(Bloomberg) -- Nineteen months after China banned crypto, more signs have emerged that its citizens continue to buy and sell digital assets.

These glimpses of their trading activity support suspicions that some of China’s 1.4 billion people flout the prohibition Beijing imposed in September 2021 as they hunt for alternatives to investments like property and stocks.

A shadowy role for Chinese demand adds to the difficulty of parsing the outlook for digital-asset markets, which have partially revived this year from a 2022 crash pockmarked with bankruptcies like that of the FTX crypto exchange.

There is even speculation the ban on the mainland could be loosened — though there are no indications of that happening — after Hong Kong pivoted to a pro-crypto stance to woo investment, a step that won quiet backing from Beijing.

The evidence of ongoing Chinese appetite for tokens comes from varied sources, including FTX’s creditor profile, citizens who said they used crypto platforms and depictions by industry insiders of workarounds to Beijing’s ban. 

Hard to ‘Eliminate’

“Essentially, bans don’t work,” said Caroline Malcolm, global head of public policy at Chainalysis, which specializes in tracking digital-asset transactions. “The decentralized nature of cryptocurrencies and the fact that they can be transferred peer-to-peer and traded on global exchanges make it difficult for any government to completely eliminate them.”

US bankruptcy filings for FTX, which collapsed in November last year, show Chinese users accounted for 8% of the exchange’s customers. FTX advisers have tallied more than 9 million customer accounts overall, while claims from creditors amount to at least $11.6 billion.

Jack Ding, a partner with crypto regulations specialist Duan & Duan Law Firm, said he represents six Chinese creditors with a combined $10 million of FTX claims. They are part of a committee for foreign FTX customers, he said.

Theoretically, crypto trading is outlawed for Chinese at home and abroad but it’s “hard to enforce,” Ding said. Often it’s about compliance systems at exchanges and whether they’ll filter out Chinese passport holders, he added.

Beijing cracked down on digital assets over concerns about money laundering, currency outflows and the environmental impact of Bitcoin mining. The likes of the Binance, OKX and FTX exchanges had tapped risk-loving investors in China, once the world’s biggest market for Bitcoin trading, to boost growth.

Compliance Challenge

Crypto platforms now try to block Chinese Internet Protocol addresses but virtual private networks can defeat such attempts by masking locations.

Interviews with Chinese investors point to the compliance challenge. Four said they had traded on the Binance digital-asset platform, and a fifth said he’d also used OKX, after Beijing’s prohibition. Binance is the largest crypto exchange while OKX ranks at No. 2, CoinGecko data on 24-hour volumes show.

The five spoke in part out of frustration over current or earlier suspensions of their accounts. Four said they lived in mainland China and had passed know-your-customer procedures using Chinese identification.

OKX declined to comment on the issue. A spokesperson for Binance said the company doesn’t operate in mainland China or have any technology, including servers or data, based there.

‘Great Firewall’

“Following the September 2021 ban, the Binance platform, including the website and mobile application, has been blocked behind the Great Firewall,” the Binance spokesperson said, referring to the system China uses to sever its internet from the rest of the world.

A sixth Chinese investor, David Jin, said he lives in Silicon Valley and has had $8 million of crypto frozen on Binance since July at the behest of police in central Chongqing city in China. The police were probing tokens allegedly linked to illegal online casinos, Jin added, while denying involvement.

A Chongqing police officer surnamed Mu, who’s in charge of the case, didn’t respond to numerous requests for comment.

The Binance spokesperson said that the company has a policy of cooperating with lawful information requests and legal inquiries from authorities pertaining to investigations, prosecutions, forfeiture actions and suspicious activities.

Binance reserves the right to reject law enforcement requests that fail legal scrutiny, don’t serve a legal purpose or where the investigative approach is flawed, the spokesperson added. 

Turning Dominican

In March, Bloomberg News reported that another major crypto exchange, Huobi Global, was giving Chinese users the option of applying for a “digital identity” with the tiny island nation of Dominica. Once on-boarded, their app profile shows them as Dominican citizens, according to people familiar with the matter, who asked not be identified discussing sensitive matters.

Huobi has said that it doesn’t operate in China and that Chinese Internet Protocol addresses are “strictly prohibited” from accessing the platform, and that new customers are “from anywhere but China.”

“Huobi has exited the Chinese market and barred Chinese users from signing up or logging in,” the company has said.

The People’s Bank of China, which announced the digital-asset ban in September 2021 when it said all crypto-related transactions are illegal, didn’t immediately respond to request for a comment on the signs that Chinese citizens continue to trade virtual assets.

Since the prohibition, Chinese regulators haven’t announced sanctions on any offshore exchange for signing up mainland users.

Malcolm from Chainalysis said the ban has either been ineffective or loosely enforced. The average monthly value of crypto flowing to China did roughly halve in 2022 from a year earlier but still remained sizable at $17 billion, the firm estimates.

If somehow the crypto sector was legalized in China in the future, “it would likely lead to a surge in demand for cryptocurrencies,” Malcolm said.

--With assistance from Sidhartha Shukla and Yujing Liu.

©2023 Bloomberg L.P.