Introduction

On December 27, 2023, the Supreme People's Procuratorate published an article on its official WeChat account titled "Typical Cases of Punishing Foreign Exchange Illegal Crimes," once again causing anxiety among the cryptocurrency community, especially among over-the-counter traders. In a previous article by the High People's Court of Guangdong Province, it was illustrated with a case from the Dapu County Court that trading virtual currency poses significant social risks. Lawyer Liu wrote a brief analysis titled "Is Trading USDT Tether Considered Illegal Business Operation?" based on the information disclosed by the court. Subsequently, colleagues and public security personnel contacted Lawyer Liu to express different viewpoints, supplementing a lot of information not disclosed in the articles from the official WeChat account of the High People's Court of Guangdong Province. However, based solely on the information publicly available from the High People's Court of Guangdong Province, Lawyer Liu believes that trading USDT does not constitute illegal business operation. In the recent article by the Supreme People's Procuratorate, two reasons have attracted attention: first, the defendant in the first case, Zhao, is actually the cryptocurrency tycoon Zhao Dong; second, among the 8 typical cases published by the Supreme People's Procuratorate in the form of typical cases, all are related to foreign exchange (some cases involve virtual currency in foreign exchange transactions), all involving illegal business operation. This once again deepens the stereotype that "virtual currency trading equals illegal business operation," especially among grassroots public security and procuratorates.

01 What Did the "Zhao and Others Illegal Business Operation Case" Say?

According to the judgment of the Hangzhou Xihu District Court, Zhao Dong and others were involved in two criminal acts:

First, engaging in illegal payment settlement business: From June to December 2019, Zhao Dong and others knowingly received RMB from another person (You) with an illegal source of funds, and still used personal bank accounts to exchange RMB for virtual currency, making a profit of over 24.29 million yuan, with Zhao Dong profiting 35,000 yuan.

Second, illegal foreign exchange trading: From February 2019 to April 2020, Zhao Dong and others provided foreign currency (United Arab Emirates dirham) exchange and payment services for others in the UAE, exchanging over 43.85 million yuan for RMB, making a profit of over 870,000 yuan. The specific modus operandi has been detailed in the cases disclosed by the Supreme People's Procuratorate, and Lawyer Liu will not elaborate further.

In the end, Zhao Dong was sentenced to 7 years in prison and fined 2.3 million yuan by the first-instance court. Zhao Dong is a controversial figure, and friends familiar with the cryptocurrency community will surely know that the above two scenarios not only involve Zhao Dong, but also many over-the-counter traders, and the amounts involved may be even larger. Will many unknown risks come to bear on oneself in the future?

02 Why is Virtual Currency Trading Defined as Illegal Business Operation?

Based on the analysis of Zhao Dong's case, currently, at least two types of virtual currency trading can be classified as illegal business operation: First, knowingly providing virtual currency exchange services for others involved in illegal criminal activities; Second, essentially conducting RMB and foreign currency exchange through virtual currency as a medium.

According to the "September 24th Notice" ("Notice on Further Preventing and Dealing with Risks of Speculation in Virtual Currency Trading") regulations, mainland China strictly prohibits any individual, organization, or entity from "engaging in the exchange of legal tender and virtual currency, and the exchange of virtual currency." Violation of this regulation, in serious cases, will result in criminal liability. For activities involving illegal payment settlement and illegal foreign exchange trading through virtual currency, the most likely charge would be illegal business operation. This offense has two levels of punishment: less than 5 years' imprisonment or detention plus a fine, and over 5 years' imprisonment plus a fine or confiscation of property. The amount of the fine is one to five times the illegal gains, which is quite severe.

03 Foreign Exchange Control in China

China currently implements strict foreign exchange control regulations. According to the "Implementation Rules for the Administration of Foreign Exchange for Individuals" of the State Administration of Foreign Exchange, the annual total for personal foreign exchange settlement and purchase of foreign exchange by mainland residents is generally equivalent to 50,000 US dollars per person per year. Those who violate this regulation will bear corresponding legal responsibilities.

According to the 1998 "Decision of the Standing Committee of the National People's Congress on Punishing Crimes of Fraudulent Purchase of Foreign Exchange, Evasion of Foreign Exchange, and Illegal Trading of Foreign Exchange," illegal trading of foreign exchange outside the designated trading venues, disrupting market order, will be punished for the crime of illegal business operation if the circumstances are serious.

In other words, currently, the total amount of foreign exchange settlement and purchase by Chinese citizens cannot exceed 50,000 US dollars, and must be conducted in designated trading venues (such as foreign exchange trading centers and qualified banks). Violations will generally result in administrative penalties for citizens, but for service providers, it may constitute the crime of illegal business operation.

04 The Past and Present of Illegal Business Operation

The precursor of the crime of illegal business operation was the "speculation and profiteering crime" in the 1979 Criminal Law, which was later decomposed into the crime of illegal business operation in the 1997 Criminal Law.

If the crime of picking quarrels and provoking trouble is the "pocket crime" in managing public order, then the crime of illegal business operation is definitely the "pocket crime" in managing market economic order. There have been over 20 judicial interpretations or related regulations regarding the crime of illegal business operation, covering areas from tobacco sales to forest resource protection, food safety, and the use of stimulants, to radio management and network security, and of course, illegal payment settlement and illegal foreign exchange trading.

Specifically, as long as Chinese citizens engage in illegal foreign exchange trading outside designated venues and meet either of the following criteria, disturbing the financial market order, they will be charged with the crime of illegal business operation:

(1) Illegal trading of foreign exchange exceeding 200,000 US dollars;

(2) Or illegal gains exceeding 50,000 RMB.

For over-the-counter traders involved in foreign currency exchange, these criteria are very easy to exceed.

05 Conclusion

We reiterate the behaviors that have been confirmed in current judicial practice as constituting the crime of illegal business operation: First, knowingly providing virtual currency exchange services for others involved in illegal criminal activities (generally the exchange of virtual currency for legal tender, as for whether the exchange of virtual currency between different currencies constitutes a crime, it needs to be analyzed specifically); Second, engaging in RMB and foreign currency exchange activities through virtual currency, which in practice constitutes or assists others in illegal foreign exchange trading.

The 8 typical cases jointly released by the Supreme People's Procuratorate and the State Administration of Foreign Exchange are mainly aimed at regulating illegal criminal activities related to foreign exchange, and are mostly related to illegal foreign exchange trading and evasion of foreign exchange. Due to the anonymity and other characteristics of virtual currency, its use in foreign exchange-related crimes has significantly increased. This serves as a warning to players in the cryptocurrency community, especially over-the-counter traders, to be extremely cautious in foreign exchange-related businesses, and to pay particular attention to the importance of compliance with criminal law, in order to avoid getting into trouble.

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