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China's growing pile of cryptocurrencies seized from illegal transactions is prompting local governments to find ways to dispose of the hoard and spurring calls from courts and the financial industry for better regulation. Lawyers said the lack of rules around how authorities should handle seized bitcoin and other tokens, whose trading is banned on the mainland, has spawned inconsistent and opaque approaches that some fear could embolden lawbreakers and foster corruption. Together with senior judges and police, attorneys are debating changes to rules they said will soon change the way confiscated virtual currencies are treated. That could be a game-changer for China's crypto industry, and comes at a time of heightened Sino-U.S. tensions in Donald Trump's second presidency, coinciding with Trump's plans to deregulate cryptocurrencies and build a bitcoin reserve. Crypto trading is banned in China, and digital tokens are not recognized as legal tender or assets there. But local governments have been using private companies to sell seized digital coins in exchange for cash to replenish public coffers strained by a slowing economy, according to transaction and court documents seen by Reuters. Such disposals are a makeshift solution that, strictly speaking, is not fully in line with China's current ban on crypto trading, said Chen Shi, a professor at the Zhongnan University of Economics and Law. Better supervision is pressing as the number of cases and amounts of money balloons, said Chen, who attended a seminar in January to discuss the issue with various officials. Guo Zhihao, a Shenzhen-based lawyer who also attended the seminar, said China's ban on crypto trading conflicts with local authorities' need to liquidate seized digital currencies. Guo, a senior partner at Beijing Yingke Law Firm, thinks China's central bank is better positioned to handle the cryptocurrencies, and should either sell them overseas or build a crypto reserve from seized tokens like Trump plans to. The seminar, one of several held in recent months, was open to all suggestions and does not guarantee implementation of any. But participants and market players say near consensus is emerging on the need to allow judicial recognition of cryptocurrencies as assets and a uniform procedure to dispose of seized virtual currencies. Surging criminal cases Discussions have heated up this year alongside a surge in criminal cases in China involving cryptocurrencies, ranging from internet fraud to money laundering and illegal gambling. Money involved in crypto-related crimes surged 10-fold to 430.7 billion yuan ($59 billion) in 2023, according to blockchain security firm SAFEIS. Last year, China sued 3,032 people involved in crypto-related money laundering, according to the country's top procurator. The number of busted crypto crimes has coincided with a jump in local governments' penalty and confiscatory incomes, which hit a record 378 billion yuan in 2023, a 65% rise in five years, according to official public budget data. Liu Honglin, a lawyer who advises local governments on crypto-related issues, said seized cryptocurrencies have become a major contributor to local finances in some cities, where digital coins - which can be transferred easily and anonymously across borders - are increasingly popular tools for criminals. But there are no rules regulating private companies that help local governments with the disposal, something that needs to change, Liu said. Jiafenxiang, a Shenzhen-based technology company, has sold cryptocurrencies worth more than 3 billion yuan in offshore markets since its founding in 2018, on behalf of local governments including those of Xuzhou, Hua'an and Taizhou cities in China's eastern Jiangsu province, according to a document seen by Reuters. The U.S. dollar proceeds are then exchanged into yuan through local banks, before being transferred into the accounts of local finance bureaus, according to transaction records. Jiafenxiang declined to comment. The local governments of Xuzhou, Hua'an and Taizhou didn't return requests for comment. China's local governments held an estimated 15,000 bitcoins worth $1.4 billion at the end of last year, ranking the state as the world's 14th biggest holder of the cryptocurrency, said bitcoin investment firm River. Highly profitable Blockchain service provider Bit Jungle said it is legitimate for private companies to help local governments dispose of cryptocurrencies, as long as they ensure safety of the assets, sell them through licensed offshore exchanges, and comply with capital management rules. It is a highly profitable business that attracts more and more participants, said Sun Jun, a crypto-focused lawyer and a senior partner at Shanghai Landing Law Offices. Sun suggests China clarifies the property attributes of virtual currencies, set up an agency or a system for cryptocurrency disposal, and vet third-party companies. Ru Haiyang, co-CEO at Hong Kong's largest licensed crypto exchange HashKey, said China might want to borrow from Trump's playbook and keep forfeited bitcoins as strategic reserve, with the central government consolidating asset disposals. Winston Ma, adjunct professor at NYU Law School and a former managing director of China Investment Corp (CIC), also sees the benefit of dealing with seized crypto in a centralised manner, such as setting up a crypto sovereign fund in Hong Kong, where crypto trading is allowed. A more centralised management would help China maximize the value of the seized cryptocurrencies, Ma said.

China debates how to handle criminal crypto cache

Money involved in crypto-related crimes surged 10-fold to 430.7 billion yuan ($59 billion) in 2023, according to blockchain security firm SAFEIS. Last year, China sued 3,032 people involved in crypto-related money laundering, according to the country's top procurator.

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