China arrests over 1,100 suspects in crackdown on crypto-related money laundering

SHANGHAI: Police in China arrested over 1,100 people suspected of using cryptocurrencies to launder illegal proceeds from telephone and Internet scams in a recent crackdown, the Ministry of Public Security said.

The arrests came as authorities in China step up their crackdown on cryptocurrency trading. Last month, three industry bodies banned crypto-related financial and payment services, and the State Council, China’s cabinet, vowed to clamp down on bitcoin mining and trading.

The public security ministry said that by Wednesday afternoon police had busted more than 170 criminal groups involved in using cryptocurrencies to launder money.

The money launderers charged their criminal clients a commission of 1.5% to 5% to convert illegal proceeds into virtual currencies via crypto exchanges, the ministry said via its official Wechat account.

China’s Payment & Clearing Association said on Wednesday that the number of crimes involving the use of virtual currencies is on the rise.

Because cryptocurrencies are anonymous, convenient and global in nature, “they have increasingly become an important channel for cross-border money laundering,” the association said in a statement.

Cryptocurrencies have already become a popular means of payment in illegal gambling activities. Nearly 13% of gambling sites support the use of virtual currencies, and blockchain technology has made it more difficult for authorities to track the money, according to the association.

Meanwhile, global banking regulators proposed on Thursday proposed that banks must set aside enough capital to cover losses on any bitcoin holdings in full, in a “conservative” step that could prevent widescale use of the cryptocurrency by major lenders.

The Basel Committee on Banking Supervision, made up of regulators from the world’s leading financial centres, proposed a twin approach to capital requirements for cryptoassets held by banks in its first bespoke rule for the nascent sector.

El Salvador has become the world’s first country to adopt bitcoin as legal tender even though central banks globally have repeatedly warned that investors in the cryptocurrency must be ready to lose all their money.

Major economies including China and the United States have signalled in recent weeks a tougher approach, while developing plans to develop their own central bank digital currencies.

The Swiss-based Basel committee said in a public consultation paper that while bank exposures to cryptoassets are limited, their continued growth could increase risks to global financial stability if capital requirements are not introduced.

Bitcoin and other cryptocurrencies are currently worth around $1.6 trillion globally, which is still tiny compared with bank holdings of loans, derivatives and other major assets.

Basel’s rules require banks to assign “risk weightings” to different types of assets on their books, with these totted up to determine overall capital requirements.

For cryptoassets, Basel is proposing two broad groups.

The first includes certain tokenised traditional assets and stablecoins which would come under existing rules and treated in the same way as bonds, loans, deposits, equities or commodities.

This means the weighting could range between 0% for a tokenised sovereign bond to 1,250% or full value of asset covered by capital.

The value of stablecoins and other group 1 crypto-assets are tied to a traditional asset, such as the dollar in the case of Facebook’s proposed Diem stablecoin.

Nevertheless, given cryptoassets are based on new and rapidly evolving technology like blockchain, this poses a potentially increased likelihood of operational risks which need an “add-on” capital charge for all types, Basel said.

UNIQUE RISKS

The second group includes cryptocurrencies like bitcoin that would be subject to a new “conservative prudential treatment” with a risk-weighting of 1,250% because of their “unique risks”.

Bitcoin and other cryptocurrencies are not linked to any underlying asset.

Under Basel rules, a 1,250% risk weight translates into banks having to hold capital at least equal in value to their exposures to bitcoin or other group 2 cryptoassets.

“The capital will be sufficient to absorb a full write-off of the cryptoasset exposures without exposing depositors and other senior creditors of the banks to a loss,” it added.

Few other assets that have such conservative treatment under Basel’s existing rules, and include investments in funds or securitisations where banks do not have sufficient information about their underlying exposures.

The value of bitcoin has swung wildly, hitting a record high of around $64,895 in mid-April, before slumping to around $36,834 on Thursday.

Banks’ appetite for cryptocurrencies varies, with HSBC saying it has no plans for a cryptocurrency trading desk because the digital coins are too volatile. Goldman Sachs restarted its crypto trading desk in March.

Basel said that given the rapidly evolving nature of cryptoassets, a further public consultation on capital requirements is likely before final rules are published.

Central bank digital currencies are not included in its proposals.