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China’s authorities are tapping private firms to sell crypto assets seized from illegal activities to shore up public finances in dealing with economic headwinds, according to a new report from Reuters, citing transactions and court documents that they have reviewed.

The practice comes amid a surge in digital asset-related crimes and takes place within a regulatory gray area, as China’s ban on crypto trading has been fully enforced since September 2021.

As reported, these transactions have funneled millions of dollars into municipal budgets strained by declining growth and mounting expenditures.

However, the trend has exposed a regulatory vacuum. In China, there are no unified national rules on how to handle or dispose of digital assets seized from cases involving fraud, money laundering, online gambling, as well as other illicit activities.

Chen Shi, a law professor at Zhongnan University of Economics and Law, said the current approach is a patchwork workaround and “not fully in line with China’s crypto trading ban.”

Fearing this could create opportunities for corruption and potentially embolden criminals, legal experts, judges, and law enforcement officials have called for urgent reform.

As of the end of 2024, China was estimated to possess nearly 15,000 Bitcoin, valued at approximately $1.4 billion at the time, according to River.

Despite the national trading ban, much of these assets have been converted to cash using private companies transacting on foreign crypto exchanges.

Selling crypto through offshore exchanges and peer-to-peer platforms is a common method that users have adopted to circumvent the existing ban. Traders on the mainland have employed social media, VPNs, and diverse payment methods to maintain their activities outside the reach of regulatory enforcement.

Shenzhen-based Jiafenxiang has sold over 3 billion yuan ($410 million) worth of crypto since 2018 on behalf of several cities in eastern China, according to the report. The dollar proceeds were converted into yuan and transferred directly to local finance bureaus, skirting national trading restrictions.

Some legal professionals have called for the central bank to assume responsibility for managing seized crypto assets, advocating for offshore sales or a national reserve, mirroring Trump-era plans for a US Bitcoin reserve.

China’s government is rumored to be quietly working on a strategic Bitcoin reserve in response to shifts in US crypto regulation.

The 2021 ban was a culmination of China’s efforts to curb what it sees as speculative financial activities and to prevent capital flight, as huge amounts of crypto were used to move money out of China.

Since the ban, China has focused on developing its own state-backed digital currency, the digital yuan (e-CNY), which is intended to provide a controlled digital payment system without the risks associated with decentralized crypto.

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