Measures Taken by the Chinese Government to Detect and Prevent Underground Crypto Activities

The Chinese government has implemented a comprehensive set of measures to detect and prevent underground cryptocurrency activities. These efforts reflect China's stringent stance on digital currencies and its determination to maintain control over its financial system.

Enhanced Monitoring and Surveillance

The government has established a comprehensive monitoring system to oversee cryptocurrency activities of individuals and companies in mainland China. This system involves coordination between central government and regional/local authorities, as well as various ministerial agencies overseeing financial, banking, public security, and cybersecurity matters (Zhang, 2022). This multi-agency approach allows for wide-ranging surveillance and early detection of illicit crypto operations.

Targeting Overseas Exchanges

A key focus of China's efforts is preventing mainland residents from accessing overseas cryptocurrency exchanges. The government has explicitly declared it illegal for overseas exchanges to provide services to residents in mainland China (Davis Polk, 2021). To enforce this:

1. Authorities are actively blocking access to over 100 foreign websites offering crypto exchange services (CoinDesk, n.d.).
2. The government is implementing measures to detect nominee arrangements that might be used to circumvent these restrictions.
3. IP address blocks are being employed to prevent access to crypto exchange platforms.

Crackdown on Domestic Support for Crypto Activities

The Chinese government has prohibited individuals in mainland China from working for overseas exchanges as employees. Additionally, companies and individuals are barred from providing marketing, payment, settlement services, or technical support to overseas cryptocurrency exchanges (Davis Polk, 2021). This measure aims to cut off any domestic support for crypto operations.

Targeting Mining Operations

To address the issue of crypto mining, which was once prevalent in China, the government has taken several steps:

1. Local authorities are required to identify current and developing mining projects, with particular attention to mines set up in state-sponsored big data and high-tech parks (CoinDesk, 2021).
2. Power grids are being checked for abnormal electricity use related to illicit mining.
3. On-site inspections of large data centers are being strengthened.
4. Electricity suppliers are prohibited from providing power to mines through direct lines or other methods that circumvent the national grid.
5. Mining firms are barred from participating in the electricity market.
6. A standard increase of RMB 0.3 ($0.05) per Kilowatt/hour has been imposed on the cost of electricity provided to crypto mines, with local governments having discretion to increase this further (CoinDesk, 2021).

Financial and Legal Measures

The government has implemented several financial and legal measures to deter crypto activities:

1. Financial institutions are prohibited from providing services related to cryptocurrencies.
2. The judicial system has been enlisted to support the crackdown, with the Supreme People's Court involved in the enforcement efforts (Zhang, 2022).
3. Local governments and financial institutions are required to phase out all existing financial and tax support provided for cryptocurrency mining companies (Zhang, 2022).

Public Education and Awareness

The Chinese government has launched education campaigns to raise public awareness regarding the risks of cryptocurrency trading (Davis Polk, 2021). This approach aims to reduce public interest in crypto activities and make it easier to identify and report illicit operations.

Continuous Policy Updates

The government continually updates its policies to address new developments in the crypto space. For instance, the September 2021 Notice expanded the scope of prohibited activities to include exchanging one kind of cryptocurrency for another, which was not explicitly banned in previous regulations (CoinDesk, 2021).

In conclusion, the Chinese government's approach to detecting and preventing underground crypto activities is multi-faceted, combining technological measures, legal prohibitions, financial restrictions, and public education. This comprehensive strategy reflects China's determination to maintain strict control over cryptocurrency activities within its borders.