On December 27, 2024, the State Administration of Foreign Exchange of our country issued the "Management Measures for Bank Foreign Exchange Risk Transaction Reports (Trial)" (hereinafter referred to as the "Measures"), clearly categorizing illegal cross-border financial activities involving virtual currencies as foreign exchange risk transaction behaviors, and requiring banks to monitor and report risks related to domestic and foreign institutions and individual clients involved in such activities.

In response to the issuance of the "Measures," many people's first reaction might be: "Has virtual currency trading been completely shut down?" The good news is that this is not the case; however, the bad news is that regulatory scrutiny has indeed increased.

So what exactly does the "Measures" convey? What signals does it send? Lawyer Mankun will provide an in-depth interpretation in this article.

This Regulatory Document Is Not Targeting Virtual Currency Trading

If you read the document in its entirety, you will find that the core requirement is for banks to focus on the transaction background and funds usage when identifying abnormal cross-border capital flows. Once suspicious risk transaction behaviors are detected, banks must promptly monitor, analyze, and submit risk transaction reports. In other words, the emphasis is on the judgment of "risk transactions" rather than on specific assets or tools.

The document states that any activities involving false trade, false investment and financing, underground banks, cross-border gambling, fraudulent export tax refunds, and illegal cross-border financial activities involving virtual currencies are classified as foreign exchange risk transactions. This reminds Lawyer Mankun of the previous interpretation issued by the two high courts regarding the application of laws in handling money laundering criminal cases. The document similarly describes that transferring criminal proceeds through virtual currencies constitutes money laundering. Therefore, whether it is the current "Measures" or the documents from the two high courts, the regulatory focus is not on specific tools but on the illegal purposes achieved through the use of these tools.

However, virtual currencies, especially stablecoins like USDT and USDC, are often used in cross-border transactions due to their inherent borderless nature and the ability to exchange with most fiat currencies. Yet, these characteristics are exploited by "smart individuals" who use virtual currencies as intermediaries to conceal cross-border capital flows or profit from the exchange rate differences between fiat currencies.

This is why the current document specifically points out illegal cross-border financial activities involving virtual currencies—our country has always maintained a high-pressure regulatory stance against foreign exchange arbitrage, and the emergence of virtual currencies has further strengthened this regulatory demand.

Thus, for institutions or individual players, staying away from illegal cross-border financial activities involving virtual currencies is key. From past cases and regulatory practices, illegal cross-border financial activities involving virtual currencies typically include the following categories:

· Cross-border money laundering and fund transfers using virtual currencies, utilizing the anonymity and global circulation of virtual currencies to transfer illegal proceeds across borders, evading anti-money laundering tracking. For example, converting domestic funds into virtual currencies through stablecoins like USDT and then selling them for cash at overseas exchanges.

· Underground banks using virtual currencies, completing fund allocations in domestic and foreign markets through virtual currencies, using them as "intermediary bridges" for cross-border currency exchange and illegal arbitrage. Such behaviors often conceal the source of funds, evade foreign exchange regulation and tax control, severely disrupting financial order.

· Cross-border gambling and illegal betting payments, where overseas gambling platforms use virtual currencies for payments to bypass the cross-border payment review of the banking system. For instance, users recharge their gambling site accounts with USDT and then transfer their gambling funds or winnings back to the domestic market through virtual currencies.

· Disguised trade and false investment flows, using virtual currencies to transfer funds and conceal the true purpose of the funds. For example, fabricating cross-border trade contracts, making "advance payments" through virtual currencies, and then using trade failures or investment losses as excuses to bring the funds back, creating a path for money laundering.

· Arbitrage and tax evasion using virtual currencies, taking advantage of price differences between domestic and foreign virtual currency markets to achieve exchange rate arbitrage while evading capital controls and foreign exchange declarations. A common scenario is buying USDT at a low price domestically and then selling it at a high price through overseas exchanges to profit from the difference.

It can be seen that these behaviors are no different from traditional illegal cross-border financial activities; fundamentally, they all share common characteristics of evading foreign exchange arbitrage, concealing the flow of funds, and avoiding capital controls. The only difference is that virtual currencies have replaced traditional fiat currencies.

After clarifying the key points of the "Measures," you may still have another question: I have never engaged in the above behaviors, why does the bank still identify my account as having foreign exchange risk transactions? This is likely a point of confusion for many players whose accounts have been frozen.

Potential Foreign Exchange Risk Characteristics of Virtual Currency Trading

According to the "Measures," when banks identify foreign exchange risk transactions, the core focus is not on the trading tools but on the background, path, and patterns of the capital flow. Therefore, even if virtual currency trading is involved, banks will not categorically label it as a risk transaction but will focus on analyzing whether the trading behavior exhibits abnormal characteristics.

Virtual currency trading inherently possesses cross-border and high liquidity attributes, and some users often exploit this feature for short-term arbitrage or capital circulation. However, this trading habit can easily exhibit typical characteristics of foreign exchange risk transactions:

1. High-frequency trading and capital flow

In virtual currency trading, complex capital flows are the norm, especially for users engaged in swing trading, where frequent deposits and withdrawals are commonplace. However, in the bank's risk control system, such funds are easily labeled as "abnormal"—high-frequency trading, complex capital paths, routing through multiple accounts, or directly connecting to overseas exchanges. If this is compounded by large remittances, split deposits, and a lack of reasonable commercial background explanations, it is likely to be identified by the bank as a foreign exchange risk transaction.

2. Mismatch between source and use of funds

In virtual currency investments, users often receive or make payments through different channels, such as peer-to-peer transfers or OTC trading. However, this "informal" channel of capital flow lacks standardized business background support in the banking system, making the authenticity of the transactions questionable. For example, if a certain account has multiple short-term inflows and outflows but cannot provide clear transaction contracts or payment receipts, it may be viewed by the bank as indicative of false trade or underground bank operations.

3. Complex and concealed capital paths

Virtual currency transactions often pass through multiple wallet addresses and trading platforms, ultimately flowing to overseas accounts or exchanges. This complex transaction path makes it difficult to trace the flow of funds, especially if it coincidentally passes through mixers, further concealing the capital movement. For instance, a user first buys USDT through OTC trading, then sends it to multiple on-chain addresses via a decentralized wallet, and finally withdraws it at an overseas exchange. This kind of routing through multiple stages is easily suspected of evading foreign exchange controls.

4. Frequent exchanges between virtual currencies and fiat currencies

The arbitrage opportunities in the virtual currency market prompt some users to frequently exchange fiat currencies for virtual currencies and then repeatedly buy and sell across different exchanges to profit from price differences. The issue of using USDT for arbitrage, which Lawyer Mankun often mentions, ultimately being classified as illegal foreign exchange trading, falls into this category. The characteristics of this capital flow often manifest as frequent deposits and withdrawals within a short period, as well as funds flowing to multiple accounts or platforms, making it easy for banks to view it as abnormal foreign exchange trading, triggering further scrutiny.

If you think that following the above characteristics in reverse will keep you safe, you are gravely mistaken. The most unpredictable risk comes from buying black USDT or dirty money, which can inexplicably make you part of a money laundering scheme. Additionally, because it is difficult to verify the true counterparties and sources of funds in virtual currency trading, and it is indeed easy to receive related illicit funds in actual transactions. Furthermore, once involved, users find it challenging to provide effective explanations to the relevant authorities, often leading to triggering the red line for foreign exchange risk transactions.

Can Users in Mainland China Still Participate in Virtual Currency Trading?

The door to virtual currency trading has not been completely shut, but the compliance threshold has been significantly raised.

Although, from a legal standpoint, individual possession of virtual currencies and related trading has not been deemed illegal. However, with the issuance of the "Management Measures for Bank Foreign Exchange Risk Transaction Reports (Trial)," illegal cross-border financial activities involving virtual currencies will face more stringent scrutiny.

At the same time, characteristics such as cross-border trading, high-frequency buying and selling, and complex capital flows in the virtual currency market naturally overlap with the risk control logic of foreign exchange regulation. Moreover, the current document requires banks to strictly monitor and report behaviors involving complex trading patterns, unclear capital flows, or cross-border arbitrage. Therefore, when participating in virtual currency trading, users in mainland China need to be particularly cautious about transaction paths and the use of funds; otherwise, even if the virtual trading itself has no illegal intent, they may still be placed on the bank's review list due to similarities in behavioral patterns with illegal cross-border activities.

As always, investing carries risks, and trading requires caution.

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