China's central bank, the People's Bank of China (PBoC), has urged the international community to jointly regulate the cryptocurrency and decentralized finance (DeFi) markets in its latest financial stability report, published on Dec. 22.

The report, which was co-authored by nine other authorities, including the Supreme People's Court, the Supreme People's Procuratorate, the Ministry of Public Security, and the State Administration of Foreign Exchange, devoted a separate section to crypto assets, highlighting the potential risks and challenges posed by the emerging industry.

The PBoC reiterated that cryptocurrencies, such as Bitcoin, are not issued by a country's monetary authority and therefore are not legal tender. They cannot and should not be circulated and used in the market as currencies, the report said.

The report also declared that all cryptocurrency transactions are illegal, including conversion, buying and selling, providing matching services, initial coin offerings (ICOs), derivatives trading, and transfers. Banks and other financial institutions are prohibited from providing any service to cryptocurrency transactions, the report added.

The PBoC warned of the legal risks of investing in cryptocurrencies, stating that if companies, organizations, and individuals violate public order and good customs, the relevant civil legal actions are invalid and the losses caused thereby will be borne by them.

The report also addressed the issue of overseas cryptocurrency exchanges providing services to Chinese residents through the internet, calling it illegal as well. The report said that their employees in China, as well as other companies, organizations, and individuals providing services to these overseas exchanges, will be held liable in accordance with law, as long as they know or should know the exchanges are carrying out cryptocurrency transactions.

The PBoC called on governments worldwide to apply the approach of "same business, same risks, same supervision" to avoid regulatory arbitrage. The report referred to a number of potential risks stemming from cryptocurrency regulatory arbitrage, such as vulnerabilities to hacker attacks, market manipulation, and concerns related to DeFi governance mechanisms.

The report specifically mentioned the Terra ecosystem collapse and the fall of FTX exchange in 2022, urging the need to manage regulatory fragmentation and eliminate supervision arbitrage.

The PBoC's move to urge the global community to regulate the cryptocurrency industry jointly comes a few years after the government of mainland China issued a major ban on crypto in 2021. Despite the ban covering virtually all crypto transactions and mining, mainland China has remained a major crypto-mining hub.

Some industry experts have speculated that Hong Kong's rapid crypto adoption could signify some "big moves" going forward in crypto regulation in mainland China. However, others have argued that China's crypto stance has nothing to do with crypto-friendly moves in Hong Kong.

The PBoC's report is the latest sign of the growing attention and scrutiny that the cryptocurrency and DeFi markets are receiving from regulators and policymakers around the world. As the industry continues to evolve and innovate, the need for clear and consistent rules and standards becomes more urgent and challenging.