Due to their anonymity and decentralized nature, crypto assets are prone to misuse in money laundering activities. The associated risks have been steadily increasing, drawing growing attention from regulatory authorities around the world. According to data from The 2025 Cryto Crime Report published by Chainalysis, a total of USD 40.9 billion in crypto assets flowed into illicit addresses globally in 2024, with approximately USD 10.8 billion going to entities involved in criminal activity.

International organizations such as the Financial Action Task Force (FATF)along with regulators in various countries and regions, are actively working to enhance anti-money laundering (AML) frameworks. Their goal is to manage the money laundering risks associated with crypto assets while also supporting financial innovation and market development.

China’s revised Anti-Money Laundering law of the People's Republic of China (hereinafter referred to as the “AML Law”) came into effect on January 1, 2025, establishing a legal foundation for the country’s AML efforts. However, compared to the EU and other regions, China’s AML framework currently lacks specific regulatory provisions tailored to cryptocurrencies.

This blog explores the risks of money laundering through crypto assets and the challenges they pose to China’s existing AML system. Through international comparisons, it also offers recommendations for how China can better respond to the evolving risks in the crypto space.

Is China’s AML Framework Ready for the Challenges of Crypto Asset?

The anonymity, decentralization, and rapid technological evolution of crypto assets not only facilitate money laundering activities but also pose significant challenges to existing China’s AML regulatory systems.

1. Risks to Intermediary-Based AML Compliance Frameworks
The traditional AML framework focused heavily on financial intermediaries—such as banks, securities firms, and insurance institutions—to fulfill compliance obligations. However, the issuance, trading, and circulation of crypto assets are inherently anonymous and decentralized, allowing large volumes of funds to bypass these intermediaries for illicit purposes. The widespread use of mixing services, privacy coins, and one-time-use wallet addresses further weakens the effectiveness and transparency of compliance mechanisms.

2. Differences Between Global Crypto Regulation and China’s Current Legislation

There is a noticeable divergence between China’s current legal framework and the increasingly fragmented global approach to crypto asset regulation. Since 2018, FATF has designated Crypto Asset Service Providers (CASPs) as AML-obligated entities and promoted rules such as the “Travel Rule”to ensure customer identification and transaction reporting. Similarly, the EU’s Markets in Markets in Crypto-Assets Regulation (MiCA) and its AML directives have established a regulatory framework centered on prudential oversight, compliance, and transparency by categorizing CASPs accordingly.

In contrast, although China’s newly revised AML law has expanded the scope of obligated entities, it does not explicitly define CASPs. Key roles such as on-chain service providers, custodial wallet operators, and decentralized exchange (DEX) operators are not clearly included in the AML compliance scope.

2. Increased Challenges for Evidence Collection, Identification, and Asset Recovery
Unlike traditional financial systems where investigations can rely on account freezes, transaction audits, and access to backend data, on-chain asset flows traverse multiple wallets and networks. This requires the use of specialized tools such as behavioral graph modeling, address clustering, and transaction path visualization. These technical requirements significantly increase the difficulty of AML enforcement and supervision.

3. Cross-Chain and Cross-Border Features Undermine China’s Enforcement Capabilities
Crypto assets can quickly move across jurisdictions and be converted into various tokens within minutes using cross-chain bridges and DeFi protocols. China’s AML enforcement capabilities are hampered by several practical obstacles, including delayed international cooperation, anonymized entity registration, and lack of mutual legal recognition. These factors lead to a significant gap between the actual capacity and the pressing need for cross-border asset tracing and data acquisition.

Reflections on China’s Approach to Mitigating Money Laundering Risks Associated with Crypto Assets

To prevent systemic financial risks and maintain market stability, China has introduced several regulatory measures in recent years. For instance, the People's Bank of China, along with six other ministries, issued the “Announcement on Preventing Risks of Token Issuance Financing”, and the People’s Bank of China, together with nine other ministries, released the “Notice on Further Preventing and Disposing of Risks Related to Virtual Currency Trading Speculation”. These initiatives comprehensively halted activities such as Initial Coin Offerings (ICOs) and operations of cryptocurrency exchanges. 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 Money Laundering Criminal Cases”, which for the first time explicitly recognized “transferring or converting criminal proceeds and their benefits through virtual asset transactions or financial asset exchanges" as money laundering activities .

Compare to the EU and the U.S., which have established AML compliance frameworks centered around CASPs, China should consider developing a more comprehensive and flexible AML system by focusing on four key areas: understanding risks, monitoring behaviors, leveraging technology, and enhancing international cooperation. Additionally, adopting a “positive list” approach—clearly defining which crypto asset activities are legal and compliant—could allow for gradual integration into the regulatory framework, rather than imposing an outright ban. Specific measures may include:

• Implementing an approval system for entities wishing to provide crypto asset services.
• Mandating real-name registration for platforms and users.
• Strengthening Know Your Customer (KYC) and Know Your Transaction (KYT) mechanisms to trace the origin and destination of funds.
• Establishing Suspicious Activity Report (SAR) and on-chain audit systems to detect and track abnormal activities.
• These steps would not only enhance platform accountability but also enable regulatory authorities to effectively monitor on-chain activities, preventing illegal actions such as money laundering and fraud.

Furthermore, China might consider formally incorporating CASPs into the AML regulatory scope, thereby holding them accountable for compliance and broadening the regulatory coverage. This could involve adding specific provisions for CASPs in the implementation rules or judicial interpretations of the AML Law. For different types of services, such as exchanges, custodial services, smart contract platforms, and cross-chain bridges, basic thresholds and requirements could be established, including:

• Entry requirements (who can provide services).
• Internal control mechanisms for AML.
• Obligations for SAR reporting.
• User identity verification (KYC) processes.

These measures would facilitate more detailed and in-depth supervision, reducing the likelihood of circumvention.

Additionally, China could explore extending the AML Law’s jurisdiction to cover overseas (Cross border) platforms, especially those offering crypto asset services to Chinese users. Some countries have become “regulatory havens” by relaxing regulations to attract these platforms, inadvertently increasing the risk of money laundering and other illegal activities. China could invoke the “effects jurisdiction” principle under Article 12 of the AML Law to address this issue. In simple terms, this means that if the actions of an overseas platform impact China, they can be regulated and held accountable under Chinese law. This principle could be clarified and enforced through judicial interpretations or specific case rulings, strengthening China’s capacity to combat cross-border money laundering.

Lastly, enhancing international law enforcement cooperation and cross-border information sharing is crucial. China has joined the Asia/Pacific Group on Money Laundering and has a foundation for global financial intelligence exchange. However, there are still limitations in blockchain data investigation, judicial assistance, and standardized procedures. China could prioritize signing bilateral anti-money laundering enforcement cooperation agreements with countries where major crypto asset service providers are located. Respecting national data sovereignty and privacy protection, China could explore establishing cross-border collaborative mechanisms for on-chain transaction information and user identity. Additionally, joining the FATF’s “Virtual Assets Contact Group” could promote a cross-border cooperation system based on joint monitoring, enhancing efforts to combat transnational money laundering and illegal activities.

‍

Conclusion

The risk of money laundering through crypto assets primarily stems from the anonymity and decentralization features enabled by blockchain technology (DLT). These very characteristics make crypto assets a convenient tool for illicit financial flows, posing significant challenges to traditional AML frameworks that rely on financial intermediaries.

Internationally, organizations such as the FATF have begun to establish AML regulatory frameworks centered around CASPs, with the “Travel Rule” as a core compliance requirement. Jurisdictions like the EU and the United States have advanced AML efforts in the crypto sector by implementing unified regulations and strengthening enforcement—offering valuable lessons for China’s own AML system reform.

China can seize this opportunity to evolve its AML regime by integrating compliance guidance, technological supervision, and international cooperation. A more transparent, adaptive, and forward-looking AML framework tailored to the unique features of crypto assets will enhance China’s ability to prevent financial crime and safeguard market stability.