Trading companies use virtual currencies such as U for settlement, which does save a lot of costs and time to a certain extent, but at the same time brings corresponding civil, administrative supervision, and criminal risks.
Author: Liu Honglin
Recently, a client approached Mankun Consulting with the following situation: The client is a foreign trade company in Guangzhou. After completing a transaction with an overseas company, they settled the payment in USDT and received USDT. The company then found a domestic service provider to exchange the USDT for RMB. However, after the service provider received the U, they disappeared, leaving the client wondering "where is the integrity."
This article combines the above case to discuss the legal risks faced by foreign trade companies in the process of exchanging USDT for fiat currency.
Settlement Process for Foreign Trade Payments
Traditional Method for Foreign Trade Payments
Most domestic businesses in the foreign trade industry, after completing transactions with overseas counterparts and receiving normal foreign trade payments, will remit the funds to China or Hong Kong through local or foreign banks, and then convert them into RMB.
Due to the strict management of the foreign exchange market in China and various factors, foreign trade businesses usually engage third parties for currency exchange, where the foreign currency, such as USD, is transferred to a third-party account, and the third party then transfers an equivalent amount of RMB to the domestic bank account of the foreign trade business. In the foreign trade industry, this transaction is known as "offsetting exchange" (the risks of this behavior will not be discussed in this article).
Based on this, various foreign trade companies continuously balance between legality, compliance, and cost control, leading to many other ways to avoid China's foreign exchange management in the settlement process.
Settlement of Foreign Trade Payments Using Virtual Currencies
Today, with the increasing recognition and use of virtual currencies in international trade, many foreign traders convert their local currency into stablecoins like USDT (referred to as "U" below), then exchange the USDT for USD into their Hong Kong dollar account, and finally settle into RMB through a licensed money service operator (MSO) in Hong Kong (since 2012, Hong Kong Customs has implemented regulations requiring all individuals and entities engaged in currency exchange and remittance operations to obtain an MSO license from Hong Kong Customs).
However, due to the decentralized, convenient, anonymous, and fast transaction nature of virtual currencies, especially in the above settlement methods, they require very complex procedures. Therefore, as mentioned in the introduction, some foreign trade companies will directly engage domestic service providers to provide services for converting highly recognized virtual currencies like U into RMB.
We can find through public channels that there are still many service providers offering such services, and even promoting them.
Illegal remarks on the internet are everywhere
Legal Risks
Civil Legal Risks
As mentioned in the introduction, foreign trade companies face significant performance risks from service providers. Once the foreign trade company transfers U to the service provider's wallet, they lose control of the U. Therefore, if the service provider refuses to transfer the funds or absconds, the foreign trade company will face the situation of not receiving the money and not knowing the whereabouts of the currency. In this case, whether it is to recover RMB or U, the likelihood is relatively low.
According to China's current regulatory policies and judicial attitudes towards virtual currencies, if a foreign trade company files a civil lawsuit to demand the return of U from the service provider, the court is likely to dismiss the lawsuit (as discussed in our previous article "Court: I Don't Care About Returning Bitcoin for Loan"), on the grounds that although virtual currency can be considered a specific virtual commodity, China currently does not have relevant laws and regulations clearly defining it as a civil law object, and it does not have the attributes of a specific object, and does not have the ability to be quantified using legal tender, which does not comply with Article 119(4) of the Civil Procedure Law of the People's Republic of China, which stipulates the scope of the people's court's acceptance of civil lawsuits.
Furthermore, what if the lawsuit demands that the service provider continue to pay RMB?
According to the "Notice on Further Preventing and Dealing with the Risks of Speculation in Virtual Currency Trading" issued by the People's Bank of China and other departments in 2019, any legal person, unincorporated organization, and natural person who invests in virtual currency and related derivatives against public order and good customs, the relevant civil legal acts are invalid, and the losses caused thereby shall be borne by them; if it is suspected of disrupting financial order and endangering financial security, it shall be investigated and dealt with by the relevant departments in accordance with the law.
We can see from China's regulatory attitude that although the country has not explicitly prohibited individuals from buying, selling, and trading Bitcoin and other virtual currencies, the current regulatory trend shows that related behaviors do not receive effective legal protection. Therefore, when filing a lawsuit to demand that the service provider continue to pay RMB, the court often deems the transaction invalid, and the foreign trade company must bear the aforementioned losses.
Administrative Supervision Risks
(1) The foreign trade company's funds may be frozen due to suspected illicit funds.
If the service provider successfully transfers the corresponding payment to the foreign trade company's bank account according to the agreement, based on the provisions of Article 2 of the "Regulations on the Application of Sealing and Freezing Measures by Public Security Organs in Handling Criminal Cases," public security organs shall, for the needs of investigating crimes, seal and freeze the property involved in the case in accordance with the law, and relevant departments, units, and individuals shall assist and cooperate. This method of settlement through the service provider can easily lead to the freezing of the foreign trade company's bank account by public security, as the funds received by the foreign trade company may be considered illicit. Therefore, the foreign trade company must regulate its own settlement behavior, otherwise it may inadvertently become a "tool" for criminals to launder money.
(2) The foreign trade company's virtual currency settlement violates foreign exchange management.
Due to the characteristics of "decentralization" and "support for peer-to-peer transactions" of virtual currencies, they to some extent serve as equivalents for cross-border payments. The flow of virtual currencies does not rely on traditional financial accounts to provide services, making it difficult to control them with existing foreign exchange management measures.
According to Article 45 of the "Regulations on Foreign Exchange Administration," if an individual engages in unauthorized buying and selling of foreign exchange, disguised buying and selling of foreign exchange, or illegal introduction of large amounts of foreign exchange trading, the foreign exchange management authority shall issue a warning, confiscate illegal gains, and impose a fine of less than 30% of the illegal amount; for serious cases, a fine of 30% or more but less than the equivalent amount of the illegal amount shall be imposed; if it constitutes a crime, criminal responsibility shall be pursued in accordance with the law.
In combination with the above provisions, if the foreign trade company's settlement behavior is investigated and verified by relevant departments, it may face not only the confiscation of the funds but also the risk of bearing a substantial fine.
Criminal Legal Risks
(1) Suspected of money laundering, etc.
Continuing the discussion from "1) The foreign trade company's funds may be frozen due to suspected illicit funds," if the RMB funds received by the foreign trade company originate from the proceeds and gains of seven crimes such as drug crimes and organized crimes of a mafia nature, according to the provisions of Article 191 and Article 312 of the "Criminal Law of the People's Republic of China," not only will the funds in the account be frozen, but there is also a high possibility of being investigated and dealt with by public security organs for suspected crimes such as "money laundering," "concealment and concealment of proceeds of crime and gains of crime," "harboring, transferring, and concealing drugs and drug proceeds," and other charges.
(2) Suspected of illegal business operations
The "Regulations on Foreign Exchange Administration" require all individual and corporate foreign exchange transactions to be handled through financial institutions. Although the foreign trade company uses virtual currency as a medium, according to the principle of "using legal forms to conceal illegal purposes," this method of settlement using virtual currency still carries a high risk of being judged by judicial authorities as illegal buying and selling of foreign exchange.
Furthermore, the "Interpretation on Several Issues Concerning the Application of Law in Handling Criminal Cases of Illegal Business Operations in Fund Payment and Settlement and Illegal Buying and Selling of Foreign Exchange" issued by the Supreme People's Court and the Supreme People's Procuratorate stipulates that acts of disguised buying and selling of foreign exchange that disrupt the order of the financial market and are serious in nature constitute the crime of illegal business operations. According to this "Interpretation," acts of illegal business operations with an amount exceeding five million yuan or illegal gains exceeding one hundred thousand yuan should be deemed as "serious" illegal business operations. If the amount of illegal business operations exceeds twenty-five million yuan or the illegal gains exceed five hundred thousand yuan, it should be deemed as "particularly serious" illegal business operations.
In general, compared to the foreign trade company, the service provider responsible for settling virtual currency and RMB is more likely to be convicted of this crime. However, if the foreign trade company meets one of the above conditions, it may also be convicted of illegal business operations.
Conclusion
In recent years, China's foreign exchange regulation has become increasingly strict, and some "money shops" have been finding ways to circumvent regulations, causing massive capital outflows through private currency exchange and more covert methods such as Usdt, which has caused great harm to China's financial stability. While foreign trade companies using virtual currencies like U for settlement do save a certain amount of costs and time, they also bring corresponding civil, administrative supervision, and criminal risks.
Foreign trade companies usually settle large amounts of funds, and if they encounter unreliable service providers, it will inevitably lead to significant losses and be difficult to recover. Moreover, because regulatory and judicial authorities are more inclined to "substantively" recognize disguised foreign exchange transactions, behaviors that bypass regular settlement channels may also be substantively recognized as violations of foreign exchange management. Therefore, it is recommended that foreign trade companies and other companies with similar needs be more cautious in choosing settlement methods.
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