China has closed a month‑long public consultation on its draft Financial Law of the People’s Republic of China, moving a step closer to adopting its first comprehensive statute devoted entirely to finance. The consultation ended on 19 April, setting the stage for a legal overhaul that would grant regulators “quasi‑judicial” powers and tighten control over activities ranging from traditional finance to digital assets.
Regulators to gain quasi‑judicial powers
Under Article 55 and related provisions, financial regulators would receive broad authority to investigate suspected violations. Agencies would be allowed to:
- review and copy property records, transaction histories and communication logs of organizations and individuals
- freeze or seal funds and securities considered unlawfully transferred or concealed
- impose travel bans on people under investigation, restricting overseas movement
These powers are designed to enable faster intervention in cases seen as threatening financial stability or breaching market‑access rules.
Regulatory backstop closes oversight gaps
A core element of the draft is the introduction of a “regulatory backstop” principle. Supervision would be based on the actual economic function of an activity rather than its legal form or product label.
Where no agency has clearly defined responsibility, the National Financial Regulatory Administration (NFRA) would be empowered to step in. This mechanism aims to close oversight gaps that have historically allowed certain financial products and platforms to operate in legally ambiguous territory.
The same logic would extend to any dealings classified as “unauthorized financial activities,” a group that in practice has long included business linked to decentralized digital assets.
Extraterritorial reach beyond China’s borders
The draft law also provides for extraterritorial application. Activities conducted outside mainland China could fall within its scope if authorities judge that they:
- disrupt the domestic financial order, or
- damage the legitimate rights and interests of Chinese citizens
This reach raises the prospect that overseas platforms, service providers and counterparties could face liability if their activities are tied back to the mainland or to Chinese clients.
Digital assets left in a legal grey zone
Zeng, chief expert at the Shanghai Finance and Development Laboratory, noted that the draft devotes limited attention to emerging fields such as:
- AI‑driven financial decision‑making
- the legal status of digital currencies
- the supervisory scope of cryptographic assets
He argued that balancing strict risk control with room for innovation remains unresolved in the current framework.
The text does not clarify the legal standing of digital currencies or decentralized assets. According to Zeng, this silence should not be interpreted as tolerance. Instead, it leaves these instruments in a precarious grey area, where they remain outside formal recognition yet squarely within the reach of broad enforcement tools.
Heightened uncertainty for participants in digital finance
The Asia‑Pacific region accounted for 13.22% of the global crypto asset and digital transformation market in 2024. Around 24.3% of adults in the region use digital assets, compared with a global average of 16.9%, underscoring its role as a hub for digital finance.
Entities and individuals in this ecosystem with any operational link to mainland China may face rising legal and operational risk if the draft passes largely unchanged. The law would allow regulators to:
- freeze accounts on the basis of suspected violations
- block international travel for individuals under scrutiny
- compel equity transfers as part of risk‑disposal measures
- order the repatriation of overseas assets connected to enforcement actions
For those handling assets not formally recognized by Chinese authorities, these provisions create a period of elevated uncertainty as the draft moves toward enactment.
Compliance pressure set to increase
The legislative focus is explicitly on “preventing and defusing financial risks,” a long‑standing policy priority in Beijing. In practice, this may mean that any financial activity perceived as bypassing China’s market‑access rules or operating parallel to the regulated system could be targeted quickly.
Market participants with China exposure are likely to reassess:
- cross‑border structures and booking models
- use of offshore entities and platforms to serve mainland clients
- reliance on digital assets and instruments outside the licensed perimeter
The combination of wide investigative powers, a regulatory backstop, and extraterritorial reach suggests that engagement in unregulated or loosely regulated activities connected to China could become significantly more hazardous once the law takes effect.
As regulations tighten worldwide, explore how traditional vs DeFi structures could reshape your strategy under China’s evolving financial framework.
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