Underground Crypto Trading in China: Risks and Reality

China officially banned cryptocurrency trading and mining in 2021. Banks can’t touch it. Exchanges like Binance and Coinbase are blocked. Yet, in the shadows, Chinese traders moved $86.4 billion in crypto between July 2022 and June 2023. That’s more than Hong Kong, where crypto is legal. It’s not a glitch. It’s a system.

What’s Actually Illegal?

The Chinese government didn’t ban holding Bitcoin or Ethereum. You can keep them in your wallet. But if you try to buy, sell, or trade them inside China - through an exchange, a broker, or even a friend - you’re breaking the law. The People’s Bank of China (PBOC) made it clear: no financial institutions can support crypto. No bank transfers. No payment processing. No crypto ATMs.

But here’s the twist: Chinese courts have ruled that cryptocurrencies are “legal property.” That means if someone steals your Bitcoin, you can sue for damages. The state doesn’t recognize it as money, but it won’t let you be robbed without recourse. That contradiction is why the underground market thrives. People aren’t just gambling - they’re protecting wealth.

How Do People Still Trade?

You won’t find a crypto exchange app on your Chinese phone. But you’ll find people using WhatsApp, Telegram, and WeChat groups to connect. Traders use peer-to-peer (P2P) platforms like LocalBitcoins or OTC desks that operate through Hong Kong. They don’t need a Chinese bank account to send money - they use family members abroad, trusted brokers, or even cash handoffs in border cities like Shenzhen.

Virtual Private Networks (VPNs) are everywhere. Traders use multiple layers - commercial services, private proxies, even encrypted mesh networks - to bypass the Great Firewall. Some set up shell companies in Hong Kong to receive crypto payments legally, then transfer funds back to China through trade invoices or fake service contracts.

Stablecoins like USDT are the secret weapon. Because they’re pegged to the U.S. dollar, they’re easier to move across borders and less volatile than Bitcoin. Traders buy USDT with yuan through OTC brokers, then use it to trade Bitcoin or Ethereum on international platforms. When they want cash back, they sell USDT to another trader in China - often in person, in a café or parking lot - and get yuan in hand.

Who’s Doing This?

It’s not just hobbyists. The average transaction size in China’s underground market is nearly double the global average. Around 3.6% of trades globally are between $10,000 and $1 million. In China, it’s over 6%. These are serious investors - small business owners, tech employees with stock options, even retired civil servants.

Why? Because China’s stock market collapsed. The CSI 300 index fell 35% over three years. Corporate earnings have missed forecasts for ten straight quarters. The government pumped 2 trillion yuan into equities to stabilize things - but trust is gone. People don’t believe in the system anymore. Crypto isn’t a side hustle. It’s a survival strategy.

The Risks Are Real

Just because you can trade doesn’t mean it’s safe. The biggest danger? Enforcement changes overnight. In May 2025, rumors swirled that personal crypto holdings were being outlawed. While unconfirmed, the panic was real. If the government decides to crack down harder - and they can - your wallet could be frozen. Your assets seized. Your name flagged.

OTC brokers aren’t regulated. If someone takes your yuan and disappears, you have no recourse. No chargeback. No customer service. No legal protection. You’re on your own.

VPNs get blocked. Platforms get shut down. Bank accounts linked to crypto activity get closed - even if you didn’t trade yourself, just receiving a payment from a friend can trigger a red flag.

And then there’s the psychological toll. Constant fear. Checking news feeds every hour. Worrying if your next message on WeChat will be the one that gets you in trouble. It’s not just financial risk. It’s emotional exhaustion.

Why Won’t It Go Away?

China wants control. That’s why they built the digital yuan - a state-controlled digital currency that tracks every transaction. They don’t want decentralized money. They want digital surveillance.

But people want freedom. They want returns. They want to move money without permission.

The underground market isn’t going anywhere. It’s too big. Too embedded. Too necessary for too many people. Even if the government shuts down one OTC network, three more pop up. If they block one VPN provider, traders switch to another. The system adapts because the need is too strong.

Shanghai regulators are now talking about regulating stablecoins. That’s a sign. Not of a crackdown - but of a possible shift. Maybe they’ll allow controlled access through licensed platforms. Maybe they’ll let people hold stablecoins but ban volatile coins. The door might crack open - but it won’t swing wide.

What’s Next?

China’s stance on crypto isn’t just about finance. It’s about power. Can a state control money in the digital age? The underground market says no. Not completely, anyway.

For now, traders will keep using Hong Kong accounts, encrypted apps, and cash handoffs. They’ll keep buying USDT. They’ll keep avoiding detection. The scale won’t shrink - not while stocks keep falling and the digital yuan offers no real yield.

The government can ban exchanges. They can jail miners. But they can’t ban human desire for better returns. And as long as that exists, crypto will find a way - even in the most tightly controlled economy on Earth.

What Happens If You Get Caught?

If you’re caught trading crypto in China, the punishment depends on how big you are. For a regular person using a P2P app to buy $5,000 in Bitcoin? You might get a warning. Your account could be frozen. Your phone might be inspected.

But if you’re running an OTC desk, managing multiple wallets, or moving over $100,000 a month? That’s commercial activity. That’s illegal under PBOC rules. You could face fines, asset seizure, or even criminal charges. There have been cases where people were sentenced to prison for operating unlicensed crypto exchanges.

There’s no public record of how often this happens - the government doesn’t publish enforcement stats. But whispers in trader forums suggest that 2024 and 2025 saw a rise in investigations targeting OTC brokers and VPN resellers.

Is There a Legal Way?

Technically, no. There’s no legal exchange in mainland China. No licensed broker. No bank that will process crypto payments.

The only legal path is to move outside China - to Hong Kong, Singapore, or another country with open crypto markets. But that requires residency, bank accounts, and paperwork most people don’t have.

Some high-net-worth individuals use offshore trusts or Hong Kong-based companies to hold crypto legally. But that’s out of reach for 99% of Chinese citizens.

So for most, the only “legal” option is to hold - not trade. But holding without trading is like owning a car but never driving it. It doesn’t solve the problem.

How Do Traders Stay Safe?

Experienced traders follow a few hard rules:

• Never use your real name on P2P platforms - use aliases, fake IDs, and burner phones.
• Keep crypto in cold wallets - never on exchanges, even offshore ones.
• Use multiple VPNs, never the same one twice.
• Only trade with people who have 5+ years of verified history on forums.
• Never keep more than you can afford to lose - because you can lose it all, and no one will help you.
• Use stablecoins as your bridge - not Bitcoin or Ethereum.

Most of all, they avoid drawing attention. No bragging. No public posts. No sharing wallet addresses. Silence is the best defense.

What About the Digital Yuan?

China’s digital yuan (e-CNY) is the government’s answer to crypto. It’s not decentralized. It’s not anonymous. Every transaction is logged. The state can freeze it. Track it. Limit how much you can spend.

But here’s the irony: the digital yuan doesn’t offer higher returns. It doesn’t let you invest globally. It doesn’t protect against inflation like Bitcoin might.

So while the government pushes e-CNY as the future of money, millions of Chinese are quietly betting on something else - something they can’t control, but that gives them real value.

The digital yuan is a tool of control. Crypto is a tool of escape.

Can China Ever Allow Crypto Again?

Maybe - but not like the West. China won’t open its markets to Bitcoin as an asset. But it might allow stablecoins under strict licensing - like a government-approved version of USDT, issued by state-backed banks, with KYC, limits, and tracking.

That’s already happening in pilot zones like Shanghai. Regulators are testing frameworks for “regulated digital assets.” It’s not crypto as we know it. It’s crypto on China’s terms.

If that happens, the underground market might shrink - but it won’t disappear. Because the people who use it aren’t just chasing profit. They’re chasing autonomy.