency mining is banned in China. The 2026 Notice reaffirms the ban and calls for continued rectification of mining activities[reference:87]. Despite the ban, some mining continues in regions like Sichuan and Xinjiang[reference:88].
Do I have to pay tax on cryptocurrency in China?
If you are a Chinese tax resident, you are required to declare any crypto-related income to Chinese tax authorities[reference:89]. The tax rate can range from 3% to 45% depending on the income type and amount[reference:90].
What is RWA tokenization and is it legal in China?
RWA (Real-World Asset) tokenization is the conversion of asset ownership or income rights into digital tokens[reference:91]. It is banned within China but may be permitted offshore with regulatory approval[reference:92]. The procedures for obtaining approval remain unclear[reference:93].
How many people use cryptocurrency in China?
Despite the ban, analysts estimate there are approximately 59 million crypto users in China as of 2025, representing roughly 10% of the global user base[reference:94]. Most operate through underground channels.
Can I use a VPN to trade crypto in China?
While many users employ VPNs to access offshore exchanges, this does not make the activity legal[reference:95]. The 2026 Notice explicitly prohibits offshore entities from providing crypto services to Chinese residents[reference:96]. VPN use does not change the legal status.