Shanghai's 6.5 billion stablecoin cross-border exchange case exposes regulatory dilemmas: Why is it difficult to curb the chaos of virtual currencies despite strict policies?

Author: Shao Shiwei

Why Have "Stablecoins" Suddenly Become So Popular?

Recently, the concept of "stablecoins" has indeed become quite popular. For those who have not paid attention to Web3 or virtual currencies, "stablecoin" may still be a somewhat unfamiliar term. However, as a lawyer who has been deeply involved in blockchain legal services for many years, I encounter related businesses and cases every day, and now it seems to have "broken the circle."

In just a few days, several news events have come together, creating a somewhat surreal feeling.

On July 10, 2025, the Shanghai Municipal State-owned Assets Supervision and Administration Commission held a central group study meeting to discuss the development trends and response strategies of cryptocurrencies and stablecoins.

On July 16, 2025, the People's Court of Pudong New District in Shanghai announced a major cross-border currency exchange case involving stablecoins. The case revealed that Yang and others used domestic shell company accounts to provide stablecoins to unspecified clients' overseas accounts, thereby achieving cross-border fund transfers for profit, with illegal foreign exchange transactions amounting to as much as 6.5 billion yuan over three years.

On July 18, 2025, U.S. President Trump officially signed the "Guidance and Establishment of the U.S. Stablecoin National Innovation Act" (referred to as the "Genius Act") at the White House, marking the first formal establishment of a regulatory framework for digital stablecoins in the United States.

At the same time, Hong Kong is set to officially implement the "Stablecoin Regulatory Ordinance" on August 1, 2025, becoming the world's first jurisdiction to establish a comprehensive regulatory system specifically for fiat stablecoins.

These events together show that major financial centers like China, the U.S., and Hong Kong are promoting the compliance and financialization of stablecoins, while some domestic law enforcement agencies still view stablecoins as a "typical illegal financial activity."

This misalignment in regulatory pace and institutional perspective seems to remind us: it is time to re-examine the real role and institutional position of "stablecoins."

Why Are Black and Gray Markets So Fond of Stablecoins?

The reason underground money houses prefer virtual currencies (especially stablecoins represented by USDT) as their first choice for cross-border currency exchange lies in their technical ability to break through multiple bottlenecks faced by traditional currency exchange, such as quota limits, capital pool pressure, transaction timing, identity concealment, and jurisdictional differences. This directly leads to regulatory policies repeatedly failing in the face of "virtual currency anonymity risks" and "virtual currency money laundering risks."

First is the issue of "quota limits." According to China's personal annual foreign exchange purchase quota system, each person can purchase a maximum of $50,000 per year. Traditional underground money houses often evade this restriction by splitting accounts and forging trade documents. However, with the emergence of stablecoins, on-chain transfers using USDT or BTC can completely bypass this quota limit, allowing for one-time cross-border transfers of millions of dollars.

Next is the "capital pool pressure" issue. Previously, underground money houses needed to prepare foreign exchange positions in both domestic and foreign locations, which was risky and costly. Stablecoins break the logic of bilateral reserves, allowing for the collection of RMB domestically and instant currency exchange or currency-fiat conversion at overseas exchanges, reducing the entry threshold from tens of millions to hundreds of thousands.

The third issue is "transaction timing." Traditional bank wire transfers usually take T+1 to T+3 working days and require a series of compliance materials. In contrast, on-chain transfers can be completed within an average of 10 minutes to 1 hour, operating around the clock without holiday restrictions, significantly improving the efficiency of fund circulation. This leads customers to be generally willing to pay 1% to 3%, or even higher, fees for "rapid transactions."

The fourth issue is "identity concealment." Traditional cross-border remittances often leave a relatively complete regulatory chain through bank statements and customs declarations, while in virtual currency transactions, the use of on-chain address mixers, desensitized wallets, and overseas exchanges greatly obscures the connection between fund flows and real identities, significantly increasing the difficulty of law enforcement investigations and extending the case resolution period.

Finally, there is a regulatory arbitrage point frequently exploited by gray markets: the differences in judicial jurisdictions. Traditional currency exchange must simultaneously deal with regulations in both domestic and foreign locations, but by using stablecoins as a cross-border medium, illegal funds often complete their final fiat landing in jurisdictions with lenient regulations. Even if domestic accounts are frozen, overseas funds can still exit safely, allowing for free movement across "different regulatory regions."

It can be said that the intervention of stablecoin technology not only reconstructs the operation mode of illegal currency exchange but also greatly amplifies the efficiency and concealment of black and gray markets. This low-threshold, decentralized, and highly cross-border capable tool is becoming a new type of technological infrastructure for "gray flows" of cross-border funds.

Why Does the State Continue to Crack Down on Virtual Currency-Related Crimes?

China's high-pressure crackdown on virtual currency-related crimes is based on the following two core regulatory logics:

First, virtual currencies have inherent anonymity and cross-border liquidity, making them difficult for traditional financial regulatory systems to effectively penetrate, and they can easily be used to conceal and transfer illegal gains.

The "Interpretation on Several Issues Concerning the Application of Law in Handling Money Laundering Criminal Cases" issued by the Supreme People's Court and the Supreme People's Procuratorate, which took effect on August 20, 2024, has officially listed "transactions through virtual assets" as one of the methods of money laundering. This means that judicial authorities have entered a clear and institutionalized stage in combating "virtual asset money laundering."

Second, as a country with strict foreign exchange controls, the borderless characteristics of virtual currencies can easily become a technical tool for evading regulation and achieving illegal currency exchange.

Such behaviors not only disrupt financial order but also have a substantial impact on macroeconomic regulation and national economic security, mainly including:

Statistical distortion: Due to the lack of local regulatory oversight over virtual currency transaction chains, the actual outflow of foreign exchange cannot be accurately accounted for in official statistics, leading to "data black holes" in international balance of payments and foreign exchange reserves;
Macro-control failure: The central bank cannot accurately grasp the real situation of market foreign exchange supply and demand, which may lead to misjudgments about the timing of exchange rate and interest rate adjustments, affecting policy effectiveness, and even requiring the use of substantial real reserves to "fill" the outflow gap;
Tax and asset loss: Illegal currency exchange through virtual currencies to evade taxes results in the loss of deposits, cross-border tax sources, and anti-money laundering data in the foreign exchange settlement process.

Since the "September 4 Announcement" in 2017 first clearly defined virtual currency-related businesses as illegal financial activities, regulatory efforts have continued to intensify. The "Card Disconnection" special action that began in 2020 not only targeted traditional bank card crimes but also prompted underground money houses and online gambling groups to gradually switch their funding channels to stablecoins and other digital asset tools. Even though the "924 Notice" in September 2021 reiterated that virtual currency-related businesses are illegal financial activities, in reality, due to the high liquidity, low threshold, and strong concealment characteristics of stablecoins, their use has become increasingly active in gray markets.

It is against this backdrop that a group of intermediaries engaging in "buy low, sell high" arbitrage has emerged, commonly referred to as "U merchants"—they do not directly participate in cryptocurrency projects or engage in upstream activities such as money laundering or gambling, but they are often accused of illegal operations, assisting in cybercrime activities, and concealing criminal proceeds due to their role in facilitating transactions and earning exchange rate differences. They are also a "high-risk marginal group" currently caught up in criminal proceedings in judicial practice.

Can Continuous Policy Crackdowns Really "Eliminate" Stablecoins?

From the "September 4 Announcement" in 2017, to the "924 Notice" in 2021, and to the ongoing nationwide crackdown on virtual currency trading and illegal currency exchange since 2023, the density and intensity of regulatory policies have significantly increased. However, as a lawyer who has handled numerous criminal cases in the fields of virtual currency, illegal operations, and illegal currency exchange, I can say that I am a "witness" in the process of handling each criminal case, and I constantly ponder during the handling of each case:

Can this continuous crackdown truly achieve effective crime deterrence and punish illegal activities?

This question arises because, in many cases I have encountered or handled, there are numerous situations where:

Those arrested are often "marginal figures":

Whether in the virtual currency trading platform cases I have handled, or in underground money houses, currency exchange companies, and money laundering networks, a very common phenomenon is that those arrested are often ordinary employees receiving wages, "runners" helping to move money, intermediaries introducing currency exchange for a small fee, and U merchants earning price differences through buy low, sell high. Of course, there are also corrupt officials entangled in such cases. However, these individuals are often neither decision-makers nor core figures in the chain, let alone actual beneficiaries.

The main offenders are at large, and law enforcement methods are difficult to pursue:

Many of the orchestrators and big bosses of cases have long fled abroad, or even changed their nationalities. Cross-border law enforcement has its costs, and my clients have repeatedly mentioned that the main offenders are in Hong Kong, but the law enforcement agencies did not actively pursue them because mainland police do not have enforcement authority in Hong Kong.

The state's losses are difficult to recover, and the high-intensity investment of judicial resources yields limited returns:

Take the cross-border online gambling case involving 400 billion yuan in illicit funds that was cracked by the Jingmen police in Hubei in 2022, which is known as the first "virtual currency case" confiscated by court judgment in the country.

From filing to judgment, it took nearly two years and involved a significant amount of human and material resources. Although the court ultimately ruled to confiscate "partially frozen virtual currencies," insiders revealed that the actual amount recovered was far below expectations.

The reason is that a large amount of the assets involved is stored in virtual currency form on overseas trading platforms or overseas company accounts. For example, the issuer of USDT, Tether, is registered in the United States, and Chinese law enforcement agencies face many practical difficulties in hoping for its cooperation in judicial seizures.

The Reality of Fragmented Law Enforcement: Addressing Symptoms but Not Root Causes

The above issues reveal a reality: for the true perpetrators, the cost of illegal activities often merely shifts the burden to "marginal figures" to serve as scapegoats; for those arrested, they are merely a link in the entire chain—neither the organizers nor capable of bearing the consequences of the entire chain. While the deterrent effect of criminal law exists, in practice, it has made "introducers," "movers," and "exchangers" the main targets of punishment, addressing symptoms but not root causes.

At the same time, it is worth pondering whether the substantial police and law enforcement resources invested by the state in each case can yield systematic governance effects. Let us review the typical cases reported by officials in recent years:

The Pudong Court in Shanghai announced a major illegal cross-border currency exchange case involving 6.5 billion yuan in stablecoins, where Yang used 17 shell companies to manipulate cross-border "wash trading" (2025).
Beijing police cracked a 2 billion yuan virtual currency serial case, using USDT for "cross-border wash trading," providing a currency exchange channel for gamblers and cross-border e-commerce (2024).
The Qingdao police in Shandong and the Qingdao branch of the State Administration of Foreign Exchange jointly cracked a major underground money house case, with an amount involved reaching 15.8 billion yuan (2023).
The Jingmen police in Hubei cracked the first national virtual currency case, involving a cross-border online gambling case with a transaction flow of 400 billion yuan (2023).
The Hangzhou Court in Zhejiang ruled against Zhao and others for illegally operating by receiving dirhams in Dubai, purchasing USDT, and selling it domestically for RMB, with a transaction flow of over 43.85 million yuan (2022).
The Baoshan Court in Shanghai ruled against Guo and Fan for building illegal currency exchange websites such as "tw711 platform" and "Fast Platform," with a transaction flow of 220 million yuan (2022).

From practice, it seems to present a sense of "the more you block, the more it leaks," and "the more you crack down, the bigger it gets." The state hopes to achieve a societal warning effect through individual case punishments, but the reality is that everyone is an island, trapped in their own information cocoon. Before the incidents, these individuals may not have paid attention to related news, or even if they did see it, they did not realize the severity of the problem or whether it was related to them.

The Dominance of Stablecoins is Something We Have Actively Abandoned

If combating gray markets is "defense," then leading legitimate alternative paths should be "offense." Unfortunately, in this field, we have actively relinquished our initiative.

Looking back, China was once a major player in the global stablecoin market. Today, those exchanges well-known in the global cryptocurrency space—Binance, OKX, Gate.io, Huobi, and Pionex—are almost all founded by Chinese individuals. Once, the operational teams of exchanges were based domestically, and cryptocurrency information platforms flourished, with the vast majority of users completing virtual currency transactions in RMB or RMB stablecoins.

But now, all of this has become a thing of the past. If it weren't for the continuous policy barriers that forced project parties, platform operators, and investment teams to shut down or choose to go overseas, China would have had a great opportunity to dominate the entire stablecoin ecosystem. Now, what remains domestically is often just the grassroots workers.

Beyond policy blockades, China has also attempted to find alternative paths. Since 2016, the central bank has initiated the research and development of the digital yuan, clearly stating the goal of publicly issuing digital currency, with Yao Qian serving as the first director of the Digital Currency Research Institute. The design goal, to some extent, is to benchmark against the US dollar stablecoin and attempt to achieve the following intentions through the digital yuan:

Reduce dependence on US dollar channels, using digital yuan for settlement in cross-border trade, investment, and aid scenarios, bypassing the SWIFT and US dollar clearing systems, and lowering the risk of international sanctions;
Curb capital flight and illegal currency exchange, technically replacing the role of USDT and USDC in the underground financial system;
Provide enterprises and individuals with an "officially produced," compliant, and fee-free digital cash tool to weaken the gray appeal of stablecoins.

However, due to the lack of widespread application scenarios and ecological support for the digital yuan, even though the technical aspects are basically ready, market acceptance remains sluggish. A forced approach does not yield sweet results, and this path has not formed a truly effective payment alternative. Users are not willing to pay, and relying solely on administrative orders for promotion is not feasible.

Additionally, in a somewhat darkly humorous twist, on November 20, 2024, it was officially reported that Yao Qian had committed serious disciplinary violations, including abusing his power to provide "close" support for specific technology companies and allegedly using virtual currencies for power-for-money transactions, becoming a key target for those who should have been regulated.

The failure to achieve policy goals in promoting the digital yuan not only proves the limitations of political paths but also highlights another side of the "ban" on stablecoins: policy resistance has not eliminated the problem itself but has instead made gray paths more concealed and underground transactions more complex and hidden. For existing regulation, it has brought more confusion.

What Are the Advantages of Stablecoins? What Are Their Use Cases?

On July 18, 2025, U.S. President Trump signed the "Genius Act," formally establishing a regulatory framework for digital stablecoins. In response, Sun Lijian, director of the Financial Research Center at Fudan Development Institute, publicly commented: "US dollar stablecoins are essentially a tokenized projection of the US dollar in the blockchain world, a digital extension of US dollar hegemony. They amplify the global penetration of the US dollar through technical means but also bring new systemic risks. For countries, stablecoins have become a new battleground for monetary sovereignty."

Looking back, what we once viewed as dross seems to be regarded as treasure by our adversaries, and now it has also become a weapon for them to counter us?

From a technical perspective, stablecoins are programmable digital assets anchored to the value of fiat currencies and operating on blockchain networks. Their core mechanism is to map the nominal value of fiat currencies (such as the US dollar, RMB, etc.) to homogeneous tokens on-chain through the custody of off-chain reserve assets. They can be transferred without relying on bank accounts, automatically executed through smart contracts, and possess characteristics such as efficiency, decentralization, and low cost.

For this reason, stablecoins are widely used in the following typical scenarios:
Cross-border trade settlement: Enterprises can achieve second-level cross-border payments using USDT or USDC, significantly reducing foreign exchange fees and clearing cycles;
Free trade zone and bonded warehouse payment systems: In free trade zones, RMB stablecoins can be used for one-click revenue sharing, covering various scenarios such as warehousing, customs, and logistics;
Supply chain finance: Platform enterprises can use stablecoins to discount accounts receivable and automatically complete multi-level split payments upstream and downstream;
Carbon trading and digital asset markets: "On-chain credit assets" pegged to stablecoins can achieve 24/7 automatic matching, enhancing the liquidity of carbon credits, digital rights, and similar assets;
B-end and C-end payment tools: As seamless intermediaries in payment scenarios such as cross-border salary payments, study abroad fees, offshore wealth management, and margin management, stablecoins can effectively bridge the "last mile" between traditional financial systems and on-chain economies.

We must recognize that while stablecoins can indeed be used for money laundering and private currency exchange, they also have legitimate positive uses, which is why regions like the U.S., Hong Kong, and Singapore are actively exploring the design of "compliance sandboxes" for them.

Therefore, when evaluating stablecoin regulatory policies, we cannot focus solely on their risk labels such as "anonymity" and "borderlessness." We need to deeply understand their value in cross-border payments, financial services, and industrial collaboration. Rather than completely excluding them from the system, we should face their functional logic and consider how to utilize them in a controlled manner.

Stablecoins Are Not Criminal Tools; Institutional Absence Is the Root Problem

Stablecoins are not inherently criminal tools; they are carriers of a new financial structure. Whether they will be misused depends on whether the system can keep pace. Simply suppressing them cannot hinder the rapid development of technology, and what we lose is not just the inability of regulation to meet expectations but also the global competitiveness we could have grasped. (In fact, it seems we have never actively sought or built it.)

From my experience as a criminal lawyer, the vacuum of the system leads to substantial law enforcement dilemmas.

First, the institutional vacuum results in a lag in understanding among law enforcement agencies.

Domestic policies that blindly suppress and deny the value and significance of virtual currencies, lacking relevant legal basis and case handling guidelines, are not conducive to the smooth handling of cases and the correct implementation of the law from a law enforcement perspective.

We represent Web3-related criminal cases in many regions across the country and frequently interact with judicial authorities at different levels. I can responsibly say that the vast majority of grassroots law enforcement personnel still lack a basic understanding of the technical principles and operational mechanisms of blockchain. This requires us lawyers to first educate law enforcement personnel on basic concepts before we can proceed to argue legal disputes.

For example, in a recent Web3 case we represented, local judicial authorities hoped our client would voluntarily submit over 100 million yuan in virtual currency as "illegal gains," but the presiding judge in the case, in communication with us before the hearing, actively asked: "What do this string of letters and numbers (address, transaction hash) mean?"—the case handler, who decides the fate of the client, knows nothing about this field, which is a common situation in our handling of numerous criminal cases involving virtual currencies, Web3 project parties, and exchanges.

Second, the fragmented crackdown strategy makes law enforcement actions resemble "whack-a-mole."

Currently, China's regulatory path for stablecoins and virtual currencies has not formed a systematic compliance guideline. From the prosecution's perspective, cases involving virtual currencies and Web3 often lack clear boundaries in their classification, leading to legal application inconsistencies and causing law enforcement personnel to be overwhelmed, perpetually trapped in a "whack-a-mole dilemma."

Judicial authorities have long relied on "plugging loopholes and catching the act" to maintain the bottom line, which is destined to be a high-cost, low-output approach. As long as there is genuine market demand and space for cross-border payments and on-chain transactions, there will always be "alternative solutions" developed. At this point, going after "marginal figures" and sealing "downstream channels" merely continues the traditional logic of combating crime, which is bound to address symptoms rather than root causes, making it difficult to form a truly sustainable governance system.

Truly effective institutional construction is neither "purely reliant on suppression" nor "building behind closed doors," but rather constructing a system that achieves a dynamic balance between safety and efficiency. This is the direction that future financial governance should take.

Conclusion

The real way out is not to block "stablecoins" and similar technological tools but to build a compliant ecological system that can guide, replace, and regulate them, allowing virtual currency regulatory policies to function accurately and effectively. Let those who should be punished have nowhere to hide, and let those who should be utilized serve our purposes.

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