Based on the work situation in the past half year, Lawyer Shao has a deep feeling: the number of cases in which buying and selling virtual currency is deemed illegal business operation is increasing.
Since the end of 2023, various official media have successively released typical cases of illegal business operations related to buying and selling virtual currency. In practice, judicial authorities across the country seem to be continuously strengthening the crackdown on such transactions.
However, many parties involved still do not understand why buying and selling USDT virtual currency would be deemed illegal business operation. Why would they be convicted even if they did not receive the proceeds of crime? What does trading U have to do with foreign exchange trading? Therefore, this article starts with specific practical situations to provide a simple explanation.
By Shao Shiwei, Lawyer
01. What is the "illegal foreign exchange trading" crime of "buying and selling foreign exchange"
The "illegal foreign exchange trading" crime of "buying and selling foreign exchange" refers to the scenario of virtual currency trading, which specifically refers to disguised foreign exchange trading (also known as "foreign exchange matching").
The so-called "disguised foreign exchange trading" refers to not directly conducting the buying and selling of RMB and foreign exchange, but instead using methods such as repaying RMB with foreign exchange or repaying foreign exchange with RMB to achieve currency value conversion through the exchange of foreign exchange and RMB. In this mode, funds circulate unidirectionally domestically and abroad, without physical movement, usually achieved in the form of account reconciliation.
China implements a foreign exchange control system (annual total amount management for individual foreign exchange settlement and domestic individual purchase of foreign exchange, with an equivalent of 50,000 US dollars per person per year). Private off-exchange foreign exchange transactions are subject to administrative violations for minor offenses and criminal penalties for serious offenses. The specific standards are as follows:
For disguised foreign exchange trading, if the amount exceeds 1,000 US dollars, it constitutes an administrative violation. If the illegal business operation amount exceeds five million yuan, or the illegal gains amount exceeds one hundred thousand yuan, it constitutes the crime of illegal business operation.
The USDT Tether coin used by U merchants or ordinary coin traders in their transactions is issued and managed by Tether Limited. As a type of cryptocurrency, it cannot be directly equated with foreign currency or other concepts. However, through U as a medium, indirect exchange of foreign exchange and RMB is realized, achieving currency value conversion, which is why domestic judicial authorities view it as "disguised foreign exchange trading." Currently, there is no dispute about this.
Due to the high threshold for filing this crime, it is generally difficult for ordinary individuals to constitute this crime through occasional exchange using this method. The common subjects of this crime are underground money changers or U merchants engaged in arbitrage trading to profit from the price difference in buying and selling virtual currency.
Even if underground money changers do not use virtual currency, they have various ways of exchanging foreign currency, and they are essentially engaged in money laundering and profiting from exchange rate differentials, so they are not innocent.
However, many U merchants that Lawyer Shao has encountered only intend to profit from arbitrage trading, and they actually have no intention of touching this crime. But due to their lack of understanding of the law, they do not understand why they have engaged in "illegal business operation" until they are caught. As Lawyer Shao often says, what U merchants see is often just the "tip of the iceberg," so next, we will understand what the "illegal foreign exchange trading" crime of "buying and selling foreign exchange" is and what roles U merchants play in it from a comprehensive perspective.
02. Scenarios of achieving "foreign exchange matching" through buying and selling virtual currency
1. Who has the demand for private off-exchange foreign exchange?
Based on the cases handled by Lawyer Shao and a large number of consultations handled daily, they can be roughly classified into the following four scenarios:
A person in China who wants to exchange their foreign currency for RMB.
For example, a foreign trade merchant, or a business or individual serving overseas groups (such as providing overseas advertising services), where the client transfers US dollars to their overseas account and A wants to cash it out for RMB.
A person in China who wants to exchange their RMB for foreign currency.
For example, many wealthy individuals who have funds abroad find that the 50,000 US dollar exchange limit is insufficient for transferring their assets abroad. In August 2023, Shanghai's largest immigration company, Wailian Company, was investigated, and its actual controller, He, was arrested. One of the gray areas in the immigration industry is to find ways to help clients transfer money abroad.
A person abroad who wants to exchange their foreign currency for RMB.
For example, someone who works abroad all year round and receives income in US dollars. If their family in China suddenly needs money, they need to quickly exchange a large amount of US dollars for RMB to send to their family in China.
A person abroad who wants to exchange their RMB for foreign currency.
For example, students studying abroad, or a group of business people (Lawyer Shao previously had a client who worked and lived in Myanmar all year round. The business they conducted was to purchase goods locally in Myanmar and then import them to China. Because they sell goods to domestic users, they receive RMB, but they purchase goods in Myanmar and pay in Burmese kyat. Therefore, even though they are abroad, they still need a large amount of foreign currency).
2. What roles do U merchants play in this?
In the above four scenarios, if clients transact with underground money changers/private off-exchange platforms, from the flow of funds, there are two types: either the client receives foreign currency abroad and pays RMB domestically, or the client pays foreign currency abroad and receives RMB domestically.
Cryptocurrencies have the inherent convenience of cross-border transactions. The illegal flow exchange between foreign currency and RMB only requires U as an intermediary. Illegal exchange platforms act as a hub for funds. First, their currency (for ease of expression, foreign currency or RMB is collectively referred to as currency) comes from clients with exchange needs, who all want to exchange currency A for currency B, or exchange currency B for currency A. Therefore, illegal exchange platforms need a large reserve of currency from different countries to meet the needs of their clients.
Of course, this exchange business can be done without U, but it would require collecting currency from users in different countries and then making a match. With U, off-exchange transactions can be done more discreetly, on a larger scale, and more conveniently—illegal exchange platforms use the currency provided by clients to purchase U domestically and abroad, and then exchange the U for the currency of the country the client needs.
In the process of virtual currency trading, the group that illegal exchange platforms interact with are those who want to sell U or buy U. This group can be divided into three categories:
- Retail coin traders who occasionally need to cash out funds but do not have the purpose of exchanging currency;
- Those who need to exchange currency but "help themselves," selling currency A for U and then finding a trading partner to exchange the U for currency B themselves;
- U merchants engaged in arbitrage trading to profit from the price difference in buying and selling virtual currency.
For the first group mentioned above, if they do not receive the proceeds of crime, there is generally not much risk. Even if they transact with illegal exchange platforms, it will not be deemed as illegal business operation.
For the second group, because they exchange currency on their own, if they do not receive the proceeds of crime and the amount does not meet the criminal or administrative penalty standards, the risk is generally not high.
The third group faces a higher risk of being involved in the crime of illegal business operation. Some U merchants may argue that they did not know that the party they transacted with was engaged in currency exchange, and they only transacted virtual currency, paying/receiving RMB. However, the following circumstances may be presumed to indicate that U merchants subjectively knew that the other party was suspected of disguised foreign exchange trading:
Stable and frequent transactions with the other party;
Large orders with amounts in the millions;
Abnormal transaction prices (higher or lower than market prices);
Even if the other party did not explicitly inform, communication between the two parties can reveal that the other party's trading partners include students studying abroad, overseas trade, and other overseas groups;
…
Under these circumstances, judicial authorities may deem that because U merchants assisted illegal exchange platforms, the two constitute joint crimes of illegal business operation.
This concludes the discussion. This article only addresses one question: why is the business of profiting from the price difference in the eyes of U merchants deemed illegal business operation?
For a legal analysis of U merchants' involvement in the crime of illegal business operation, you can click on the link at the bottom of the article to read a previous article published by Lawyer Shao.
Final thoughts:
Whether receiving the proceeds of crime or being involved in foreign exchange, these are not things that U merchants subjectively want to touch. This business of profiting from the price difference is actually very difficult to do.
In the past, Lawyer Shao used to advise U merchants to do good KYC when transacting, but after handling too many cases, they no longer want to mention it, because there is really no perfect KYC. Who can achieve an all-seeing perspective like a god?
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