On January 31, 2026, as the market experienced drastic fluctuations due to liquidity pressures, the \”Network Crime Prevention Act (Draft for Solicitation of Comments)\” drafted by the Ministry of Public Security in conjunction with relevant departments was officially released to the public for comments. Searching for \”Network Crime Prevention Act\” on X (Twitter), you will find very few discussions. Given the diminishing marginal effects of the documents issued by various ministries and commissions in the past few years, most people’s reactions are: \”Isn’t this just the same old story?\” or \”Anyway, it’s already banned, what else can they do?\” This is an extremely dangerous misjudgment.
Rising from a \”ministry and commission notice\” to a \”national law\” means that the regulatory logic has evolved from preventing financial risks to precise criminal governance. Biteye believes that this is very likely to be the most far-reaching legislation affecting the Web3 ecosystem in mainland China in recent years.
Carefully studying these sixty-eight draft articles, you will find that it no longer dwells on macro concepts such as \”financial risk\” or \”illegal fundraising\”, but like a scalpel, precisely cuts into the three core weaknesses of the crypto circle’s operation: OTC fund flows, technology development, and public chain node operation. In this article, Biteye provides you with an in-depth analysis: legal experts interpret key legal provisions and what compliance actions practitioners need to start taking.
I. Compared with previous documents issued by ministries and commissions, it crushes three floors.
- OTC Dilemma: Redefining \”Knowing\”
In the past, OTC merchants (U merchants) often used \”I’m just doing business, I don’t know the source of the other party’s funds\” as a defense. In legal terms, it is mostly defined as illegal business operations or aiding and abetting crimes, and the threshold for conviction is relatively high.
However, Article 26, Paragraph 3 of the new bill clearly states: \”No individual or organization may, knowing that the funds are proceeds from other people’s illegal and criminal activities, carry out the following fund transfer, payment and settlement, and other acts… using virtual currencies or other online virtual properties to provide fund transfer services for others.\”
Although the word \”knowing\” is retained here, in judicial practice, the scope of recognition of \”knowing\” is being extremely expanded. If you have abnormal transaction prices, use encrypted chat software to circumvent supervision, or fail to conduct extremely strict KYC audits, you may be presumed to \”know.\”
This is no longer a simple \”prohibition of transactions\”, but formally incorporates virtual currencies such as USDT into the regulatory scope of online crime fund transfers. For the OTC industry, this means that compliance costs will be infinitely increased. It is no longer a question of whether it is easy to do, but whether it can be done.
- Long-arm jurisdiction and \”joint liability\” mechanism
The crypto circle has always believed in \”code is law, technology is innocent.\” However, Articles 19 and 31 of the new bill deal a fatal blow to this creed: \”No one may knowingly provide support and assistance to others who use the network to commit illegal and criminal activities, such as… development and operation, advertising and promotion, application packaging…\”
What is even more troubling is Article 2 regarding \”long-arm jurisdiction\”: \”Citizens of the People’s Republic of China who are abroad and foreign organizations and individuals who provide services to users within the territory of the People’s Republic of China who commit acts in violation of the provisions of this Law… shall be held legally responsible in accordance with the law.\”
Biteye consulted Sharon (@sharonxmeng618), a financial compliance lawyer at Allbright Law Offices, regarding this provision: Many provisions of the \”Network Crime Prevention Act\” draft are regulations on administrative management obligations. Generally, the first thing faced is an order to correct, confiscation of illegal income, fines, and other administrative penalties. Only when the circumstances are serious (such as involving huge amounts of fraud funds, not only providing signatures but also participating in operations) will it rise to the criminal level. Moreover, long-arm jurisdiction also has a \”cost-effectiveness\” issue: Although Chinese criminal law has the principle of personal/territorial jurisdiction, in cross-border practice, unless it involves particularly large cases (such as the PlusToken level) or involves national security, the judicial cost of transnational arrest for programmers located overseas is extremely high.
- Public Chain Governance: One-Way Challenge to Decentralization
This bill will also affect the public chain ecosystem in mainland China. Article 40, Paragraph 9 requires nodes or institutions providing blockchain services to have the ability to \”monitor, block, and dispose of\” illegal information and payment settlements.
People who understand technology know that a truly decentralized public chain (Permissionless Blockchain) cannot achieve single-point \”blocking.\” This actually poses an unsolvable problem for Web3 projects in China: either you become a \”consortium chain\” (pseudo-chain) with backdoors and censorship rights; or you are illegal because you cannot fulfill the \”blocking\” obligation.
II. Echoes of History: From \”9.4\” to \”2.1\”
In order to see the magnitude of this impact, we need to lengthen the timeline and compare the three milestones of China’s crypto regulation:
2013/2017 (9.4): \”Announcement\”, defensive stage. The focus is on \”preventing risks\” and prohibiting ICOs. At that time, the purpose of regulation was \”to prevent ordinary people from losing money.\”
2021 (9.24): \”Notice\”, liquidation stage. The focus is on \”illegal financial activities\”, clearing mining. The purpose of regulation is \”the crypto circle cannot disrupt financial order.\”
2026 (Network Crime Prevention Act): \”Law\”, governance stage. The focus is on \”crypto circle-related cybercrimes.\” In the first two stages, the regulatory departments were the People’s Bank of China and the National Development and Reform Commission, and the focus of the competent departments was on their own business areas, namely \”money\” and \”things.\” But this time, the Ministry of Public Security is taking the lead. They are in charge of \”crimes\” and \”people.\”
Sharon (@sharonxmeng618), a financial compliance lawyer at Allbright Law Offices, interprets it this way: \”In recent years, both crypto-driven crimes (such as using crypto assets for money laundering and fraud) and crypto-native crimes (such as hacking attacks, Rug pull, etc.) have shown a high incidence. This series of legislative actions is an inevitable response from the regulatory authorities to upgrade from \”administrative prohibition\” to \”criminal regulation\” for such new types of crimes.
Written at the end: 2026 is the year of rebuilding the rules of the crypto circle
The plunge on February 1 may just be an emergency response of the market to the liquidity crunch. The K-line chart will eventually be repaired, and the red columns will eventually turn green. But when the scalpel of the law cuts into code and funds, compliance is no longer an option, but a prerequisite for survival.
Advice from Sharon lawyer: \”The scope of attack of \”aiding and abetting crime\” has been expanding in judicial practice in recent years. Against this background, it is not recommended that Web3 practitioners and entrepreneurs regard \”technological neutrality\” as a legal exemption, but need to do a good job of separation in related businesses, such as strictly implementing KYC and substantially blocking domestic user IPs; establishing anti-money laundering risk control; and avoiding participating in token market making and commission promotion of high-risk projects.\”
In this new era, for practitioners and investors in mainland China, \”compliance\” is no longer a slogan, but a red line between life and death.
China’s Network Crime Prevention Act: A Paradigm Shift for Crypto Regulation
The recently released “Network Crime Prevention Act (Draft for Solicitation of Comments)” by China’s Ministry of Public Security marks a watershed moment in the country’s approach to cryptocurrency regulation. This legislation represents a fundamental escalation from previous administrative measures to comprehensive criminal governance, targeting the core infrastructure of the crypto ecosystem with surgical precision. For experienced crypto investors, this development demands immediate reassessment of exposure to China-related assets and fundamental reconsideration of long-term market structures.
Regulatory Evolution: From Risk Prevention to Criminal Governance
China’s crypto regulatory journey has progressed through distinct phases:
- 2013/2017 (“9.4”): Defensive prohibition focused on ICOs and “preventing ordinary people from losing money”
- 2021 (“9.24”): Liquidation approach targeting “illegal financial activities” and clearing mining operations
- 2026: Criminal governance led by the Ministry of Public Security, reframing crypto activities through the lens of “crimes” and “people”
This latest iteration, elevated from ministerial notices to national law, fundamentally alters the risk calculus. The regulatory lens has shifted from financial stability to criminal liability, creating an environment where compliance is no longer optional but a prerequisite for survival.
Three Pillars of Impact: OTC, Technology, and Decentralization
1. OTC Trading: Redefining “Knowing” with Legal Precision
Article 26, Paragraph 3’s expansion of liability for virtual currency fund transfers represents a existential threat to OTC markets. The draft law’s redefinition of “knowing” creates near-impossible compliance standards:
- Abnormal transaction patterns now constitute presumed knowledge
- Use of encrypted communication tools for transactions becomes incriminating
- Insufficient KYC procedures automatically trigger liability
This effectively criminalizes OTC trading regardless of intent, creating a regulatory environment where “plausible deniability” is no longer a viable defense. For investors, this means China’s substantial OTC market will likely face collapse or complete migration underground, with significant implications for Bitcoin price discovery and liquidity.
2. Technology Development: The End of “Code is Law”
Articles 19 and 31 deliver a fatal blow to the principle of technological neutrality:
- Explicit criminalization of knowingly providing “development and operation, advertising and promotion, application packaging” for crypto services
- Extension of Chinese criminal law to citizens abroad and foreign entities serving Chinese users (“long-arm jurisdiction”)
While enforcement against foreign developers faces practical challenges, the mere existence of this framework creates chilling effects. Development teams will need to implement geographic access controls and enhanced due diligence, fragmenting the global development ecosystem.
3. Public Chain Governance: The Decentralization Dilemma
Article 40, Paragraph 9’s requirement for blockchain nodes to “monitor, block, and dispose of” illegal information creates an unsolvable conflict with true decentralized architectures:
- Permissionless blockchains cannot implement single-point blocking without compromising decentralization
- Projects face an existential choice: become state-controlled consortium chains or operate illegally
This provision effectively forces public chain projects to either compromise their core principles or abandon the Chinese market entirely—a decision with profound implications for network effects and long-term viability.
Market Implications: Short-Term Volatility, Long-Term Restructuring
Token Price Impact
- Chinese-exposed tokens: Facing significant downside risk as market reassesses enforcement likelihood
- Major cryptocurrencies (BTC, ETH): Moderate short-term pressure due to reduced liquidity from Chinese markets
- Privacy coins: Potential outperformance as demand for regulatory circumvention increases
- Compliance-focused infrastructure: Potential upside for projects offering KYC/AML solutions
The February 1 market dip referenced in the article likely represents just the beginning of price discovery as the market digests the implications of this legislation.
Risk Assessment
The draft law introduces several novel risk factors:
- Legal precarity: Expanded interpretation of “aiding and abetting” creates liability for services previously considered neutral
- Operational impossibility: Compliance requirements directly conflict with core crypto principles
- Enforcement uncertainty: The gap between draft legislation and practical implementation remains unclear but appears increasingly severe
Strategic Opportunities
Amid these challenges, several opportunities emerge:
- Compliance innovation: Development of blockchain architectures that can implement selective compliance without compromising decentralization
- Geographic arbitrage: Migration of talent and capital to jurisdictions with clearer regulatory frameworks
- Infrastructure specialization: Growth in specialized compliance solutions for virtual asset service providers
Investment Recommendations
For sophisticated crypto investors, this legislation necessitates portfolio reassessment:
- Underweight China-exposure: Reduce exposure to projects with significant Chinese user bases or development teams
- Reevaluate risk models: Incorporate regulatory risk as a primary factor, not secondary to technical or market risk
- Monitor implementation: Track the legislative process and enforcement patterns for clues about actual impact
- Focus on compliance by design: Prioritize projects that have baked regulatory compliance into their architectures
As Sharon from Allbright Law Offices correctly notes, “technological neutrality” is no longer a legal shield. In this new regulatory environment, the most resilient projects will be those that can demonstrate proactive compliance without compromising core value propositions.
The Network Crime Prevention Act represents more than just another regulatory hurdle—it signifies a fundamental realignment of power between state and technology in the digital asset space. For investors who recognize this paradigm shift, the current market dislocation may present strategic opportunities to position portfolios for the next phase of crypto development—one where regulation and innovation must coexist, rather than conflict.