Chinese Police Freezing OTC Traders' Bank Accounts Over 'Tainted' Crypto Transactions

Thousands of cryptocurrency over-the-counter merchants and their clients may have been affected as police in China freeze bank accounts over tainted crypto and fiat assets.

AccessTimeIconJun 8, 2020 at 8:34 a.m. UTC
Updated Sep 14, 2021 at 8:49 a.m. UTC

Thousands of cryptocurrency over-the-counter merchants and their clients may have been affected as police in China freeze bank accounts over crypto and fiat assets tainted by illicit activity.

Caught up in a police probe since Thursday, some Chinese crypto buyers and sellers and OTC market makers have already had accounts frozen because their transactions may have been contaminated by money-laundering activities involving cryptocurrencies.

Sun Xiaoxiao, a former staffer at Chinese crypto wallet startup Bixin who now runs an OTC desk, wrote in a Weibo post on Friday his bank accounts had been frozen and it was not an individual case. The action, taken by the police in China's Guangdong province, potentially impacts "several thousand people," he said.

The affected crypto users aren't necessarily accused of any wrongdoing, and the incident raises the wider question of the quantity of cash and crypto assets that has been contaminated by illicit activity. It's a concern because OTC desks are the only fiat currency on- and off-ramps for China-based crypto users who do not have overseas bank accounts.

It's unclear at this stage which precise case the Chinese police are investigating that's prompting the widespread freezes. But Sun detailed in a longer follow-up post on Friday that the usual causes include telecommunication frauds, Ponzi schemes and casino businesses.

It's unusual for individuals to have their bank accounts frozen over tainted cryptocurrency, according to Sun.

In the past, account freezes have been seen when someone tries to convert cryptocurrencies into Chinese yuan without knowing for sure that the fiat money received is "clean." There's a chance the funds can later be identified by a police investigation as being linked to money-laundering activities.

"Now there are also OTC merchants who had their bank accounts frozen because of questions over the source of the coins they bought. That means, besides 'dirty money,' there are also 'dirty coins‘ circulating," Sun wrote.

There's a growing trend of using blockchain networks to transfer high-risk capital in China, he added. While previously bitcoin was the first choice for such transactions, the U.S dollar-linked stablecoin tether (USDT) has now become the most popular choice.

As a result of this trend, "police are also catching up on their knowledge of blockchain. More and more criminal cases have started using on-chain analysis to trace blockchain assets," Sun said.

Since September 2017, when China's central bank issued an ban on initial coin offerings and cut off Chinese exchanges' direct channels for fiat currency deposits and withdrawals, peer-to-peer transactions through OTC market makers remain the only way for people in China to buy crypto assets with yuan or exchange crypto coins into cash.

For those whose accounts have been frozen, Sun said they would need to reach out to the relevant law enforcement agency to provide evidence they are an innocent victim. The time it would take to unfreeze the accounts would also depend on the severity of the case, he said.


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