Hong Kong Offers Beijing Legal Route to Sell Seized Crypto
By Qing Na, Wang Xiaoqing and Liu Ran
The Chinese mainland is taking a new approach to disposing of cryptocurrency seized in law enforcement cases, allowing the authorities to convert illicit digital assets into real money through licensed exchanges in Hong Kong in a way that complies with the mainland’s stringent regulations on virtual currencies.
The Beijing Municipal Public Security Bureau (PSB) announced Thursday that it has teamed up with the China Beijing Equity Exchange (CBEX) — a state-owned platform for trading equities and other assets — and established a mechanism to dispose of virtual currencies in a compliant way.
Under the mechanism, the Beijing PSB and its sub-bureaus can entrust the disposal of virtual currencies to the CBEX, which will select professional service institutions to verify, accept and transfer the assets, the bureau’s legal affairs department said in a statement.
As direct conversion of digital assets like cryptocurrencies into real money is banned on the mainland, the assets will be publicly converted through one of the 10 licensed crypto exchanges in Hong Kong. After the sale, the proceeds will go through the approval process of the State Administration of Foreign Exchange and then be repatriated to a special account for that particular case before being deposited into the state treasury.
The new method was recently trialed successfully in a case handled by the PSB sub-bureau in the capital’s Shunyi district, according to the statement.
Although this is the first public announcement of such a disposal process by the Beijing PSB, a source working for one of the licensed exchanges in Hong Kong told Caixin that China’s Ministry of Public Security issued internal guidelines last year encouraging local PSBs to convert seized virtual currencies into real money through the Hong Kong exchanges.
The Beijing PSB’s new approach to handling seized virtual currencies — which some have dubbed the Beijing model — may serve as a reference for other regions exploring legal frameworks for disposing of digital assets.
The new approach carries significant legal and policy implications. By handling the liquidation of the assets through Hong Kong’s compliant, licensed exchanges, the Beijing PSB says that it is not violating the mainland’s ban on virtual currency trading. In addition, relying on regulated entities subject to stringent anti-money laundering checks adds a layer of global legitimacy to the process.
When disputes arise, the mechanism allows the PSB, under the Supreme People’s Court’s mutual judicial assistance arrangement, to request enforcement assistance from Hong Kong courts. This arrangement refers to agreements between the mainland and Hong Kong under the “one country, two systems” framework that allow courts in both jurisdictions to recognize and enforce certain of each other’s civil and commercial judgments, including asset recovery or disputes involving crypto.
The new mechanism also puts guardrails in place to protect the digital assets. The institution selected by the CBEX to carry out the sale will be required to pay a deposit equal to 110% of the value of the seized virtual currency, so that the money is protected should the institution or its employees abscond with the funds during the disposal process, sources at an institution providing the service told Caixin. The deposit will be returned when the PSB receives the sale proceeds, they said.
The government has been gradually tightening the noose around cryptocurrencies and crypto trading activities since 2017, when it prohibited initial coin offerings and shut down domestic trading platforms. It has subsequently launched further crackdowns, including outlawing crypto mining and banning financial institutions and payment companies from directly or indirectly providing cryptocurrency services to customers, including accepting the currency as payment.
However, Hong Kong, as a special administrative region, is not subject to that ban and has been doubling down on efforts to become an international hub for trading virtual assets. The Hong Kong Securities and Futures Commission (SFC) announced in February a new roadmap to make the city a global hub for virtual assets, aiming to provide new frameworks for regulating virtual asset-related over-the-counter and custodian services, as well as expanding virtual asset products.
On May 21, Hong Kong’s Legislative Council passed the Stablecoins Bill, signaling the impending rollout of a licensing regime for stablecoin issuers later this year.
In June 2023, the SFC introduced a licensing regime for virtual asset trading platforms, requiring businesses operating a virtual asset exchange in the city or actively marketing their services to Hong Kong investors to obtain a license granted by the commission.
The commission has so far licensed 10 platforms, including OSL Exchange, HashKey Exchange, and HKVAX, according to its website. OSL and HashKey were among the first to obtain licenses and have relatively mature operations, Caixin learned from sources familiar with the matter. The other firms are still in their early stages and currently focus mainly on large-scale over-the-counter trading, they said.
HashKey held discussions with Beijing authorities in 2024 regarding the disposal of illegal virtual assets, sources with knowledge of the matter told Caixin. But it is unclear whether the platform was eventually involved, they said. The Beijing police did not disclose which of the 10 licensed exchanges assisted in the case dealt with by the Shunyi police.
Contact reporter Qing Na (qingna@caixin.com) and editor Nerys Avery (nerysavery@caixin.com)
caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.
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