Global regulatory trends in crypto assets and China's response

China can balance financial efficiency while ensuring financial security, re-examine the economic functions and strategic value of crypto assets, and promote the evolution of regulatory policies toward a phased "moderate opening-up."

Authors: Deng Jianpeng, Ma Wenjie

With the vigorous development of crypto assets, the global regulatory paradigm is accelerating its differentiation. Developed economies such as the European Union, the United States, the United Kingdom, and China's Hong Kong Special Administrative Region are actively formulating or updating relevant regulatory policies. China once adopted a "comprehensive ban" regulatory strategy in the field of crypto assets, which phasedly curbed domestic speculative activities and prevented financial risks. However, in the face of the rapid evolution of the crypto asset ecosystem and international regulatory policies, prohibitive regulation is difficult to be practically feasible. Its structural conflicts with the global development of crypto assets have become increasingly obvious, which may inhibit blockchain financial innovation and wealth effects, easily lead to a serious lack of protection for the rights and interests of legitimate holders, and weaken China's voice in the formulation of international rules. China can balance financial efficiency while ensuring financial security, re-examine the economic functions and strategic value of crypto assets, and promote the evolution of regulatory policies toward a phased "moderate opening-up." Specifically, it can implement classified supervision based on the risk characteristics of crypto assets, incorporate crypto asset activities into a compliant regulatory framework, and include crypto asset reserves in the consideration of the national new economic development strategy, so as to occupy a commanding height in the new round of global digital financial competition and help China move toward becoming a financial power.

In recent years, the global crypto asset market has entered a rapid development track, evolving from a marginal field to an important part of the global financial system and investment field. Developed economies such as the United States, the European Union, the United Kingdom, Japan, Singapore, the United Arab Emirates, and Hong Kong have formulated or are formulating regulatory policies for crypto assets, incorporating them into their national new economic development strategies. The EU's *Markets in Crypto-Assets Regulation* (MiCA), which came into effect in 2024, implements risk-based classification supervision for crypto assets. In 2025, the U.S. government announced the establishment of a Bitcoin strategic reserve and a U.S. digital asset reserve, and the *Guiding and Establishing National Innovation for U.S. Stablecoins Act* (referred to as the "GENIUS Act") was formally legislated at the federal level, requiring stablecoins to be reserved with U.S. dollars or short-term U.S. bonds. Since 2024, the Hong Kong Special Administrative Region of China has implemented a licensing system for mainstream crypto asset exchanges and practiced ETFs for Bitcoin and Ethereum, and passed the *Stablecoin Bill* in 2025.

China's financial regulatory authorities have successively established a prohibitive regulatory framework through administrative normative documents such as the *Notice on Preventing the Risks of Bitcoin* (2013), the *Announcement on Preventing the Risks of Token Issuance and Financing* (2017), the *Notice on Further Preventing and Disposing of the Risks of Crypto Asset Trading and Speculation* (2021), and the Supreme People's Court's Guiding Case No. 199. They regard crypto asset-related transactions as "illegal financial" activities, prohibit pricing Bitcoin in fiat currency, prohibit Bitcoin "mining," and clean up and crack down on the entire industrial chain of crypto assets. The prohibitive policy once effectively curbed domestic crypto asset speculation and prevented related financial risks, but with the evolution of the market, its controversy has gradually emerged, attracting the attention of a small number of researchers: On the one hand, judicial organs are affected by the aforementioned administrative normative documents, leading to vague identification and wavering of the legal attributes of crypto assets. On the premise that there is no formal legislation denying the legality of crypto assets, the protection of civil rights and interests of legitimate holders of crypto assets is seriously lacking. Some civil cases involving crypto assets are rejected by courts on the grounds of "risk assumption," and there are a large number of "different judgments in similar cases" in civil and criminal judgments. On the other hand, with the explosive growth of new crypto assets such as stablecoins in recent years, the prohibitive norms of a single sovereign country are difficult to cope with the challenges of crypto assets and no longer meet the minimum infringement effect of financial supervision.

Especially since 2025, developed economies represented by the United States have incorporated crypto assets into their national new economic development strategies, re-examined and adjusted their regulatory strategies for crypto assets, and introduced special legislation for stablecoins, aiming to gain competitive advantages in the new round of blockchain financial "arms race." The global crypto asset industry is experiencing rapid "business model innovation" and "rule reconstruction." In this context, the structural conflict between China's prohibitive supervision and the global development of crypto assets has become increasingly obvious, or no longer meets the requirements of "proportional principle" in financial supervision. This key issue has not been fully concerned by domestic financial regulatory and legal researchers. "Laws adapt to the times, then governance prospers; governance conforms to the world, then achievements are made." How to adjust China's policies in a timely manner in combination with the international development trend of crypto assets and build a crypto asset regulatory framework that balances financial security and innovative inclusiveness is an urgent strategic issue for China to consider. Compared with existing domestic research, the innovations of this article will mainly be reflected in two aspects: First, the materials are new and effective, systematically sorting out the ecological development, innovation of crypto assets in recent years, and new regulatory policies in developed economies, and judging their trends and policy points. Second, it puts forward clear and highly practical optimization paths for existing regulatory policies. Prohibitive supervision is essentially a continuation of the "financial repression" policy, which has limitations in financial development and innovation, protection of financial consumers' rights and interests, and the right to formulate international governance rules. This article will propose a policy adjustment from "comprehensive ban" to phased "moderate opening-up" from both theoretical discussion and practical paths.

### I. The Concept of Crypto Assets and Regulatory Needs

#### (一) The Concept and Ecology of Crypto Assets

At present, there is no completely unified conceptual consensus and classification on crypto assets internationally. Crypto assets are often confused with concepts such as virtual currencies, private digital currencies, virtual assets, digital assets, and tokens. However, international organizations such as the Financial Stability Board (FSB), the International Monetary Fund (IMF), and the Basel Committee on Banking Supervision (BCBS) have used the expression "crypto assets" in their regulatory policy recommendations and official documents in recent years. This article adopts the expression "crypto assets" and does not distinguish it from "virtual currencies" in China's regulatory normative documents, referring to assets such as Bitcoin, Ethereum, and Tether, which are issued by non-monetary authorities, use encryption technology and blockchain distributed accounts or similar technologies, and exist in digital form.

Bitcoin, born in 2009, is a typical decentralized privately issued crypto asset. Bitcoin features a decentralized peer-to-peer value transfer method based on a shared public ledger (public blockchain using distributed ledger technology). It is not supported by any assets. Its original purpose is to realize transactions between individuals without a trusted third party by coordinating the incentive mechanisms of network participants and solve the technical problem of "double-spending." After the birth of Bitcoin, the crypto ecosystem expanded rapidly, forming a self-reinforcing cycle by attracting new market participants, which in turn promoted the rise of crypto asset prices. Centralized exchanges have played a key role in guiding capital into the crypto asset field, facilitating the exchange between crypto assets and fiat currencies. Subsequently, Ethereum was launched in 2015, whose core innovation lies in the introduction of smart contracts, enabling developers to deploy various decentralized applications on the chain, realize condition-triggered automated transaction execution, and promote the prosperity of Decentralised Finance (DeFi). Decentralized finance is a new ecosystem providing crypto services, improving transparency and reducing financial intermediaries to lower costs. Decentralized finance protocols combine multiple smart contracts to provide lending, borrowing, and trading services within the crypto ecosystem. Holders of crypto assets can use assets such as Ethereum to engage in decentralized financial transactions, lending, and other financial activities. At the same time, stablecoins are a key component of decentralized finance. They maintain a relatively stable price with the anchored fiat currency and assume the function of payment and transaction medium of fiat currency in the crypto ecosystem.

#### (二) Risks of Crypto Assets and Regulatory Motives

The "shadow financial" functions of crypto assets and decentralized finance are similar to many vulnerabilities in traditional financial markets, and at the same time bring new challenges to existing financial supervision. The motives and goals of regulating the crypto market mainly include maintaining national financial security, protecting the rights and interests of financial consumers; maintaining financial market stability, and cracking down on financial crimes such as fraud, manipulation, money laundering, and terrorist financing.

First, crypto assets challenge the legal tender system, especially stablecoins anchored to the U.S. dollar may bring risks of replacing other countries' legal tenders and accelerating cross-border capital flows. Crypto assets objectively bypass the existing fiat currency system, banking system, and third-party payment system, establishing a new currency and payment system. The International Monetary Fund uses "cryptoisation" to refer to the replacement of domestic legal tender by crypto assets. That is, investors in some countries hold a large number of crypto assets, and there is a phenomenon that crypto assets (mainly U.S. dollar stablecoins) replace local currencies. These stablecoins are replacing local currencies and assets, and bypassing exchange rate and capital control restrictions. This will reduce the monetary authority's control over liquidity in the economy, affect the transmission channel of monetary policy, weaken the effectiveness of monetary policy, and may even spread to other regulated entities or the real economy, triggering systemic risks.

Second, crypto assets are easily used as tools for illegal crimes, and face difficulties in accountability. In the crypto asset ecosystem, there have emerged products and services such as crypto assets with enhanced anonymity, mixers, decentralized platforms and exchanges, and privacy wallets. These tools reduce the transparency of financial flows, exacerbate information confusion, and contribute to risks of tax evasion, money laundering, terrorist financing, fraud, and market manipulation. Compared with traditional financial transactions, there are a large number of off-chain information gaps in crypto assets and decentralized finance. For example, the identities, technical backgrounds, and compliance records of developers and traders are often hidden, and users cannot identify their reputation or behavioral motives, significantly amplifying the risk of information asymmetry. In addition, the "decentralized" characteristic of blockchain is completely opposite to the "centralized" pattern of the financial regulatory system, making it difficult for supervision to control risks through traditional financial intermediaries as "grasps." The anonymity and cross-border nature of crypto assets make supervision and tracking difficult, and investors' funds are at great risk, bringing important challenges to regulatory agencies and law enforcement departments.

Third, crypto assets may enhance financial risks. One of the most popular uses of crypto assets is for investment (speculation) and trading (hyping). The market for the issuance, purchase, sale, exchange, and storage of crypto assets, as well as related products, tools, intermediaries, applications, and technologies, has grown explosively, with significant expansion in the scale of retail and institutional use. The scope of global crypto asset investors continues to expand. According to the *2024 Crypto Wealth Report* released by British consulting firm Henley & Partners, the crypto asset market has experienced significant wealth creation and scale expansion, with overall growth in the number of wealthy individuals, total users, and overall market value. As of the end of June 2024, there were 560 million global crypto asset users, and the number of holders with more than $1 million in crypto assets reached 172,300. With the rapid growth of crypto market participation and volume, crypto assets have gradually deepened their connection with traditional finance and the real economy, and their potential spillover effects on financial stability have attracted high vigilance from regulatory agencies. The failure of key service providers in the crypto asset ecosystem (such as crypto asset exchanges) will quickly transmit risks to other parts of the ecosystem. The price instability of crypto assets, coupled with leveraged trading, liquidity mismatch, and connections with the traditional financial system, can easily amplify financial systemic risks. These challenges and risks have strengthened the necessity of global regulation of crypto assets.

### II. Global Regulatory Dynamics of Crypto Assets

The rapid expansion of the crypto asset market has raised concerns about the imperfection of financial consumer rights protection mechanisms and the impact on financial stability. Global financial regulatory authorities are accelerating the legislative process for crypto asset-related activities. In the new trend of crypto asset regulation, the regulatory practices of the following countries or regions deserve high attention.

#### (一) Core Connotations of New Regulatory Policies in Developed Economies

First, the EU's unified legislation and risk-based classification supervision. In May 2023, the Council of the European Union voted to approve the *Markets in Crypto-Assets Regulation* (MiCA). MiCA provides a comprehensive regulatory framework for the EU crypto asset market. Following the idea of classified supervision, MiCA makes detailed provisions on the definition and use of crypto assets, the access permission of crypto asset issuers and service providers, the operation and management of crypto asset issuers and service providers, the reserve and redemption management of crypto asset issuers, and the anti-money laundering supervision of crypto asset trading activities. It is by far the most comprehensive crypto asset regulatory regulation in the world. MiCA classifies crypto assets into Asset-Referenced Tokens (ART), E-money Tokens (EMT), and other crypto assets, and sets differentiated regulatory rules. Among them, electronic money tokens (EMT) and asset-referenced tokens (ART) are the main types of crypto assets regulated by MiCA. It is worth noting that MiCA does not cover crypto assets such as DeFi, NFTs, and security tokens that meet the conditions of other regulated tools, nor does it cover central bank digital currencies (CBDCs). In terms of regulatory objects, MiCA mainly regulates the establishment and operation of crypto asset issuers and crypto asset service providers.

Second, the U.S. crypto asset promotion policies and strategic reserve plans. In March 2022, the United States issued the *Executive Order on Ensuring Responsible Development of Digital Assets*, establishing the U.S. digital asset development strategy at the federal level, supporting digital asset development, and positioning the United States as a leader in blockchain innovation and digital asset technology. The U.S. Securities and Exchange Commission (SEC) approved spot Bitcoin and spot Ethereum ETFs in 2024, attracting a large amount of capital inflow from traditional investment institutions. In January 2025, U.S. President Trump signed an executive order *Strengthening U.S. Leadership in Digital Financial Technology*, announcing the construction of a new digital asset regulatory system, requiring the protection of public chain access and digital asset freedom, establishing a presidential "Digital Asset Market Task Force" to manage the issuance and operation of U.S. digital assets, setting up a new "Digital Asset Committee," prohibiting the issuance of central bank digital currencies, promoting legislative matters such as researching Bitcoin strategic reserves, and building the United States into the "world capital of cryptocurrencies."

In March 2025, Trump signed an executive order announcing the establishment of a Strategic Bitcoin Reserve and a U.S. Digital Asset Stockpile, incorporating approximately 200,000 seized Bitcoins into the national reserve, and forming a "U.S. dollar-stablecoin-crypto market" cycle by supporting U.S. dollar stablecoins (such as USDT and USDC) to strengthen the pricing position of the U.S. dollar in global crypto asset transactions. In July 2025, the U.S. Congress finally voted to pass the *Guiding and Establishing National Innovation for U.S. Stablecoins Act*, which will take effect after being signed by the president, formulating clear rules for the issuance, legal reserves, transparency, and supervision of U.S. dollar-backed stablecoins to stabilize the mechanism of digital stablecoins pegged to the U.S. dollar. At the same time, the U.S. House of Representatives passed the *Digital Asset Market Clarity Act of 2025* (referred to as the "CLARITY Act"). The Act subdivides digital assets into digital commodities, investment contract assets, and non-commodity collectibles, clarifies the dispute over the attributes of crypto assets, and defines the regulatory structure, that is, the spot market for digital commodities is under the responsibility of the CFTC, and securities issuance and anti-fraud law enforcement are under the responsibility of the SEC. The U.S. government's policy mainline of supporting the compliant and innovative development of crypto assets, while incorporating the crypto market into the U.S. financial system and binding it to the U.S. dollar system (U.S. dollars and national debt) through stablecoins, aims to strengthen the status of the U.S. dollar in the international monetary system, increase the global acceptance and demand for digital payments in U.S. dollars, help the United States control the future of digital finance, and strengthen U.S. financial dominance. Its strategic intent deserves high attention from China.

Third, Crypto Asset-Friendly Policies in Hong Kong, China. In October 2022, as a crucial financial opening-up window of China, the Hong Kong Special Administrative Region Government released the *Policy Statement on the Development of Virtual Assets in Hong Kong*. This document elaborated on the macro policies and development directions for crypto assets in Hong Kong amid technological trends such as Distributed Ledger Technology (DLT) and Web 3.0. It also put forward principled proposals for regulatory sandboxes covering crypto assets, including the issuance of Non-Fungible Tokens (NFTs), digital issuance of green bonds, and the digital Hong Kong dollar. In October 2022, the Financial Services and the Treasury Bureau (FSTB) of the Hong Kong Special Administrative Region Government issued the *Policy Statement on the Development of Virtual Assets in Hong Kong*, clarifying its regulatory vision and policy direction for virtual/digital asset activities under the principle of "same business activities, same risks, same regulation". In June 2023, the Hong Kong Special Administrative Region Government established a working group to promote Web3 development. Since 2024, Hong Kong has shifted from its previous strict regulatory approach, implementing a licensing system for trading mainstream crypto assets (Bitcoin and Ethereum). Security tokens are subject to the *Securities and Futures Ordinance*, while non-security tokens are brought under anti-money laundering supervision. It has also successfully explored the listing and trading of Bitcoin and Ethereum ETFs. In May 2025, the Legislative Council of the Hong Kong Special Administrative Region passed the *Stablecoin Bill*, establishing a licensing regime for fiat-backed stablecoin issuers in Hong Kong, China, with implementation scheduled for August 1. In June 2025, Hong Kong released the *Hong Kong Digital Asset Development Policy Statement 2.0*, proposing the "LEAP" framework with four strategies: optimizing laws and regulations, expanding types of tokenized products, advancing application scenarios and cross-sector collaboration, and developing talents and partnerships. It also clarified the regularization of government bond tokenization, promoted the tokenization of real-world assets such as precious metals, non-ferrous metals, and renewable energy, and reaffirmed its goal of building Hong Kong into a global innovation hub in the digital asset sector.

### (II) Analysis of Policy Characteristics in Developed Economies

In July 2023, drawing on the experience of institutions in various jurisdictions in implementing international standards, the Financial Stability Board (FSB) released the final report of the *FSB Global Regulatory Framework for Crypto-asset Activities*. It put forward the overall principles for regulatory recommendations: first, the principle of "same business, same risk, same regulation". If a crypto asset business has the same economic functions as traditional financial businesses and is accompanied by the same types of financial risks, it should comply with the same regulatory requirements. Second, the principle of flexibility. Regulatory authorities in various economies can apply existing laws and regulations to the crypto asset industry or formulate new ones to implement relevant regulatory recommendations. Third, the principle of technology neutrality. Regulatory authorities in various economies should regulate crypto asset businesses based on their economic functions and risk characteristics, rather than their underlying technologies. Based on these international standards, developed economies have issued relevant proposals or formal legislation on crypto asset-related activities, which generally exhibit the following characteristics.

First, crypto asset-friendly regulatory attitudes and frameworks. In the early stages of crypto asset development, countries had differing regulatory policies, with varying focuses on balancing innovation and risks. However, recently, developed economies have re-examined and adjusted their regulatory strategies for crypto assets, actively guiding and fostering crypto asset-friendly regulatory attitudes and frameworks. U.S. President Trump has undergone a significant shift in his attitude toward non-sovereign cryptocurrencies like Bitcoin, moving from viewing "Bitcoin as a scam competing with the U.S. dollar" to believing "Bitcoin will not pose a threat to the U.S. dollar", adopting a positive and inclusive policy toward crypto assets. The Trump administration explicitly repealed the previous *Digital Assets Executive Order* and the U.S. Department of the Treasury's *Framework for International Engagement on Digital Assets*, deeming these measures stifled innovation and undermined U.S. economic freedom and global leadership in digital finance. The regulatory policies of developed economies have shifted from fragmented rules to systematic frameworks, displaying a crypto asset-friendly stance and attracting capital inflows by enhancing policy certainty.

Second, strengthening compliance requirements for anti-money laundering and counter-terrorist financing (AML/CFT). Anti-money laundering and combating terrorist financing are core elements of crypto asset regulation. Regulatory authorities in developed economies typically take the standards of the Financial Action Task Force on Money Laundering (FATF) as the basis, focus on crypto asset service providers as regulatory anchors, and require strict implementation of anti-money laundering and counter-terrorist financing measures. In June 2019, FATF updated Recommendation 15 and its explanatory notes, and released the *Guidance for a Risk-Based Approach for Virtual Assets and Virtual Asset Service Providers*, applying anti-money laundering and counter-terrorist financing measures to virtual assets (VAs) and virtual asset service providers (VASPs). A key requirement is the "travel rule", which mandates that countries ensure virtual asset service providers of the initiating party can promptly and securely obtain, hold, and exchange information about the sender and receiver of a transaction when conducting transactions, and safely transmit it to the receiving party's virtual asset service provider or relevant financial institutions when necessary. FATF's recommendations on anti-money laundering regulation of crypto assets are regarded as a bellwether for national anti-money laundering laws on crypto assets. Developed economies such as the United States, the European Union, Japan, and Singapore have strengthened anti-money laundering regulation of crypto assets through institutional unification and law enforcement, gradually establishing a compliance system centered on virtual asset service providers. FATF's 2025 *Special Update on the Implementation of Standards for Virtual Assets and Service Providers* shows that in the 2025 survey, 73% of the surveyed jurisdictions (85 out of 117, excluding those that explicitly prohibit or plan to prohibit VASPs) have enacted legislation to implement the "travel rule".

Third, emphasizing risk-based classified regulation. Most developed economies refer to or follow the FSB's principle of "same business, same risk, same regulation" for classified supervision. A common classification method is to categorize crypto assets into "stablecoins" (those with a stabilization mechanism) and "unbacked crypto-assets" (those without) based on whether they attempt to stabilize their value by referencing other assets. For stablecoins with a value stabilization mechanism, MiCA further classifies them into two categories based on underlying assets: asset-referenced tokens (pegged to one or more fiat currencies, commodities, crypto assets, or a combination thereof) and e-money tokens (pegged to a single fiat currency), with differentiated regulatory rules. Additionally, many countries or regions actively promote the application of securities laws in the crypto asset field, distinguishing crypto assets with financial instrument characteristics (including securities) from other crypto assets. The former, sometimes called "security tokens", may be subject to the same regulation as financial instruments and securities issuers. In 2018, the Swiss Financial Market Supervisory Authority (FINMA) issued a guide on the regulatory framework for Initial Coin Offerings (ICOs), classifying crypto assets into three categories: payment tokens, utility tokens, and asset tokens. Based on their functions, FINMA defines payment tokens as "non-security" payment methods, similar to currency; asset tokens as "securities" akin to financial products; and utility tokens are distinguished based on whether they have additional investment purposes, with different regulatory frameworks applied accordingly. Of course, these classifications are not absolute. For example, the Securities and Futures Commission (SFC) of the Hong Kong Special Administrative Region of China has noted that the terms and characteristics of crypto assets may evolve over time, and non-security tokens may become security tokens and vice versa. It further recommends that crypto asset service providers "prudently" apply for licenses related to both types of assets.

### III. Characteristics and Limitations of China's Prohibitive Policies

#### (I) Phased Evolution of Prohibitive Policies

The potential risks of crypto assets necessitate intervention by financial regulatory authorities. China has phasedly expanded the scope of prohibitive regulation, as detailed below.

The first phase is the risk early warning stage. To protect public property rights and prevent money laundering risks, in December 2013, the People's Bank of China and other departments issued the *Notice on Preventing the Risks of Bitcoin* (Yin Fa [2013] No. 289), clearly stating that Bitcoin is not a currency but a specific virtual commodity. Bitcoin transactions, as a form of online commodity trading, allow ordinary people to participate at their own risk. In the early stage of crypto asset development, regulatory authorities generally adopted a wait-and-see attitude, acknowledging Bitcoin's status as legal property and allowing limited on- and off-exchange transactions.

The second phase is the key risk rectification stage. In 2017, Initial Coin Offerings (ICOs) gained global popularity, with many projects raising funds by issuing tokens on Ethereum. In an ICO, initiators sell a certain token (crypto asset) to a group of investors in exchange for investors' fiat currencies or mainstream crypto assets like Bitcoin. Crypto assets issued through ICOs are similar to traditional stocks or debt instruments, with holders entitled to claim specific property rights from issuers, hence being called "security tokens" and "utility tokens". However, in most cases, unregulated and unrestricted ICOs are often distorted into tools for fraudsters to engage in illegal financial activities. ICOs are generally suspected of illegally absorbing public deposits or fundraising fraud, where initiators drive up token prices and then sell quickly for profit, causing buyers to lose substantial principal. In September 2017, the central bank and other ministries issued the *Announcement on Preventing the Risks of Token Issuance and Financing*, making it clear that no organization or individual shall engage in illegal token issuance and financing activities, all such activities must cease immediately, financial payment institutions are prohibited from participating in crypto asset businesses, and domestic exchanges are required to withdraw. This effectively controlled relevant financial risks in the short term.

The third phase is the comprehensive prohibition stage. In May 2021, the Financial Stability and Development Committee of the State Council held its 51st meeting, proposing to resolutely prevent and control financial risks and crack down on Bitcoin "mining" and trading activities. Subsequent regulatory policies quickly implemented the spirit of this meeting. In September 2021, the National Development and Reform Commission and other departments issued the *Notice on Rectifying Virtual Currency "Mining" Activities*, classifying mining as an obsolete industry, strictly prohibiting new mining projects, and strengthening strict supervision over the entire industrial chain of crypto asset "mining" activities. The *Notice on Further Preventing and Disposing of the Risks of Virtual Currency Trading and Speculation* issued by the central bank and other ministries in September 2021 emphasized that crypto asset-related business activities are illegal financial activities, which are strictly prohibited and resolutely banned in accordance with the law, and services provided by overseas exchanges to domestic residents are also deemed illegal financial activities. Notably, the issuers of this notice included the Supreme People's Court, the Supreme People's Procuratorate, and the Ministry of Public Security, making financial regulatory rules directly influential in law enforcement and judicial trials. It clearly stipulates that any legal person, unincorporated organization, or natural person investing in crypto assets and related derivatives in violation of public order and morality will have their relevant civil legal acts deemed invalid, and resulting losses shall be borne by themselves.

In February 2022, the Supreme People's Court revised the *Interpretation on Several Issues Concerning the Specific Application of Law in the Trial of Criminal Cases Involving Illegal Fund-raising* (Fa Shi [2022] No. 5), explicitly listing "virtual currency trading" as a means of illegally absorbing funds, providing a clear basis for judicial organs to crack down on such crimes. In August 2024, the Supreme People's Court and the Supreme People's Procuratorate jointly issued the *Interpretation on Several Issues Concerning the Application of Law in Handling Criminal Cases of Money Laundering*, which for the first time explicitly included "transferring or converting criminal proceeds and their benefits through 'virtual asset' transactions and financial asset exchange" as money laundering acts.

China adopts a vigilant attitude toward crypto asset-related risks, with a relatively negative characterization of crypto assets, ultimately presenting the characteristics of prohibitive regulation. Prohibitive regulation covers three dimensions: first, prohibition of the entire industrial chain at the administrative supervision level. At the issuance level, it prohibits the creation of crypto assets through mining or issuance via ICOs; at the transaction level, it prohibits any domestic or foreign entity from providing crypto asset services such as custody and settlement, exchange investment, and information consulting to domestic residents. Second, linking some aspects to illegal and criminal activities at the criminal level. On the basis of administrative regulations clarifying the illegality of crypto asset trading activities, through judicial interpretation, specific crypto asset trading behaviors are included in the categories of illegal fund-raising, money laundering, and other criminal activities, thereby emphasizing the "illegality" of crypto asset-related trading activities and the "legitimacy" of prohibition measures. Third, non-protection at the civil judicial level. The impact of prohibitive regulation has penetrated from administrative supervision to the judicial level, sending a signal to society about the illegality of crypto asset transactions and risk prevention. Regulatory authorities or judicial organs tend to认定 that civil acts such as entrusted investment in crypto assets are invalid due to violating public order and morality, and do not provide relief or protection for losses of relevant investors, further exerting the active role of financial justice and strengthening the collaborative governance of financial justice and financial supervision.

#### (II) Limitations of China's Prohibitive Regulatory Policies

China has phasedly and gradually expanded the scope of prohibition on crypto assets, which has played an important role in cracking down on domestic speculation, combating crypto-related illegal and criminal activities, and controlling financial risks. However, with the rapid evolution of the crypto asset ecosystem and international regulatory trends, the limitations of prohibitive regulation have become increasingly prominent.

First, the legal basis of prohibitive regulatory norms is questionable. The *Notice on Preventing the Risks of Bitcoin*, the *Announcement on Preventing the Risks of Token Issuance and Financing*, and the *Notice on Further Preventing and Disposing of the Risks of Virtual Currency Trading and Speculation* constitute the normative basis for crypto asset regulation. In terms of formulation entities and procedures, these documents are jointly formulated and issued by the People's Bank of China and other ministries (departments), with relatively simple legislative procedures that do not meet the high standards for formulating rules specified in the *Regulations on the Procedures for Formulating Rules*, and can only be regarded as "normative documents below the level of rules" in terms of legal effect. According to Article 80 of China's *Legislation Law*, without provisions in laws or administrative regulations, rules shall not grant themselves powers, shall not impair citizens' rights and freedoms, and shall not increase their obligations. Therefore, normative documents have no authority to directly create provisions that impair citizens' rights or increase their obligations; otherwise, their own legality is questionable. The *Notice on Further Preventing and Disposing of the Risks of Virtual Currency Trading and Speculation* holds that crypto asset-related business activities "are suspected of illegally issuing token tickets, unauthorized public offering of securities, illegal operation of futures business, illegal fund-raising, and other illegal financial activities" and should be "strictly prohibited and resolutely banned in accordance with the law". In practice, crypto asset-related business activities are complex and diverse, and the "one-size-fits-all" non-legal characterization and prohibition provisions in normative documents for crypto asset-related businesses exclude the obligation to investigate and hear cases individually, leading to the prohibition of some legal acts. At the same time, prohibitive provisions deprive market entities of the freedom to participate in crypto asset transactions, which is suspected of improperly impairing citizens' rights, raising concerns about legality.

Second, prohibitive regulation has failed to effectively protect the rights and interests of financial consumers and even exacerbated the dilemma of protecting the rights of legitimate crypto asset holders. Due to policy reservations and abstract wording, norms in the crypto asset field are generally not systematic, stable, or clear, leading to differences in understanding of regulatory policies in practice. Affected by the strict regulatory stance, judicial organs have cognitive biases regarding the legal attributes of crypto assets, resulting in many cases of "different judgments for similar cases" in judicial decisions, which easily arouse public doubts. On the issue of the legal attributes of crypto assets, some courts认定 crypto assets as "virtual property" protected by law, while others consider them illegal property or unlawful objects. Regarding the validity of civil legal acts involving crypto assets, there are two views: "validity theory" and "invalidity theory". Especially after the issuance of the *Notice on Further Preventing and Disposing of the Risks of Virtual Currency Trading and Speculation* in 2021, courts tend to cite this normative document to认定 that entrusted investment contracts involving crypto assets are invalid for violating the "public order and morality" provision in Article 153, Paragraph 2 of the *Civil Code*. On the issue of compensation for damages and enforcement in cases involving crypto assets, some arbitration institutions support "replacement with fiat currency for return", but the key points of the judgment in Guiding Case No. 199 of the Supreme People's Court state that arbitral awards of compensation in fiat currency equivalent to Bitcoin violate national financial regulatory provisions and social public interests. Although this judicial approach aligns with the administrative authorities' regulatory policy of comprehensively prohibiting virtual currencies, it is not conducive to protecting and relieving the legitimate rights and interests of crypto asset investors, and even encourages adverse social selection and increases moral hazards. Currently, China's prohibitive regulatory policies have led some judicial organs to hold the perception that "trading in currencies is illegal" or even "involvement with currencies is illegal", automatically associating crypto asset transactions with illegal crimes, which has had a widespread negative impact on some legitimate crypto asset holders in certain regions. For example, some public security organs have seized parties' crypto assets without legal basis.

In addition, cases in the field of crypto assets often involve "confiscation" charges such as organizing and leading pyramid schemes and operating casinos, due to their wide public involvement and high value of涉案 property. These two factors have led judicial organs to intensify their crackdown on crypto asset activities in practice, easily triggering issues such as "long-distance fishing" and "profit-driven law enforcement". Some public authorities have handed over seized large amounts of crypto assets to third-party companies for sale, leading to serious problems such as interest transfer. Judgments in the major online pyramid scheme case of "Wallet +" (Plus Token), known as the "largest fund scam in the crypto circle", show that after the case, the investigating authorities seized 194,775 Bitcoins, 833,083 Ethers, etc. The defendant Chen applied to the public security organ to entrust a Beijing technology company to legally sell and cash out the crypto assets seized by the public security organ overseas, with all proceeds used as his restitution. The funds and proceeds obtained were confiscated in accordance with the law and turned over to the state treasury. This approach faces significant legality and rationality issues: first, the exchange of crypto assets and fiat currencies within China is an illegal financial activity. This provision also binds state organs, and even if judicial departments are involved in the transaction process, its illegal nature does not change. Second, China prohibits financial institutions or related platforms from engaging in cryptocurrency-related businesses, so it is impossible to find official institutions or professional organizations for entrusted custody in China, and can only seek overseas trading platforms to handle relevant businesses, which is incompatible with the functional positioning, legal attributes and requirements of China's public security and judicial organs. Moreover, this method lacks effective supervision and is prone to breeding job-related crimes and interest transfer.

Third, prohibitive regulation has stifled financial innovation in the crypto asset industry and the wealth benefits of the public. Although China's regulatory policies have curbed risks, they have also hindered the application of blockchain technology in many fields such as cross-border payments (e.g., stablecoins), real-world asset tokenization (RWA), decentralized finance, and stock tokenization. In addition, as market entities pursuing efficiency, financial institutions and technology R&D institutions, under the influence of policy uncertainty, have to shift resources originally used for compliant technological innovation to building overseas structures to avoid regulation, which may push financial innovation out. Under the general trend of global fiat currency depreciation and increasingly frequent capital controls, mainstream crypto assets have gradually become important tools for global asset allocation and personal wealth preservation. The United States has clearly established a Bitcoin and crypto asset reserve strategy, while China's prohibitive regulation has put crypto assets under the shadow of "object illegality", objectively causing individuals, enterprises and even the country to lose this important anchor asset. Domestic citizens, market entities and even public authorities face significant restrictions in holding, trading and disposing of crypto assets, as well as severe institutional obstacles to the legality of liquidation, making it difficult to participate in the crypto asset market or share investment returns. They face development dilemmas in the wave of global digital assets, which may even seriously affect a country's citizens' wealth accumulation and financial returns, and even affect a country's financial security.

Fourth, prohibitive regulation has led to insufficient participation in international governance and weakened power in formulating international rules. Many developed countries or regions have formulated or are preparing to formulate crypto asset classification regulatory frameworks and actively put them into practice. The MiCA regulation clearly states that the EU continues to support the promotion of global coordinated governance of crypto assets and crypto asset services through international organizations such as the Financial Stability Board, the Basel Committee on Banking Supervision, and the Financial Action Task Force on Money Laundering. The UK Financial Conduct Authority has stated that it needs to learn and maintain interactions with international partners and regulatory authorities to ensure that the formulated framework is closely aligned with international standards. The UK Financial Conduct Authority has played a leading role in the work on crypto assets of the International Organization of Securities Commissions, taking the lead in formulating and promoting the implementation of the "Policy Recommendations on Crypto Assets and Digital Assets"; it has also worked closely with the Financial Stability Board and the Financial Action Task Force on Money Laundering to take the lead in conducting a thematic peer review on the global regulatory framework for crypto asset activities.

China has been under strict regulation for a long time, rarely systematically participating in the formulation of international rules by the International Organization of Securities Commissions, the Financial Stability Board, and the Financial Action Task Force on Money Laundering, and has made limited contributions to formulating rules related to crypto assets. For example, in June 2025, the Financial Action Task Force on Money Laundering released the "Travel Rule Regulatory Best Practices", providing examples of good practices that jurisdictions can consider when formulating regulatory frameworks. However, China has explicitly prohibited the use of virtual assets and virtual asset service providers (VASPs), making it impossible to implement the travel rule, let alone develop best practices for it. The Financial Action Task Force on Money Laundering also pointed out the limitations of prohibitive regulation in the "Travel Rule Regulatory Best Practices", including "stablecoin issuers need to freeze illegal funds but require regulatory cooperation between jurisdictions. Regions that have not implemented the travel rule (such as some prohibitionist countries) cannot provide a cooperation framework" and "differences in implementation across jurisdictions require crypto asset service providers to separately review transactions from non-implementing regions (such as China), significantly increasing compliance costs and risk delays". China's prohibitive regulation may face problems of weak institutional adaptability and insufficient international coordination, and domestic regulatory documents are out of touch with international regulatory trends, which may further squeeze China's discourse space in this field in the long run.

### IV. Transformation and Improvement of China's Regulatory Strategy

#### (I) Re-understanding the Strategic Significance of Crypto Assets

Crypto assets have important strategic value in building a strong financial country. In 2023, national leaders proposed the six key core financial elements of a strong financial country - a strong currency, a strong central bank, strong financial institutions, a strong international financial center, strong financial supervision, and a strong team of financial talents - pointing out the direction for the development of finance with Chinese characteristics. Under this strategic framework, as an important carrier of the financial technology revolution, crypto assets have strategic value for enhancing China's financial competitiveness. First, in promoting the internationalization of the RMB, the Hong Kong regulatory sandbox program is testing cross-border payments with stablecoins pegged to offshore RMB and other fiat currencies. This innovation allows the RMB to bypass the restrictions of the traditional SWIFT system, achieve efficient circulation of "payment as settlement", improve the efficiency of RMB cross-border trade settlement, expand the function of currency carriers, and RMB-pegged stablecoins can enhance the multiple functions of the RMB as a pricing currency, payment currency, and reserve currency. Establishing an offshore RMB stablecoin system can attract countries along the "Belt and Road" to use it as a tool for trade settlement and reserve assets, forming a new technology-driven path for RMB internationalization and a driving force for the RMB to become a "strong currency".

Second, developed economies such as the United States are trying to lead crypto asset innovation, and China's prohibition policy may miss the opportunity to build a strong financial country. Blockchain finance has the characteristics of "disintermediation". From stablecoins to real asset tokenization (RWA), they are all Web3-based financial innovation models that go beyond the traditional bank-led financial intermediation, representing the future transformation of financial models and may help spawn new "strong financial institutions". China can consider guiding private capital to allocate crypto assets through compliant channels (such as ETFs of mainstream crypto assets) in stages in the future, implicitly expanding national strategic reserves to avoid falling behind in the "digital gold" competition. The legalization of crypto asset transactions will bring "underground finance" into the open and prevent systemic risks. Some domestic people have long had a practical demand for crypto asset allocation because Bitcoin has anti-inflation properties. After being impacted by the rise in global fiat currency inflation rates, its price often rises, similar to the anti-inflation asset function of gold. Bitcoin also has the advantages of constant supply, portability, divisibility, and being unaffected by the monetary policies of specific countries. Therefore, investors regard Bitcoin as "digital gold" to hedge against fiat currency depreciation. We believe that Bitcoin is an "important wealth carrier for the next generation", which is becoming a key accounting unit for human wealth and the underlying asset of cyberspace, and may surpass gold. However, the prohibition policy has objectively led to the lack of compliant channels for domestic transactions and investments in China, causing domestic funds to flow out through gray channels such as offshore trading platforms and over-the-counter transactions. Such underground transactions are prone to risks of fraud, currency exchange, money laundering, and capital flight.

The deep integration of the global crypto asset system and the traditional financial system has become an irresistible trend, independent of the will of specific individuals, institutions, or countries. In the long run, the limitations and negative effects of prohibitive regulation have become increasingly prominent. The legalization and classified regulation of crypto asset transactions will help realize transparent supervision of domestic funds, protection of financial consumers' rights and interests, and compliance of crypto asset investment taxation, increase fiscal revenue, and promote financial supervision capabilities in practice. China can re-examine the economic functions and strategic value of crypto assets, explore the evolution from "comprehensive prohibition" to "moderate opening", and bring crypto assets into the track of compliant development. Instead of sitting back and watching the huge investment demand and risks breeding underground, regulatory authorities should guide them into a legal framework under the premise of ensuring financial security, monitor capital flows in real-time, prevent illegal financial activities, and improve investor suitability standards.

#### (II) Theoretical Reconsideration of Prohibitive Regulatory Policies

The idea of comprehensively prohibiting crypto asset-related industries is not practically feasible and does not conform to the principle of proportionality and interest considerations. Financial regulation is a public law act where public power interferes with private rights, and should also be bound by the principle of proportionality in public law - the principles of legitimate purpose, suitability, necessity, and balance. In terms of regulatory purposes, crypto assets represented by stablecoins show a legitimate expansion of purpose at the level of monetary sovereignty, and prohibitive regulation is difficult to cope with the corresponding challenges of currency substitution. In terms of the suitability and necessity of means, regulatory authorities can use alternative means that are less harmful to private rights, such as restricting market access. The structural conflict between prohibitive regulation and the development of global crypto assets has become increasingly obvious. In terms of the principle of balance, prohibitive regulation may inhibit inclusive finance and financial innovation, causing public authorities to excessively interfere with private rights in the name of public interests, making it difficult to balance the infringement of private rights and the realization of public interests. With the continuous acceleration of China's financial market opening-up, the connection between domestic and international financial institutions has become increasingly close, and there is room for re-examining the existing policies.

Classic theories and practices of financial regulation show that security, efficiency, and fairness are core values that cannot be neglected in financial regulation. In determining the value goals of financial regulation, Professor Xing Huiqiang proposed the "three-legged theorem" solution, taking "financial security", "financial efficiency", and "consumer protection" as the "three legs" of financial legislation, financial regulatory goals, and financial system reform. Professor Feng Guo further improved the "three-legged theorem" by expanding "consumer protection" to "financial fairness", forming a mutually restrictive game model with "financial security", "financial efficiency", and "financial fairness" as the three legs. However, in China's crypto asset field, balancing these multiple policy goals is particularly challenging. Overall, the risk prevention strategy that over-relies on administrative prohibitions stems from excessive demand for financial security, seriously ignoring financial efficiency, especially the protection of financial consumers' rights and interests, triggering obvious conflicts of multiple regulatory values.

Prohibitive regulation stems from the perception that crypto assets and blockchain decentralized finance have almost no practical value, trigger a large number of crimes such as money laundering, pyramid schemes, and fraud, and pose significant risks to the financial system and consumers' rights and interests, while ignoring the positive functions and values of crypto assets and their ecosystems. In a positive sense, private crypto assets represented by Bitcoin realize peer-to-peer (P2P, where the remitter sends directly to the receiver's wallet) transactions, integrating payment, settlement, and clearing in one step. The significant advantages of such mainstream private crypto assets lie in streamlining intermediary links, reducing costs, improving efficiency, and being open and transparent, making them important tools to hedge against the long-term depreciation risk of fiat currencies. Stablecoins are gradually becoming one of the mainstream revolutionary cross-border payment and settlement tools. Compared with traditional financial payment systems, stablecoin cross-border payments can achieve instant clearing between any nodes in the world, with advantages such as peer-to-peer, 24/7 all-weather payment, near real-time transactions, low and transparent fees. Decentralized finance is becoming an efficient investment and financing tool, trying to replicate traditional financial services and formats in a decentralized manner in the crypto world. This on-chain lending model has the characteristics of no permission required, global openness, automatic execution, and transparent mortgage rates. Crypto assets themselves and related ecosystems are not just tools for illegal crimes, but also have the characteristics of inclusive finance and the value of promoting inclusive growth.

We believe that financial security, financial efficiency, and protection of financial consumers' rights and interests are by no means opposing, but to a large extent unified and mutually reinforcing. Financial security that lacks efficiency, ignores costs, and stifles innovation is fragile. Only when financial regulatory policies can both promote innovation and effectively protect financial consumers' rights and interests can financial security be consolidated. On the one hand, the United States has adopted an inclusive policy, actively embracing crypto asset innovation, strengthening the dollar's international dominance with the help of stablecoins, and using Bitcoin as a strategic reserve to build the United States into the world's crypto asset capital; on the other hand, regulatory agencies such as the U.S. Securities and Exchange Commission (SEC) have frequently taken actions against blockchain financial companies such as Ripple in recent years in the name of protecting financial consumers' rights and interests, and have strengthened the protection of financial consumers' rights and interests through recent relevant legislation, effectively promoting the compliant development of crypto asset从业 institutions and ensuring national financial security. However, under the prohibition policy, regulatory norms and judicial decisions in the crypto asset field mostly reflect the trend of "public interest priority", exacerbating the embarrassment of insufficient legal protection and judicial relief for the rights and interests of legitimate crypto asset holders. The current financial regulatory paradigm is undergoing a structural transformation from simple regulatory constraints to innovation empowerment. The relationship between financial innovation and financial regulation has transcended the traditional binary opposition model, and the core goal of regulation is no longer a single control, but to actively conform to the development trend of financial innovation and provide long-term impetus for financial innovation through financial regulation. Based on this, in promoting the crypto asset regulatory system, in addition to the "financial security" dimension, we should focus on re-including the two long-missing value dimensions of "financial efficiency" and "consumer rights protection" into policy-making considerations to ensure positive interaction between these value goals. China can re-examine the functional value of the crypto asset ecosystem for inclusive finance and financial development, especially focusing on the strategic value of mainstream crypto assets in international financial and political competition, and then give them accurate legal characterization.

In terms of crypto asset development strategies, China can seek a prudent balance between promoting innovation and preventing risks, and build a dynamic system based on risk assessment. Some researchers have summarized three action routes for regulatory authorities to respond to crypto asset-related risks: Ban, Contain, and Regulate. Except for the comprehensive prohibition of crypto asset activities, these options are not mutually exclusive and can be used in combination. In the future, China can, on the basis of adhering to the bottom line of risk prevention and control, explore more adaptive regulatory paths to achieve a balance between regulation and development. In terms of regulatory strategy selection, China can evolve from "comprehensive prohibition" to "moderate opening", comprehensively use containment and regulatory strategies, bring crypto assets into the track of compliant regulation, and gradually shift from developing only "central bank digital currency" to a model of "coordinated development of central bank digital currency and crypto assets".

#### (III) Core Dimensions of Regulatory Policy Adjustment

1. Ideas of Classified Regulation

China's regulatory policies have long failed to effectively distinguish between types of crypto assets, simply adopting the vague definition of "virtual currency" and a "one-size-fits-all" prohibition policy. The *Notice on Further Preventing and Disposing of the Risks of Virtual Currency Trading and Speculation* points out that "virtual currencies" such as Bitcoin, Ethereum, and Tether have the main characteristics of being issued by non-monetary authorities, using encryption technology and distributed accounts or similar technologies, existing in digital form, and not having legal tender status. It can be seen from the regulatory text that "virtual currency" in China's financial regulatory perspective is a complex and large collection, including not only "

Under the guidance of the principles of "same business, same risk, same regulation", "flexibility principle" and "technology neutrality" proposed by the Financial Stability Board, classified supervision has become a global consensus in crypto asset regulation. Developed economies adopt a classified regulatory approach based on asset characteristics and risk levels, implementing differentiated supe