China Declares All Crypto Activity Illegal, Specifically Targets Stablecoins as Threat to Monetary Sovereignty

China's central bank, the People's Bank of China (PBOC), has escalated its crackdown on cryptocurrency, explicitly declaring all crypto-related activity illegal and singling out stablecoins as a primary threat to monetary sovereignty and financial order. In a multi-agency meeting held on November 28th involving top financial, judicial, and cybersecurity bodies, officials reaffirmed the blanket ban and highlighted the specific dangers posed by stablecoins like Tether (USDT) and Circle's USDC, warning they lack basic customer identification and anti-money laundering safeguards.

The move represents a significant policy shift, focusing enforcement from volatile cryptocurrencies to stablecoins, which have become the dominant medium for underground trading since the 2021 ban. Author Roger Huang notes that Tether, due to its low spreads and broad trading pair support, is the overwhelming majority of traded tokens, allowing traders to move funds to smaller exchanges that list desired assets.

Despite the ban, reports indicate cryptocurrency trading activity in mainland China has increased this year. Officials discussed improving coordination, information sharing, and law enforcement to counter this. Analysts describe the current environment as a "don't ask, don't tell" principle for crypto fundraising, where Party warnings create waves with institutions but act as "social self-censorship" for individuals.

Experts point to China's economic backdrop—deflation, high youth unemployment (~20%), and declining housing and stock markets—as driving continued interest in crypto as an alternative investment. Bonnie Girard of China Channel LLC notes that while warnings are respected, a cultural penchant for gambling leads some to run personal risk-reward calculations and use tools like VPNs to bypass restrictions. She predicts adherence will tighten as stories of heavy losses or convictions spread.

The crackdown coincides with China's aggressive promotion of its central bank digital currency (CBDC), the digital yuan (e-CNY). The e-CNY, already used for trillions of yuan in transactions for shopping, welfare, and salaries, is intended to replace physical cash and potentially dominant payment apps like Alipay and WeChat Pay, giving the state unprecedented visibility into monetary flows.

Professor Eric Lee from UNSW Sydney explains that for a government seeking full monetary control, decentralized stablecoins represent a "structural problem." The warnings leave no room for feigned ignorance and serve to quash the idea of private stablecoins, especially as they gain traction in neighboring regions like Japan, Hong Kong, and Singapore. Girard adds that Chinese digital asset policy is ultimately viewed through the lens of whether it bolsters Communist Party control, with social and financial stability seen as essential to maintaining rule.

In a related development highlighting the state's preferred path for blockchain, Hua Xia Bank, a state-controlled commercial bank, issued 4.5 billion yuan ($600 million) in tokenized bonds on December 4th. The three-year bonds, offering a 1.84% yield, were auctioned exclusively to digital yuan holders through subsidiary Hua Xia Financial Leasing. This move aims to reduce clearing friction by removing intermediaries, showcasing China's commitment to developing a state-sanctioned, permissioned blockchain ecosystem for real-world asset (RWA) tokenization while suppressing private crypto alternatives.