The People's Bank of China names stablecoins! 13 departments target Money Laundering risks, Hong Kong's layout is embarrassing.

The People's Bank of China reiterated after a multi-department meeting held last Friday that digital assets have no legal status in China, specifically pointing out that stablecoins fail to meet AML and customer identification requirements, stating that they pose a threat to financial stability. The People's Bank of China convened representatives from 13 government departments in Beijing to discuss the issue of the “resurgence” of digital asset speculation, marking the strongest public comments from the central bank regarding Crypto Assets since the comprehensive ban on trading and Mining in September 2021.

13 Department Meeting Decides: Stablecoin is Clearly Defined for the First Time

The People's Bank of China stated in a statement: “Virtual currencies do not have the same legal status as fiat currencies, do not possess the status of legal tender, and should not and cannot be used as currency in the market.” The statement also pointed out that the Central Bank of China will “severely crack down on illegal and criminal activities.” Previously, the People's Bank of China held a meeting in Beijing on Friday, gathering representatives from 13 government departments to discuss the issue of the “resurgence” of speculative activities in digital assets.

The scale and specifications of this conference are extremely rare. Thirteen government departments, including financial regulatory agencies, public security departments, the Cyberspace Administration, and the Ministry of Industry and Information Technology, cover various aspects from financial regulation and law enforcement to technical management. This cross-departmental joint action demonstrates that the central government has elevated its attention to cryptocurrency activities to the level of national security.

A statement claimed that the People's Bank of China stated that its crackdown on virtual currency activities, such as the comprehensive ban on trading and Mining in September 2021, has “corrected the chaotic situation in the virtual currency market” and has “achieved significant results.” This is the strongest public comment made by the People's Bank of China on the issue of Crypto Assets since the ban was implemented. This wording shows that regulators believe the past bans have been effective, but it also implies signs of a resurgence, necessitating further tightening.

Most importantly, financial regulatory authorities have for the first time provided a clear definition of stablecoins, categorizing them as a form of virtual currency. This definition holds significant legal and regulatory implications, as it explicitly brings stablecoins under the jurisdiction of the 2021 ban. Prior to this, some market participants believed that stablecoins, due to their peg to fiat currencies, might not fall under the scope of the ban, but this meeting has completely dispelled that illusion.

Stablecoins Classified as Financial Security Threats: AML as a Decisive Reason

Stablecoins have attracted particular attention from the Central Bank of China. The statement pointed out that stablecoins failed to meet the know your customer and AML standards, posing risks of money laundering, fraudulent fundraising, illegal cross-border transfers, and underground payments, and stated that they pose a threat to national financial security. This characterization directly categorizes stablecoins from technological innovation as a financial threat, reflecting the regulatory authorities' tough stance.

AML and customer identification (KYC) are the core reasons for the Central Bank of China attacking stablecoins. The traditional financial system requires that all financial transactions must be traceable to users with real-name authentication, which is the foundation of AML and anti-terrorist financing. However, many stablecoins can be transferred in an anonymous or semi-anonymous state, making it difficult for regulators to track the flow of funds.

The Five Major Risks Associated with Stablecoins

Money Laundering Channel: Anonymity makes it an ideal tool for laundering illegal funds.

Fraudulent Fundraising: Conducting illegal fundraising under the banner of stablecoin.

Illegal Cross-Border Transfers: Circumventing foreign exchange controls for capital flight

Underground Payment Network: Provides payment settlement services for illegal transactions.

Financial system instability: Large-scale use may impact the status of fiat currency.

Zhou Xiaochuan, former governor of the People's Bank of China, also warned about the potential risks of stablecoin applications at a closed-door seminar in July. Zhou stated: “We must be vigilant against the risk of stablecoins being excessively used for asset speculation, as deviations in price trends may lead to fraud and instability in the financial system.” Zhou served as the governor of the People's Bank of China from 2002 to 2018, and his warning indicates that concerns about stablecoins are prevalent even among high-level retired officials.

From a regulatory perspective, the hostility of China's Central Bank towards stablecoins is not surprising. Stablecoins are essentially a privately issued currency substitute, and their widespread use could undermine the Central Bank's control over monetary policy. Furthermore, the cross-border liquidity of stablecoins makes them an ideal tool for circumventing capital controls, which is an intolerable financial security loophole for China, which implements strict foreign exchange controls.

Hong Kong vs Mainland: The Dual System of Stablecoins under One Country, Two Systems

Mainland China continues to ban cryptocurrency trading and mining, while Hong Kong actively embraces the cryptocurrency industry through a licensing system for exchanges and stablecoin issuers. This regulatory difference under the “one country, two systems” framework provides the only legal channel for the crypto industry within China. At the same time, the Central Bank of China is also vigorously promoting the digital yuan pilot project, with over 225 million personal wallets already activated.

However, this dual-track system is facing challenges. According to previous reports from The Block, Beijing recently cracked down on some digital asset activities in Hong Kong, requiring some top brokerage firms to suspend their real-world asset tokenization activities in September, and in October, it prevented some Chinese tech giants from issuing their own stablecoins in Hong Kong. These measures indicate that the central government's tolerance towards Hong Kong's crypto industry is narrowing.

On November 30, it was reported by Beijing Business News that industry insiders believe this meeting will not affect the layout of stablecoins in Hong Kong, but the speculation of stablecoins in mainland China will be severely cracked down upon. Furthermore, the subsequent layout of stablecoins by relevant entities within the mainland in Hong Kong will have its imaginative space greatly reduced, limited to practical application scenarios such as cross-border payments and supply chain finance.

This judgment reveals subtle differences in regulation. Licensed stablecoin issuers in Hong Kong can still operate legally as long as they meet requirements for AML, customer identification, and reserve transparency. However, domestic entities, even if they operate stablecoin businesses through Hong Kong subsidiaries, will face stricter scrutiny and restrictions. The regulatory intent is clear: to allow Hong Kong to retain a certain level of the crypto industry as an international financial center while strictly preventing the outflow of domestic funds through stablecoins.

Strategic Considerations for Advancing the Digital Renminbi and the Encirclement of Stablecoins

The Central Bank of China is vigorously promoting the pilot project for the digital renminbi, with over 225 million personal wallets now activated. The strategic intent behind this figure is closely related to combating stablecoins. The Central Bank of China aims to establish its own controllable digital currency system, while privately issued stablecoins represent the greatest competitor and threat to this strategy.

Digital yuan and stablecoins have technical similarities, both being forms of digital currency that allow for fast and low-cost transfers. However, they differ significantly in terms of control. The digital yuan is issued and regulated by the Central Bank of China, and all transactions are under the monitoring of the central bank, allowing the government to track every flow of funds. In contrast, while stablecoins claim to be pegged to fiat currencies, their issuance and circulation are not controlled by the central bank, allowing users to operate with a certain degree of anonymity.

From a strategic perspective, the Central Bank of China is constructing a dual system: promoting the digital yuan domestically while allowing regulated stablecoins to exist abroad (mainly in Hong Kong). The digital yuan meets domestic payment, regulatory, and monetary policy needs, while licensed stablecoins in Hong Kong serve international trade and cross-border payment scenarios. This arrangement maintains absolute control over the domestic financial system while not completely closing off connections with the international crypto ecosystem.

For the crypto industry, the signals released by this meeting are extremely clear: any form of stablecoin speculation or promotion in the mainland will face severe crackdowns. Relevant entities in the mainland that subsequently plan to deploy stablecoins in Hong Kong will see their imaginative space significantly shrink, limited to practical application scenarios such as cross-border payments and supply chain finance. Speculative stablecoin trading, stablecoin wealth management products promising high returns, and any attempts to promote stablecoins in the mainland will become key targets of regulatory crackdowns.

For global stablecoin issuers, the Chinese market has effectively been completely closed. Although mainstream stablecoins like USDT and USDC are widely used globally, holding or trading them within China is considered illegal. While Hong Kong allows the existence of stablecoins, it is limited to products issued by licensed institutions, and they must meet strict regulatory requirements.