Exclusive Analysis: What Does the Draft Cybercrime Prevention Law Mean for the Cryptocurrency Industry?
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Exclusive Analysis: What Does the Draft Cybercrime Prevention Law Mean for the Cryptocurrency Industry?
In this new era, for practitioners and investors on the mainland, “compliance” is no longer just a slogan—it is a life-or-death red line.
Navigating Web3 tides with focused insights
On January 31, 2026—amid sharp market volatility triggered by liquidity pressures—the Ministry of Public Security, jointly with other relevant departments, officially released the “Draft Law on Prevention and Control of Cybercrime” for public consultation.
Searching for the “Law on Prevention and Control of Cybercrime” on X (formerly Twitter) yields minimal discussion. Given the diminishing marginal impact of multi-departmental regulatory notices over the past several years, most reactions are along the lines of: “Another rehash?” or “It’s already banned anyway—what more can happen?”
This is an extremely dangerous misjudgment. Elevating regulation from “ministerial notices” to “national law” signals a fundamental shift in regulatory logic—from financial risk prevention to precise criminal governance. Biteye believes this may be the most consequential piece of legislation affecting mainland China’s Web3 ecosystem in recent years.
A close reading of the draft’s 68 articles reveals it no longer dwells on macro-level concepts like “financial risk” or “illegal fundraising.” Instead, it functions like a surgical scalpel, precisely targeting three core operational pillars of the cryptocurrency industry: OTC fund flows, technical development, and public blockchain node operations.
This article provides Biteye’s deep-dive analysis:
- Key legal provisions
- Expert legal interpretation
- Compliance actions practitioners must begin taking immediately
I. Compared to Past Ministerial Notices, This Law Shatters Three Foundational Assumptions
1. The OTC Dilemma: Redefining “Knowing”
In the past, OTC merchants (“U-merchants”) often defended themselves by claiming, “I’m just conducting business—I don’t know where the counterparty’s funds come from.” Legally, such conduct was typically classified as illegal business operation or the crime of “assisting information network-related criminal activities” (the “Helping Crime”), both carrying relatively high thresholds for conviction.
But Article 26, Paragraph 3 of the new draft law explicitly clarifies:
“No individual or organization may knowingly carry out fund transfer, payment settlement, or similar activities involving funds known to be proceeds of others’ criminal or illegal activities… including providing fund transfer services for others using virtual currencies or other online virtual assets.”
Although the term “knowingly” remains, judicial practice has dramatically expanded its scope of application. Abnormal transaction pricing, use of encrypted messaging apps to evade oversight, or failure to implement extremely rigorous KYC checks may all lead courts to infer “knowledge.”
This goes far beyond a simple “ban on trading.” It formally brings virtual currencies such as USDT into the regulatory line of sight for cybercrime-related fund transfers. For the OTC industry, this means compliance costs will rise exponentially—not merely raising questions about whether one *should* operate, but whether one *can* operate at all.
2. Extraterritorial Jurisdiction and “Collective Punishment” Mechanisms
The crypto community long held that “code is law” and “technology is neutral.” Yet Articles 19 and 31 of the new draft deliver a fatal blow to this belief:
“No individual or organization may knowingly provide… development and operations support, advertising and promotion, app packaging, or other assistance to persons who use networks to commit criminal or illegal activities.”
Even more concerning is Article 2’s provision on “extraterritorial jurisdiction”:
“Chinese citizens located overseas, as well as overseas organizations and individuals providing services to users within the People’s Republic of China, who violate the provisions of this law… shall bear legal liability accordingly.”
Biteye consulted Sharon (@sharonxmeng618), a financial compliance lawyer at AllBright Law Offices, regarding this provision: “Many clauses in the draft ‘Law on Prevention and Control of Cybercrime’ impose administrative management obligations. In practice, violators typically first face administrative penalties—including orders to rectify, confiscation of unlawful gains, and fines. Only in cases of serious circumstances—such as involvement in massive fraud proceeds, or not only signing code but also participating directly in operations—will the matter escalate to the criminal level.”
Moreover, extraterritorial enforcement also faces a “cost-benefit” constraint: While China’s Criminal Law establishes principles of personal and territorial jurisdiction, in cross-border practice, unless a case involves exceptionally large-scale crimes (e.g., at the scale of PlusToken) or national security concerns, the judicial cost of extraditing or prosecuting software developers physically located overseas is prohibitively high.
3. Public Blockchain Governance: A Unidirectional Challenge to Decentralization
This law will also impact mainland China’s public blockchain ecosystem. Article 40, Clause 9 requires blockchain service providers—including nodes and institutions—to possess capabilities for “monitoring, blocking, and handling” illegal information and illicit payment settlements.
Anyone familiar with the technology understands that a truly decentralized, permissionless public blockchain cannot achieve centralized, single-point “blocking.”
This effectively presents Web3 projects operating within China with an unsolvable dilemma: Either you transform into a “consortium chain” (a pseudo-chain) equipped with backdoors and censorship authority—or you become unlawful, because you cannot fulfill the statutory “blocking” obligation.
II. Echoes of History: From “Sept. 4” to “Feb. 1”
To grasp the magnitude of this impact, we must extend the timeline and compare three landmark moments in China’s crypto regulatory history:
- 2013/2017 (“Sept. 4” Notice): “Announcement,” Defensive Phase. Focus: “Risk prevention”; ICOs banned. At the time, regulators’ goal was simply “to prevent ordinary citizens from losing money.”
- 2021 (“Sept. 24” Notice): “Notice,” Wind-down Phase. Focus: “Illegal financial activities”; mining outlawed. Regulators aimed to ensure “crypto could not disrupt financial order.”
- 2026 (“Law on Prevention and Control of Cybercrime”): “Law,” Governance Phase. Focus: “Cybercrimes related to crypto.”
In the first two phases, regulators were led by the People’s Bank of China and the National Development and Reform Commission—authorities whose mandates center on their respective domains: “money” and “affairs.” This time, however, the Ministry of Public Security takes the lead. Their mandate covers “crimes” and “people.”
AllBright Law Offices’ financial compliance lawyer Sharon (@sharonxmeng618) interprets it thus: “In recent years, both crypto-driven crimes (e.g., money laundering and fraud facilitated by crypto assets) and crypto-native crimes (e.g., hacking attacks and rug pulls) have surged sharply. This series of legislative moves represents regulators’ inevitable response—elevating their approach from ‘administrative prohibition’ to ‘criminal regulation’ against these novel forms of crime.”
Final Thoughts: 2026 Is the Year of Rule Rebuilding for Crypto
The market crash on February 1 may merely reflect an acute, short-term reaction to liquidity tightening; candlestick charts will eventually recover, and red bars will turn green again. But when the scalpel of law cuts into code and capital, compliance is no longer optional—it is the prerequisite for survival.
Lawyer Sharon’s advice: “The ‘Helping Crime’ has shown an expanding scope of enforcement in recent judicial practice. Against this backdrop, Web3 practitioners and entrepreneurs should not treat ‘technological neutrality’ as a legal immunity. Instead, they must implement strict operational segmentation—for example, rigorously enforcing KYC, substantively blocking domestic user IPs, establishing anti-money laundering risk controls, and avoiding participation in high-risk token market-making or commission-based promotional campaigns.”
In this new era, for practitioners and investors based in mainland China, “compliance” is no longer a slogan—it is the red line separating life from death.
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