A research report released by blockchain data platform Chainalysis on Tuesday (September 17) showed that although Chinese regulators have strict control over Bitcoin and cryptocurrency market activities, investors are looking for alternatives to depressed stocks amid an economic slowdown, and China's cryptocurrency trading activity is still on the rise, with over-the-counter trading volume increasing by more than 200% compared with the same period in 2021.

Nikkei Asia cited the report, saying that in the second quarter of 2024, China's bitcoin and cryptocurrency "over-the-counter" (OTC) market trading volume more than tripled from the same period in 2021 to $23.7 billion. The so-called "over-the-counter" means that cryptocurrency buyers and sellers contact each other directly through a usually hidden network.

“After China shut down access to major cryptocurrency exchanges in 2021, users began looking elsewhere, turning to over-the-counter platforms and peer-to-peer (P2P) trading networks,” Chainalysis analysts explained.

Chinese regulators have been heavily restrictive on cryptocurrencies for years. In 2017, authorities including the People's Bank of China (PBOC) banned private token offerings (ICOs) and exchanges that trade Bitcoin and cryptocurrencies. In 2021, they further cracked down on mining, trading, and related services, including issuing a statement that "services provided by foreign cryptocurrency exchanges to domestic residents are also considered illegal financial activities."

In contrast, Hong Kong, which is considered an offshore jurisdiction, has taken a different approach by regulating such trading through licensed intermediaries such as exchanges and cryptocurrency-based exchange-traded funds (ETFs).

Still, Chainalysis data shows that cryptocurrency activity in mainland China has not been stifled.

Eric Jardine, head of cybercrime research at Chainalysis, said the data does not fully reflect the size of China's OTC market because buyers and sellers often connect through channels on social media groups and transactions often pass through networks nested among service providers who may not understand the true business scope of the traffic.

Even under the restrictions, mainland users can still access over-the-counter markets offered by global exchanges, according to people familiar with the matter, who declined to be named because of the sensitivity of the topic.

One of the people familiar with the matter said the platforms require buyers to provide personal information and ask for deposits to guarantee the completion of the transaction.

Chainalysis found that over-the-counter inflows tend to increase when China’s Shanghai Composite Index fell from January 2023 to June 2024. The index fell 4.78% during that period.