Local governments sell seized Crypto Assets to increase public funds! Is China considering drafting new regulations for Crypto Assets?

Recently, Chinese legal, financial, and government departments have engaged in intensive discussions around the "disposal mechanism for seized Crypto Assets." As the number of crimes related to Crypto Assets has surged, local governments' practice of supplementing their finances by selling seized digital assets has drawn widespread attention. Moreover, the lack of an existing regulatory framework has led to chaotic disposal processes, insufficient transparency, and even risks of corruption. Currently, local governments in China are facing an awkward reality in the field of Crypto Assets: despite the national ban on Crypto Assets trading and mining since 2021, the scale of Crypto Assets seized by local governments through crackdowns on criminal activities continues to expand. Data shows that in 2023, the amount involved in Crypto Assets-related crimes in China reached 430.7 billion RMB (approximately 59 billion USD), a tenfold increase compared to 2022, with case types covering online fraud, money laundering, illegal gambling, and more. During the same period, national prosecutorial agencies prosecuted 3,032 individuals for Crypto Assets-related money laundering cases, setting a historical record. The upgrade in crime patterns has forced law enforcement to increase their crackdown efforts, with the value of Crypto Assets confiscated nationwide growing by 120% year-on-year in 2023, with Bitcoin holdings alone reaching 15,000 coins (approximately 1.4 billion USD). At the same time, under the pressure of economic downturn, seizing and liquidating assets has become an important channel for local governments to supplement their finances. In 2023, the national penalty income reached 378 billion yuan, an increase of 65% over five years. In some areas with high crime rates, such as Xuzhou and Taizhou in Jiangsu, the income from the disposal of Crypto Assets accounts for more than 30% of the penalty income.

According to the disclosure, local governments in China are working with private companies to sell the seized cryptocurrencies in overseas markets and exchange them for cash to replenish public funds. Since 2018, a private company in Shenzhen has assisted the local government in selling more than 3 billion yuan of cryptocurrency on overseas exchanges, and the funds have been converted into RMB through compliant channels and directly entered the local treasury account. However, this operation has sparked controversy due to the lack of unified rules. This "temporary solution" is in obvious contradiction with the national ban, and local governments are liquidating assets on their own without clear authorization, placing themselves in a gray area. At the same time, while this can alleviate short-term financial pressure, it exposes a regulatory vacuum — there are significant differences in the identification, valuation, and disposal processes of seized assets in different regions, and some grassroots courts have even seen non-standard practices of "using coins to pay debts." In addition, over 70% of confiscated asset disposal currently relies on private enterprises. Although these institutions assist in solving technical operational issues, there is a risk of conflicts of interest: some companies charge service fees as high as 5%-8% and lack effective regulation. Industry lawyers point out that the involvement of private enterprises in the disposal of criminal assets may lead to opaque pricing, uncontrolled flow of funds, and even foster corruption issues such as "using fines instead of management" and "selective law enforcement." For example, in early 2024, a local public security bureau was investigated by the discipline inspection commission for colluding with intermediary agencies to lower asset valuations and pocketing the price difference. Currently, although Chinese law clearly prohibits Crypto Assets trading, there is no clear definition regarding whether the "involved Crypto Assets belong to legal property." The current law only defines Crypto Assets as "special internet goods," which can be regarded as "virtual property" in civil cases, but are often categorized as "illegal operating tools" in criminal cases. This ambiguity leads to inconsistent judicial handling standards, and in some regions, there have even been cases of mistakenly freezing legal investors' assets. As cases of crypto-related crimes continue to rise and the scale of seized assets expands, the Chinese government is facing a dilemma: to maintain a comprehensive ban on Crypto Assets or to adjust its policies to build a compliant, transparent, and strategically significant management system for Crypto Assets.

It is reported that senior judges from the prosecutor's office and the police are discussing new regulations that may change the handling of seized Crypto Assets. This could be a significant shift for China's Crypto Assets industry, especially against the backdrop of escalating tensions in China-U.S. relations during Trump's second term, as Trump plans to relax regulations on Crypto Assets and establish a strategic Bitcoin reserve in the United States. Although no changes are guaranteed, at a regulatory seminar in early 2025, experts from the Supreme Court and the Ministry of Public Security, along with legal scholars, reached a consensus: China needs to formally recognize Crypto Assets and establish clear procedures to handle seized digital assets. Specific recommendations include: Definition of legal attributes: A "digital asset" clause is added to the Civil Code to recognize the property rights of cryptocurrencies and provide a legal basis for judicial disposal. For example, the Shanghai Baoshan Court has passed a civil judgment to support the request for the return of bitcoin, indicating that judicial practice has made a breakthrough. Centralized management: Led by the People's Bank of China or the State Administration of Financial Regulation, a unified national cryptocurrency custody platform will be established to standardize the process of asset registration, valuation, and auction. Or learn from the U.S. plan to include seized assets in the national foreign exchange reserve system, which not only resolves regulatory contradictions, but also enhances financial stability. After all, China currently holds about 194,000 bitcoins, worth about $16 billion, making it the world's second-largest bitcoin holder. This dual-track system of "onshore law enforcement and overseas disposal" can not only circumvent the mainland's regulatory restrictions, but also connect with the international financial market. Technology-enabled supervision: Use blockchain traceability technology to establish a "digital asset blacklist" to track the flow of seized assets in real time and prevent secondary circulation. In 2024, the pilot "on-chain supervision system for assets involved in the case" has realized the dynamic monitoring of more than 100,000 bitcoins. It can be seen that China's attitude towards Crypto Assets may be shifting from "全面禁止" (comprehensive prohibition) to "分类治理" (categorical governance). Although the document from ten ministries in 2021 explicitly prohibited Crypto Assets trading, this seminar released two major signals: first, the recognition of asset attributes: no longer simply viewing Crypto Assets as "非法金融工具" (illegal financial instruments), but incorporating them as "特殊涉案财物" (special involved property) into the legal framework. This change lays the groundwork for possible compliance pilots in the future (such as institutional-level custody and cross-border asset transfer); second, balancing security and efficiency: exploring market-oriented disposal paths for seized assets while preventing financial risks. For example, allowing some assets to be used for "反洗钱基金" (anti-money laundering fund) or public services, rather than simply liquidating them. Overall, China's exploration of the disposal mechanism for seized Crypto Assets is essentially a microcosm of regulatory innovation in the digital economy era — when technological innovation conflicts with institutional lag, finding a balance between risk prevention and value utilization has become a common challenge faced globally. From local governments' "temporary measures" to the central government's "institutional reconstruction," this discussion will not only reshape the underlying logic of China's Crypto Assets regulation but may also provide a "Chinese solution" for global digital asset governance. With the gradual clarity of the regulatory framework, the role of crypto assets in China is shifting from "illegal financial tools" to "special regulatory assets." In the future, when seized bitcoins are included in the national strategic reserves and when blockchain technology is used for asset tracking, we may witness a more inclusive regulatory system - one that upholds the bottom line of financial security while leaving necessary space for technological innovation. This institutional reform that began with "gray revenue" may ultimately become an important milestone in the modernization of China's digital financial governance.