Underground Flows: How Crypto Powers China’s Shadow Economy
A new report published on November 15, 2025, by Kathryn Westmore, a senior research fellow at the Centre for Finance and Security at the Royal United Services Institute (RUSI), sheds light on the escalating role of cryptocurrencies in China’s sophisticated money laundering operations. Despite Beijing’s stringent capital controls and a nationwide ban on digital assets since 2021, criminal networks are increasingly leveraging Bitcoin (BTC) and Tether (USDT) to circumvent restrictions, facilitating the movement of illicit funds both domestically and across borders. The paper, titled “The Shadow Bankers: Chinese Money Laundering Networks and Cryptocurrency,” argues that these networks have become indispensable intermediaries for global organized crime, including fentanyl trafficking and Western drug cartels, while also serving as vehicles for wealthy Chinese individuals to evade outbound transfer limits.
Westmore’s analysis arrives amid a surge in crypto-related crime, with Chainalysis estimating investor losses exceeding $2.3 billion in 2025 alone—a 40% increase from 2024. Pig-butchering scams, a hallmark of these operations, stole $4 billion from victims in 2024, predominantly through romance frauds that lure targets into fake crypto investments. The report warns that no single jurisdiction can dismantle these transnational pipelines alone, as cryptocurrencies enable seamless, pseudonymous transfers that traditional banking systems cannot match.
China’s underground banking sector, estimated at $500 billion annually, has evolved into a hybrid model where crypto acts as the “vehicle” for wealth exfiltration. Despite the People’s Bank of China’s (PBOC) crackdowns—including a blanket ban on trading, mining, and offshore services—criminals exploit decentralized exchanges (DEXs) and over-the-counter (OTC) platforms to convert fiat into BTC or USDT, then route funds to offshore accounts in jurisdictions like Turkey, the UAE, or Southeast Asia. Westmore notes that these groups have also become vital launderers for Western organized crime, including the U.S. fentanyl supply chain, where drug proceeds are swapped for stablecoins and funneled back to Chinese suppliers.
The Anatomy of Crypto-Enabled Laundering in China
Chinese money laundering networks operate with industrial efficiency, blending traditional hawala systems with blockchain’s speed and anonymity. Key tactics include:
- Pig-Butchering Scams: Victims, often in the U.S. or Europe, are groomed via social media into “lucrative” crypto investments on fake platforms. Funds are transferred as USDT or BTC, then laundered through Chinese underground banks. Losses hit $4 billion in 2024, with 2025 on track for $5.5 billion.
- Capital Flight Vehicles: Wealthy individuals use crypto to bypass $50,000 annual outbound limits, converting RMB to BTC/USDT via OTC desks like Nobitex (Iran’s largest exchange, processing $7.8 billion since 2018). Funds are then swapped for fiat in lax hubs.
- Fentanyl Pipeline Intermediaries: Chinese groups launder U.S. cartel payments for precursors, converting dollars to crypto and routing to suppliers—estimated at $1 billion annually.
The RUSI report highlights a 2025 Beijing court case where five individuals were jailed for laundering $166 million via USDT, marking one of China’s most significant crypto prosecutions. The Haidian District People’s Court sentenced them to 2-4 years, using blockchain analytics to trace flows—a sign of Beijing’s growing forensic capabilities despite the ban.
| Laundering Method | Estimated Annual Volume | Primary Crypto | Key Hubs |
|---|---|---|---|
| Pig-Butchering Scams | $4-5.5B (2024-2025) | USDT, BTC | U.S./EU victims → SE Asia compounds → China |
| Capital Flight | $100-200B | BTC, USDT | OTC desks → UAE/Turkey → Offshore fiat |
| Fentanyl Laundering | $1B | BTC | U.S. cartels → Chinese suppliers via DEXs |
Data from Chainalysis and RUSI; volumes exclude non-crypto-native crime.
Regulatory Responses: Crackdowns and Global Coordination
China’s response has been multifaceted but inconsistent. The PBOC’s 2021 ban halted mining (once 65% global hashrate) and trading, but underground activity persists—95% of mining is illicit, consuming 2% of national power amid blackouts. A December 2024 fiat conversion ban was partially reversed in January 2025, unblocking crypto-rial gateways with data-sharing mandates to the Central Bank. Recent convictions, like the $166 million USDT case showcased at the 2025 Financial Street Forum, demonstrate enhanced tracing via blockchain forensics.
Globally, the U.S. Treasury’s OFAC sanctioned 13 crypto addresses in 2024 (second-highest ever), targeting $100 million in Iranian oil networks with Chinese ties. The UK seized $6.7 billion in BTC from a Chinese Ponzi mastermind in November 2025, the largest crypto forfeiture. The US-UK Scam Center Strike Force, launched November 12, has dismantled 3,000+ scam sites and seized $401 million, focusing on SE Asian compounds run by Chinese émigrés.
Challenges abound: Decentralization evades full shutdowns, and SE Asia’s lax enforcement (e.g., Myanmar’s 67,000 deportations since 2023) sustains hubs. Westmore calls for international cooperation: “No single jurisdiction can tackle this alone—shared intelligence on DEX flows is key.”
Implications for Crypto Markets and Policy
The report’s revelations could accelerate global AML reforms, with the EU’s MiCA (effective 2026) mandating 100% reserves for stablecoins and enhanced tracing. In the U.S., the GENIUS Act (July 2025) favors compliant issuers but ramps up OFAC scrutiny—USDT’s 62% dominance ($184 billion cap) faces opacity risks. For investors, it’s a double-edged sword: Crypto’s pseudonymity enables fraud but also innovation; DEX volumes up 43.8% QoQ to $10.3 trillion signal resilience.
X reactions underscore urgency: “Crypto’s laundering role in China = wake-up call for MiCA enforcement” (@CryptoNewsAlerts, 1K likes); “Pig-butchering’s $4B toll—blockchain forensics to the rescue?” (@Chainalysis, 850 retweets).
In a $3.57 trillion market, China’s crypto laundering networks—$15.8 billion illicit inflows in 2024—expose vulnerabilities, but also opportunities for compliant rails like USDC. As Westmore concludes: “Globalization demands global solutions.” The ledger’s transparent; the shadows, less so.