Profiting from price differences = illegal business operations? This is absurd!
Special Disclaimer: This article is an original work by Attorney Shao Shiwei. It represents only the personal views of the author and does not constitute legal consultation or legal advice on specific matters. For article reposts, legal consultations, or business exchanges, please add: sswls66
In recent years, it is no longer novel for businesses profiting from price differences in virtual asset trading to be convicted of the crime of illegal business operations if they involve disguised foreign exchange trading. There is currently no controversy in practice regarding this point.The number of USDT merchants involved in such cases is increasing.。
However, on July 9, 2024, the People's Court of Yubei District, Chongqing Municipality, published a case in which a USDT merchant profiting from price differences in virtual asset trading was deemed by the court to be “engaging in fund payment and settlement services on a virtual asset payment platform,” thereby constituting the crime of illegal business operations, sentenced to three years of fixed-term imprisonment, and fined RMB 5 million.This is rare in legal practice.
Although the court of second instance has issued a final judgment in this case, upholding the original verdict, this attorney believes that the factual findings and the judgment result remain open to discussion.
By Attorney Shao Shiwei
01
Basic Facts of the Case
[Case Description]
Initially, He conducted exchange transactions between USDT and RMB on his own. Later, Zheng provided financial support to He, and He operated jointly with Liu. To expand the scale, He used the names of relatives and friends to register multiple accounts, using both his own funds and funds accepted from others to conduct virtual asset exchanges.
(Media Focus | Transaction Volume of Virtual Assets Reaches RMB 14 Billion! Judge Warns: Such Profits Must Not Be Sought!)
According to this press release from the official WeChat account of the People's Court of Yubei District, Chongqing Municipality, the profit-making business conducted by He, the USDT merchant in this case, was no different from that of ordinary USDT merchants; it merely involved buying low and selling high on virtual asset exchanges to engage in arbitrage.
[Court's Viewpoint]
Hethe funds in his possessionformed avast chain of illicit funds. He's actions seriously violated national regulations regarding virtual asset transactions, not only disrupting financial order but also posing significant risks to society.He claimed that the exchange business he engaged in between virtual assets and RMB did not constitute fund payment and settlement activities, but neither the court of first instance nor the court of second instance supported this claim, convicting He of the crime of illegal business operations.
02
Does profiting from price differences in crypto trading constitute the crime of illegal business operations?
Based on relevant legal provisions, it can be seen that: 1. The prerequisite for constituting the crime of illegal business operations is violating “state provisions”; 2. Buying and selling virtual assets for arbitrage purposes is not explicitly stipulated by law as conduct involving “illegally engaging in fund payment and settlement services.”
Article 225 of the Criminal Law [Crime of Illegal Business Operations]
Whoever violates state provisions and commits any of the following illegal business operations, disrupting market order, where the circumstances are serious, shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention, and shall also, or shall only, be fined not less than one time but not more than five times the illegal gains; where the circumstances are especially serious, shall be sentenced to fixed-term imprisonment of not less than five years, and shall also be fined not less than one time but not more than five times the illegal gains or have property confiscated: ... (3) Without approval from the relevant state authorities...,or illegally engaging in fund payment and settlement services；
Article 1 of the 2019 Interpretation by the Supreme People's Court and the Supreme People's Procuratorate on Several Issues Concerning the Application of Law in the Handling of Criminal Cases of Illegally Engaging in Fund Payment and Settlement Services and Illegally Buying and Selling Foreign Exchange: Violating state provisions, any of the following circumstances shall belong to “illegally engaging in fund payment and settlement services” as stipulated in Item (3) of Article 225 of the Criminal Law:
(1) Using acceptance terminals or online payment interfaces, etc., to pay monetary funds to designated payees through illegal means such as fictitious transactions, falsely invoicing prices, or transaction refunds;
(2) Illegally providing services for cashing out from unit bank settlement accounts or transferring funds from unit bank settlement accounts to personal accounts for others;
(3) Illegally providing check cashing services for others;
(4) Other circumstances of illegally engaging in fund payment and settlement services.
In fact,profiting from price differences in virtual asset trading is not prohibited in China and is not illegal. There are numerous court judgments supporting this view. Due to space limitations, this article lists only two examples:
Case 1: He Hongmei et al. vs. Sales Contract Dispute:
The court held that BSN Coin, as a type of virtual asset, does not possess monetary attributes such as legal tender status or compulsoriness, and thus does not belong to currency. ... BSN Coin has the attributes of virtual property and can be traded as ordinary goods. As virtual property, Chinese laws and administrative regulations do not prohibit the holding and lawful circulation of virtual assets or tokens, nor do they prohibit normal transactions of virtual assets between private individuals.
Case 2: Chen Zusong Case of Impairing Credit Card Management:
This case is quite typical, and we will explain it in detail. Similarly involving the use of other people's bank cards for arbitrage to profit from price differences, the court's viewpoint aligns with the views expressed by Attorney Shao above, which can be summarized as follows: 1. The “September 24 Notice” and the “September 4 Announcement” did not prohibit transactions of virtual assets between individuals; 2. There are no explicit legal provisions stating that profiting from price differences in virtual asset trading is illegal.
Starting from August 2018, the defendants Chen Zusong and Chen Xingguang bought and sold virtual assets such as USDT on the Okex platform. After consultation, the two decided to use a large number of other people's credit cards for crypto trading operations. Subsequently, Chen Xingguang and Chen Zusong instructed relatives and friends, including Chen and Lin, to apply for a total of 49 credit cards, which were handed over to Chen Xingguang for trading virtual assets such as USDT.
The court held that this did not constitute the crime of illegal business operations, with the following reasoning:
The crime of illegal business operations stipulated in Article 225 of the Criminal Law of China regulates illegal business operations that violate state provisions and seriously disrupt market order. According to Article 96 of the Criminal Law of China, “state provisions” in the Criminal Law refer to laws and decisions enacted by the National People's Congress and its Standing Committee, administrative regulations, administrative measures, decisions, and orders formulated and issued by the State Council. The aforementioned “Announcement” and “Notice” are departmental rules and do not prohibit individual investors from holding or trading virtual assets. Therefore, based on the principle of legally prescribed punishment for specified crimes, the acts of Chen Zusong and others in holding and trading virtual assets do not constitute the crime of illegal business operations.
Furthermore, the period during which the parties were involved in this case was from August 2018 to August 2019. The period during which He was involved in the aforementioned Chongqing case was from May 2018 to May 2019. The two cases are similar not only in facts but also in timeframe. Regardless of how one evaluates the “September 24 Notice” issued in September 2019,the involvement of the actors in both cases occurred at least before the issuance of the “September 24 Notice.” Therefore, the legal evaluation of the actors' conduct should be similar, rather than drastically different.
Moreover, “fund payment and settlement” generally refers to a three-party payment and settlement process where the settling party is responsible for transferring funds from Party A to Party B. The “payment and settlement type” of illegal business operations punishes entities engaged in illegal financial business activities. However, the subjective purpose of arbitrage is to earn price difference profits for oneself,not to act as an intermediary matching Party A and Party B. The business model of USDT merchants is completely different from that of commercial banks and third-party payment institutions.
Attorney Shao believes that if one engages in arbitrage by buying and selling virtual assets and uses other people's bank cards to obtain higher returns, such conduct may constitute the crime of impairing credit card management (for relevant legal analysis, see ➡️ Profiting from Price Differences in USDT Virtual Asset Trading: Does It Constitute the Crime of Impairing Credit Card Management?).
However, based on the official press release from the Chongqing Court, He merely used his own funds and funds from others for arbitrage. He did not receive illicit funds, nor was he involved in disguised foreign exchange trading. Under the existing legal framework, characterizing the actor's conduct as illegal business operations in this case is far-fetched, and the reasoning is difficult to convince the public.
03
Concluding Remarks
The end of the Chongqing Court's press release states: “Although virtual asset trading has certain investment value, it requires cautious handling. We should choose legal and compliant trading platforms for operations and abide by national laws and regulations.” This indicates that the authorities do not deny the investment value of virtual assets and allow ordinary people to engage in trading. However,based solely on the description of the case facts throughout the document, He's conduct was merely ordinary profit-making from price differences, so where exactly lies the illegality?
It is regrettable to see such a judgment result. Nevertheless, this case is merely an individual case, and China is not a country of case law. Therefore,this case is not the “final verdict” on whether trading virtual assets violates the “payment and settlement type” of illegal business operations. From the perspective of legal defense, there is still room to strive for a lesser charge or even acquittal in specific cases.
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