Author: Zhang Chengjun, Man Kun Blockchain Legal Services

On February 2, 2024, Mr. Christopher Hui Ching-yu, the Secretary for Financial Services and the Treasury of Hong Kong, stated that the government believes there is a need to regulate over-the-counter (OTC) virtual currency exchanges and will soon begin consulting on the proposed regulatory framework, hoping that citizens and stakeholders will actively express their opinions.

When this news came out at the beginning of the year, it caused quite a stir in the industry. However, it seemed to have brought no significant impact to domestic veteran coin traders, who continue to play the role of moving coins cautiously. At the same time, many cryptocurrency enthusiasts, after reading some introductory materials, seem to think that OTC trading is quite simple – buy low, sell high, and make a profit, right?! Every time I see someone who seems to have mastered the secret of wealth, I, as a legal practitioner, cannot help but solemnly say to them, "Friend, if it were so easy to obtain the secret of wealth, why would so many people still be searching for it?"

Veteran coin traders may also have something to say. Do you know how I've been getting by all these years? I'm not trying to discourage everyone's interest in understanding web3.0. But please do not think of it as too simple.

What is OTC for Virtual Currency?

To understand this question, we first need to understand what OTC is.

OTC (over the counter) literally means off-exchange trading, and the "exchange" refers to the virtual currency trading platform. On-exchange and off-exchange are based on whether the transaction is conducted through a trading platform. OTC can also be divided into two forms based on this:

1. Online peer-to-peer trading (C2C), which still needs to be conducted through a digital currency trading platform for publication and communication, but the transaction is not formed through the trading platform. Instead, after the buyer and seller confirm the transaction, the buyer transfers the payment to the seller through methods such as Alipay, WeChat, or bank transfer.
2. Traditional methods, which involve introductions through individuals and private trading agreements between individuals, without going through a platform.

After understanding what OTC is, do new friends feel that it's even more profitable and an old-school model? Is this what I thought web3.0 was? Isn't this just "speculation"? In that case, I have to say, friend, you've hit the nail on the head. The historical period that gave rise to "speculation" was the early stage of China's reform and opening up, when the market economy was not yet perfect and demand for goods was not being met.

Common Legal Risks for OTC Merchants

Returning to the topic, for the current actual situation in the domestic cryptocurrency industry, although virtual digital currency trading has not been classified as illegal behavior by law, the high degree of anonymity, high investment risk, strong secrecy, and cross-border mobility of virtual digital currency make OTC trading vulnerable to exploitation by criminals for money laundering, evading foreign exchange controls, and illegal transactions. This forces us to pay attention to the legal risks involved.

This is also the reason why the Hong Kong government is legislating to establish industry rules. It seems to be tightening, but it actually makes things more smooth. An industry without healthy rules is like a highway without guardrails. It's easy to veer off the right path and end in disaster.

Although virtual currency OTC will usher in a compliant era in Hong Kong, there are no indications of similar developments in mainland China. The conduct of virtual currency trading in mainland China is still rife with issues such as "illegal operation," "helping others to commit crimes," "organizing and leading pyramid schemes," and "concealment."

This is also the reason for the high risk. It's not a good sign if the police come knocking while you're in the middle of doing business. Of course, if we just want to be honest OTC merchants, I believe there shouldn't be a big problem.

Through discussions with industry veterans, it has been pointed out that "helping others to commit crimes" is becoming or has already become the first challenge for coin traders. Today, I will first talk about the issue of "helping others to commit crimes."

In 2017, the "Announcement on the Prevention of Risks from Token Issuance and Financing" stipulated in Article 1 that "tokens" or "virtual currencies" are not issued by monetary authorities, do not have the attributes of legal tender or mandatory currency, do not have the same legal status as currency, and should not be used as currency in the market. Based on this, in our country, virtual currency does not have the attributes of currency and does not have payment and settlement capabilities. The announcement also indicates that the prohibited business is limited to ICO (initial coin offering) and prohibits exchanges from engaging in exchange and information intermediary services. In other words, as OTC merchants, our transactions of buying and selling virtual currencies between individuals are not regulated as illegal activities by relevant laws.

How do OTC Merchants Commit "Helping Others to Commit Crimes"?

Let's first understand the "crime of helping others to commit crimes on information networks." As soon as you see the full name of this charge, the word "helping" stands out, so OTC merchants have become suspects of this crime not because we are coin traders, but because we have "helped" in information network crimes.

At this point, many OTC merchants may want to protest, saying, "I haven't helped anyone! I don't know anything!" Our only way of helping is through one action – "receiving money"! This is a problem that troubles all OTC merchants. How do we receive clean money? I asked industry veterans the same question, and they gave me a serious yet somewhat unconventional answer: "Receive cash." Indeed, receiving cash can physically eliminate the possibility of network crimes, but what about large-scale or on-exchange coin traders? Only a very small part of the business is done offline. In that case, we have to conduct thorough KYC checks for every customer and every transaction. However, this may still not completely sever the connection to this charge.

In the "Interpretation of Several Issues Concerning the Application of Law in Handling Criminal Cases of Illegal Use of Information Networks, Helping Others to Commit Crimes on Information Networks, etc.," the entry criteria for this crime are clearly defined:

1. Considering the scope of assistance provided, a standard is set for the number of assisted parties.
2. Considering the provision of payment and settlement assistance, a standard is set for the amount of payment and settlement.
3. Considering the provision of assistance through advertising, a standard is set for the amount of funds provided through advertising and other means.
4. Considering the illegal gains of the perpetrator, a standard is set for the amount of illegal gains.
5. Considering the subjective malice of the perpetrator, a standard is set for cases where the perpetrator has been subject to administrative penalties for illegal use of information networks, helping others to commit crimes on information networks, or endangering the security of computer information systems within two years, and has subsequently helped others to commit crimes on information networks.
6. Considering the situation where the assisted party commits a serious crime, a standard is set for cases where the assisted party's criminal activities have caused serious consequences.
7. In addition to the elements of the crime, it is explicitly stated that the suspect must be aware of their actions as "helping others to commit crimes" in seven specific situations.

My advice is for friends who are currently engaged in OTC to compare their behavior with the above situations. For example, if a customer contacts you through an exchange and requests a large deposit, and can immediately transfer the money, can this situation be considered as a significant deviation in transaction price and method?

Coin Traders Should Guard Against "Illegal Operations"

Relevant legal provisions: Article 225 of the Criminal Law of the People's Republic of China stipulates that the crime of illegal operation refers to the act of disturbing market order by violating state regulations with any of the following illegal business activities. In cases of serious circumstances, the perpetrator shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention, and shall also be fined not less than one time but not more than five times the illegal gains, or shall be fined not less than one time but not more than five times the illegal gains, or shall be subject to confiscation of property:

1. Engaging in the sale of goods that are subject to exclusive operation or sale without permission under the law or administrative regulations, or other goods subject to restricted trading.
2. Engaging in the sale of goods that require a license for import and export, or engaging in business activities that require a business license or approval document or other documents as stipulated by laws or administrative regulations.

(3) Engaging in securities, futures, or insurance business without approval from the relevant competent authorities, or illegally engaging in fund payment and settlement business;

(4) Other illegal business activities that seriously disrupt market order.

Based on past precedents, the third provision of the above-mentioned legal article is the main basis for convicting OTC merchants of the crime of illegal business operations. However, as mentioned earlier, in OTC, both modes involve direct trading between buyers and sellers, and the settlement is also conducted through payment and settlement institutions such as WeChat and Alipay. Therefore, as a normal OTC merchant, direct engagement in payment and settlement business does not occur.

In the "Notice on Printing and Distributing the Provisions on Filing and Prosecution Standards for Criminal Cases Jurisdiction by Public Security Organs (2)" (2022), Article 71 stipulates another provision for convicting OTC merchants of the crime of illegal business operations under Article 225 of the Criminal Law. The relevant provision states: engaging in illegal foreign exchange transactions such as speculation or disguised buying and selling of foreign exchange, disrupting the financial market order. This is because OTC merchants may engage in foreign currency transactions, but whether this constitutes the "realization" mentioned in the provision is questionable. I believe that normal OTC transactions do not involve this. Although there are virtual currencies like Tether that can be exchanged for US dollars, they are not considered foreign currencies. Therefore, there is fundamentally no issue with foreign exchange.

OTC merchants continue to work hard to avoid receiving illicit funds and having their cards frozen, so they are constantly engaged in risk avoidance. Therefore, the title of the article at the beginning is a sincere question to all OTC merchants about how they are doing. I believe that for veteran OTC merchants, the content of this article may not be extensive, as they have been walking on thin ice for a long time. For new OTC merchants, I think they should have a relatively good understanding of the legal risks. For those who have not entered the industry, my clear advice remains the same – it is not recommended.

Man Kun Lawyer

Be steadfast! KYC is extremely important, and every customer and every transaction must be adhered to. OTC merchants face significant risks in promoting the circulation of virtual currencies. In the process of risk avoidance, Man Kun strives to use legal principles and regulations to resolve the issues encountered by OTC merchants. Throughout this article, it seems as if we are discussing the original sin of OTC merchants. However, this is not a criminal act.

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