When Notices Become Law: What Does the Draft Network Crime Prevention Law Mean for the Crypto World?

marsbitPublicado a 2026-02-03Actualizado a 2026-02-03

Resumen

The draft "Cyber Crime Prevention Law" released by Chinese authorities on January 31, 2026, marks a significant shift from previous regulatory notices to formal legislation, fundamentally altering the legal landscape for cryptocurrency activities in China. Unlike earlier policies focused on financial risks, this law adopts a criminal governance approach, specifically targeting three core areas: OTC transactions, technical development, and public node operations. Key provisions include Article 26, which redefines "knowledge" in OTC trading, making it easier to prosecute those involved in transferring illicit funds using virtual currencies. Articles 19 and 31 extend liability to those providing technical support, such as developers or promoters, with Article 2 asserting extraterritorial jurisdiction over overseas entities serving Chinese users. Additionally, Article 40 requires blockchain nodes to monitor and block illegal activities, challenging the feasibility of permissionless networks. Legal experts note that while penalties may start with fines, severe cases could lead to criminal charges. The law reflects a broader trend from administrative bans to criminal regulation, emphasizing compliance through strict KYC, AML controls, and geo-blocking for Chinese users. For the crypto industry, this law establishes compliance as a critical survival threshold rather than an optional measure.

On January 31, 2026, amid severe market volatility due to liquidity pressures, the Ministry of Public Security, in conjunction with relevant departments, drafted the "Network Crime Prevention Law (Draft for Comments)" and officially solicited public opinions.

Searching for "Network Crime Prevention Law" on X (Twitter), you will find very little discussion. Given the diminishing marginal effects of multiple ministries' notices over the past few years, most reactions are: "Is this just the same old story?" or "It's already banned anyway, what more can they do?"

This is an extremely dangerous misjudgment. The elevation from a "ministry notice" to a "national law" signifies that the regulatory logic has evolved from preventing financial risks to precise criminal governance. Biteye believes this could very well be the most impactful legislation for the Web3 ecosystem in mainland China in recent years.

A careful study of these sixty-eight draft articles reveals that it no longer dwells on macro concepts like "financial risks" or "illegal fundraising." Instead, it acts like a scalpel, precisely targeting three core lifelines of the crypto world's operations: OTC capital flows, technical development, and public chain node operation.

This article by Biteye provides an in-depth analysis:

Key Legal Provisions
Legal Expert Interpretation
Compliance Actions Practitioners Need to Start Taking

I. Compared to Previous Ministry Notices, It Shatters Three Foundations

1️⃣OTC Dilemma: Redefining "Knowing"

In the past, OTC merchants (U merchants) often used "I was only trading, I didn't know the source of the funds" as a defense. Legally, it was often classified as illegal business operations or the crime of assisting information network criminal activities, with a relatively high threshold for conviction.

However, the new bill Article 26, Paragraph 3 makes a clear redefinition:

"No individual or organization may, knowing that funds are proceeds of others' illegal or criminal activities, conduct the following fund transfer, payment settlement, or other acts... using virtual currency or other network virtual property to provide fund transfer services for others."

Although the word "knowing" is retained here, in judicial practice, the scope of认定 (determining) "knowing" is being extremely broadened. If your transaction price is abnormal, you use encrypted chat software to evade supervision, or you fail to perform extremely strict KYC reviews, you may be presumed to "know."

This is no longer a simple "prohibition of trading," but formally brings virtual currencies like USDT into the regulatory scope of fund flows for network crimes. For the OTC industry, this means compliance costs will be infinitely heightened. It's no longer a question of whether it's easy to do, but whether it can be done at all.

2️⃣Long-Arm Jurisdiction and "Collective Punishment" Mechanisms

The crypto world has always believed that "code is law, technology is innocent." But the new bill's Article 19 and Article 31 deliver a fatal blow to this belief:

"[One] shall not, knowing that others are using the network to commit illegal or criminal acts, provide them with... development and operation maintenance, advertising promotion, application packaging... and other support and assistance."

More concerning is the provision on "long-arm jurisdiction" in Article 2:

"Citizens of the People's Republic of China outside the territory of China, as well as overseas organizations and individuals that provide services to users within the territory of the People's Republic of China, who commit acts in violation of this Law... shall be investigated for legal responsibility according to law."

Biteye consulted Sharon (@sharonxmeng618), a financial compliance lawyer at AllBright Law Offices (锦天城), regarding this provision: "Many clauses in the draft Network Crime Prevention Law stipulate administrative obligations. Generally, one would first face administrative penalties such as orders to correct, confiscation of illegal gains, and fines. Only in serious circumstances (e.g., involving huge amounts of fraud funds, not only providing signatures but also participating in operations) does it escalate to the criminal level.

Furthermore, there is a 'cost-effectiveness' issue with long-arm jurisdiction: Although Chinese criminal law has the principles of personal/territorial jurisdiction, in cross-border practice, unless it involves major cases (like the PlusToken level) or national security, the cost of跨国抓捕 (cross-border arrest) for programmers overseas is extremely high."

3️⃣Public Chain Governance: A One-Sided Challenge to Decentralization

This bill will also affect the public chain ecosystem in mainland China. Article 40, Item 9 requires nodes or institutions providing blockchain services to possess the ability to "monitor, block, and handle" illegal information and payment settlements.

Those who understand technology know that a truly decentralized public chain (Permissionless Blockchain) cannot achieve single-point "blocking."

This essentially presents an unsolvable dilemma for Web3 projects within China: either you become a "consortium chain" (pseudo-chain) with backdoors and censorship power, or you are illegal because you cannot fulfill the "blocking" obligation.

II. Echoes of History: From "9.4" to "2.1"

To understand the magnitude of this impact, we need to extend the timeline and compare three milestones in Chinese crypto regulation:

2013/2017 (9.4): "Announcement", Defensive Phase. The focus was on "preventing risks," prohibiting ICOs. Back then, the regulatory purpose was "don't let ordinary people lose money."
2021 (9.24): "Notice", Clearance Phase. The focus was on "illegal financial activities," clearing out mining. The regulatory purpose was "the crypto world must not disrupt financial order."
2026 (Network Crime Prevention Law): "Law", Governance Phase. The focus is on "network crimes related to the crypto world."

In the first two phases, the regulatory departments were the central bank and the National Development and Reform Commission. As the competent authorities, their focus was on their own business areas, namely "money" and "matters". But this time, the lead is the Ministry of Public Security. They manage "crime" and "people".

Sharon (@sharonxmeng618), the financial compliance lawyer from AllBright Law Offices, interpreted it this way: "In recent years, both crypto-driven crimes (e.g., using crypto assets for money laundering, fraud) and crypto-native crimes (e.g., hacker attacks, Rug pulls) have shown a high incidence. This series of legislative actions is an inevitable response from regulators to upgrade from 'administrative prohibition' to 'criminal regulation' for such new types of crimes."

Final Words: 2026 is a Year of Rule Rebuilding for the Crypto World

The plunge on February 1st might just be a stress response from the market to liquidity tightening. The charts will eventually recover, the red bars will eventually turn green. But when the legal scalpel cuts into code and capital, compliance is no longer an option; it is a prerequisite for survival.

Advice from Lawyer Sharon: "The crime of assisting information network criminal activities has shown a trend of an expanding scope of打击 (crackdown) in recent years' judicial practice. Against this background, it is not recommended that Web3 practitioners and entrepreneurs regard 'technological neutrality' as a legal immunity. Instead, they need to make clear separations in related businesses, for example, strictly implement KYC, substantially block domestic user IPs; establish anti-money laundering risk control; avoid participating in token market-making and rebate promotion for high-risk projects."

In this new era, for practitioners and investors within mainland China, "compliance" is no longer a slogan, but a red line between life and death.

Preguntas relacionadas

QWhat is the 'Network Crime Prevention Law (Draft for Comments)' and why is it significant for China's crypto ecosystem?

AThe 'Network Crime Prevention Law (Draft for Comments)' is a proposed law drafted by the Ministry of Public Security and other relevant departments, officially released for public comment on January 31, 2026. It is highly significant because it elevates crypto regulation from administrative notices to national law, shifting the focus from preventing financial risks to precise criminal governance. This represents a fundamental and far-reaching legislative change for the Web3 ecosystem in mainland China, directly targeting core operations like OTC capital flows, technical development, and public chain node operations.

QHow does the draft law change the regulatory landscape for OTC (Over-The-Counter) trading and the 'knowingly' standard?

AThe draft law, specifically in its Article 26, Clause 3, states that individuals and organizations must not 'knowingly' engage in capital transfer or payment settlement for funds obtained from illegal activities, including services using virtual currencies. While it retains the 'knowingly' requirement, the judicial interpretation of this term is being vastly expanded. Factors like abnormal trading prices, use of encrypted communication software to evade supervision, or failure to implement extremely strict KYC reviews can now be used to presume 'knowledge,' dramatically increasing compliance costs and existential risks for OTC businesses.

QWhat are the implications of the law's 'long-arm jurisdiction' and 'implicated mechanism' for overseas developers and service providers?

AArticle 2 of the draft establishes a 'long-arm jurisdiction' clause, allowing China to pursue legal liability against overseas Chinese citizens and foreign organizations/individuals providing services to users within China. Furthermore, Articles 19 and 31 create an 'implicated mechanism,' making it illegal to 'knowingly provide support and help' such as development, operation, maintenance, or advertising for others committing cyber crimes. While practical cross-border enforcement may be limited to major cases' due to high judicial costs, this legally obligates even overseas entities serving Chinese users and removes the 'technology is neutral' defense.

QHow does the draft law challenge the operation of permissionless public blockchains within China?

AArticle 40, Clause 9 of the draft requires entities or nodes providing blockchain services to possess the capability to 'monitor, block, and handle' illegal information and payment settlements. This presents an unsolvable dilemma for permissionless public blockchains operating in China, as their decentralized nature inherently prevents any single point of control or 'blocking' capability. The law effectively forces projects to choose between becoming permissioned (managed) chains with backdoors and censorship capabilities or being deemed illegal for failing to meet these obligations.

QAccording to the legal expert cited, what practical steps should Web3从业者 (practitioners) take for compliance?

AAccording to financial compliance lawyer Sharon from AllBright Law, Web3 practitioners should not rely on 'technology neutrality' as a legal exemption. Key recommended compliance steps include: strictly implementing KYC procedures, substantively blocking IP addresses from mainland China, establishing anti-money laundering (AML) risk control systems, and avoiding participation in high-risk activities such as token market-making and rebate promotions for dubious projects. The focus is on proactive risk mitigation and clear separation from any potentially illicit activities.

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