Stay Informed Through Current Events

The Elephant in the Room

Recently, a certain major exchange added fiat on-ramp and off-ramp modules. The founder of a competitor platform, Star, commented: “We have had this functionality for a long time, but for well-known reasons, it is not currently available to users in mainland China.” Upon seeing this message, I smiled inwardly; Star is indeed adept at speaking in veiled terms.

With a mindset of enjoying the spectacle without fearing escalation, I reposted and commented: “Core trading functions are open to users in mainland China, while fiat on-ramp and off-ramp functions are not. This ‘definition of compliance’ is somewhat peculiar.”

This is by no means a joke. While it may appear to be merely an issue of fiat on-ramps and off-ramps, it reflects the most core and tacitly understood survival rule of the global crypto assets market—“Selective Compliance”。

Let us shift our focus from a single bank card to the broader and more obscure depths of the “crypto circle.”

In this world that champions decentralization, how do centralized giants (exchanges, payment institutions, and banks) navigate the gaps between regulatory regimes in various countries? Why can some business lines be tolerated with a “blind eye,” while others require “decisive sacrifice”? Why can users in China engage in contract trading worth hundreds of millions of U.S. dollars on exchanges, yet cannot compliantly purchase a cup of coffee?

Centering on the theme of “selective compliance,” this article provides practitioners, investors, and observers in the Web3 industry with a perspective that pierces through the fog, revealing the true rules within this “dark forest.”

 

The “Red Lines” and “Gray Areas” of China’s Crypto Assets Policy

To understand why institutions engage in “selective compliance,” one must first clarify the regulatory landscape they face.

Regulation of virtual currencies in mainland China has not been implemented overnight; rather, it constitutes a decade-long “campaign of suppression.” Regarding virtual currencies, the stance of Chinese regulators has undergone three key transitional phases, each of which has reshaped the survival dynamics of the industry.

Era 1.0: Risk Prevention and Severing Banking Channels (2013–2017)

In December 2013, five ministries and commissions issued the Notice on Preventing Bitcoin Risks. This marked the first official characterization of bitcoin as a “specific virtual commodity.”

• Characterization Logic: At that time, regulators held that bitcoin lacked monetary attributes such as legal tender status and compulsion, and therefore was not currency in the true sense.

• Core Red Line: Financial institutions (including banks and third-party payment processors) were prohibited from providing services for bitcoin transactions.

• Gray Area: Ordinary individuals retained the freedom to participate in transactions, subject to their own assumption of risk. This left a lawful niche for the early “crypto community” and provided the jurisprudential basis for platforms such as Huobi and OKCoin to register and operate domestically.

Era 2.0: Comprehensive Crackdown on ICOs and Fiat Currency Trading (2017–2021)

On September 4, 2017, seven ministries and commissions jointly issued the Announcement on Preventing Risks Associated with Token Issuance and Financing (commonly referred to as the “September 4 Announcement”).

• Background: The surge in initial coin offerings (ICOs) triggered significant financial risks and social instability.

• Decisive Enforcement Measures: Classifying initial coin offerings (ICOs) as “unauthorized illegal public fundraising,” involving suspected criminal activities such as the illegal sale of token vouchers, illegal issuance of securities, illegal fundraising, financial fraud, and pyramid schemes.

• Industry Upheaval: Domestic exchanges were forced to close fiat currency trading pairs (CNY/BTC) and increasingly moved their operations overseas. It was from this moment that USDT (Tether) replaced the renminbi as the standard unit of account in the Chinese-speaking crypto community, ushering in the era of “crypto-to-crypto trading.”

Era 3.0: Comprehensive Crackdown on Illegal Financial Activities (2021–Present)

On September 15, 2021, the People’s Bank of China and nine other ministries and commissions jointly issued the Notice on Further Preventing and Disposing of the Risks of Virtual Currency Trading and Speculation (Yin Fa [2021] No. 237, hereinafter referred to as the “September 24 Notice”). This document constitutes a landmark and definitive regulatory determination. Rather than merely issuing risk warnings, it explicitly characterized virtual currency-related business activities asillegal financial activities, including virtual currency exchange services, acting as a central counterparty for buying and selling virtual currencies, providing matching services for virtual currency transactions, token issuance and financing, and trading in virtual currency derivatives.

For the first time, the document expressly stipulated that “the provision of services by offshore virtual currency exchanges to residents within the territory of China via the internet likewise constitutes illegal financial activity.” This provision directly shattered the “safe haven” expectations of offshore exchanges. Liability extends not only to the exchanges themselves but also to relevant personnel located within China, as well as legal persons, unincorporated organizations, and natural persons who provide marketing, payment and settlement, technical support, and other related services. This approach is referred to as “full-chain enforcement.”

Given the stringent nature of the “September 24 Notice,” why do exchanges such as OKX and Binance continue to serve a substantial number of users from mainland China? Why do active Chinese-language communities remain visible? These questions implicate the “gray areas” and “jurisprudential gaps” inherent in the enforcement of Chinese law.

Current judicial practice and prevailing legal views hold that the mereholdingof virtual currencies is not unlawful. Although Chinese law does not recognize the “currency” attribute of virtual currencies, certain judicial decisions acknowledge their status as “virtual property,” which is protected under the Civil Code of the People’s Republic of China. This dual structure—where “holding is not unlawful” but “operating is unlawful”—has given rise to a peculiar phenomenon:

• Operating an exchange constitutes a criminal offense(such as the crime of illegal business operations or the crime of operating a casino).

• Conducting an initial coin offering (ICO) constitutes a criminal offense(such as fundraising fraud).

• However, individual trading of tokens(provided it does not involve money laundering) is generally regarded as a civil act undertaken at one’s own risk, or falls within a gray area of administrative regulation, rather than constituting a direct criminal offense.

China has tens of millions of existing crypto users. From the perspective of enforcement costs, it is impractical to bring all individuals participating in transactions within the scope of crackdowns. Therefore, regulatory focus has consistently been oncracking down on new activities, cutting off funding channels, and punishing related crimes (such as money laundering and fraud),rather than completely eliminating individual trading activities.

This regulatory logic creates opportunities for institutions to exploit loopholes. The "selective compliance" strategy adopted by institutions essentially bets on regulators' enforcement approach of "targeting major violations while overlooking minor ones," and leverages offshore structures to create obstacles to legal recourse.

 

The Covert Battle over Payment Channels—Crypto Debit Cards, Offshore Banks, and Compliance Arbitrage

Returning to the opening of this article: OKX may offer trading functions to users in mainland China, but must block fiat on-ramp and off-ramp (crypto debit card) functions? This conceals the most vulnerable link in the Web3 ecosystem:Fiat Currency Channels。

For mainland Chinese users deeply affected by the wave of bank account freezes, crypto debit cards are seen as a lifeline. The basic mechanism is as follows: users deposit USDT into the app, the platform converts it into USD or EUR, deposits the funds into a Visa or Mastercard debit card, and users can then spend globally (including by linking the card to Alipay or WeChat Pay for domestic use in China).

This seemingly simple process is in fact supported by a complex global industry chain involving multiple stakeholders:

In the case of OKX, Bank Frick plays a key role. It is a family-owned bank headquartered in Liechtenstein that describes itself as a "pioneer of European blockchain banking." Bank Frick does not directly serve retail customers (B2C); instead, it adopts a B2B2C model, serving financial intermediaries such as OKX.

Bank Frick delegates the burdensome tasks and direct responsibilities associated with KYC (Know Your Customer) procedures to OKX. As long as OKX represents that its customer base is sourced legally, Bank Frick will open fiat settlement accounts for it. However, for many years, offshore banks like Bank Frick have maintained "restricted country lists" primarily targeting countries subject to international sanctions (such as North Korea, Iran, and Russia), as well asthe United States(due to fears of penalties imposed by the SEC and the IRS).Mainland Chinais often not explicitly included in their prohibited lists, or, even if included, there is significant flexibility in enforcement.

As Visa and Mastercard have increasingly tightened their compliance requirements for crypto-asset businesses, they require issuing banks to ensure that end users are not located in restricted jurisdictions. The stringent “September 24 Notice” in mainland China has led Visa and Mastercard to designate the region as high-risk. Although Bank Frick is a bank, its U.S. dollar clearing relies on U.S. correspondent banks. As U.S. regulators (such as the OCC and the Federal Reserve) have intensified their crackdown on “shadow banking,” upstream banks have required Bank Frick to reduce its high-risk exposures.

The essence of the U Card isto circumvent China’s foreign-exchange controls, thereby enabling cross-border transfer and consumption of assets. If the scale is small, it may remain concealed; once the scale expands, it readily risks violating the crime of “illegal business operations” under the Criminal Law of the People’s Republic of China (involving illegal trading of foreign exchange). As a major exchange striving for global compliance, OKX cannot assume the risk of antagonizing the global banking system over a single U Card.

Trading functions are the core source of profits and operate in a regulatory “gray area” under offshore oversight, allowing for calculated risk retention; by contrast, the U Card involves fiat-currency settlement and falls within the regulatory “red line,” necessitating decisive divestiture. This is the coldly calculative logic of “selective compliance.”

 

Exchanges’ Survival Tactics—“Nominal Delisting” and Offshore Structures

If the blockade of the U Card represents an institutional “retreat,” the continued operation of exchanges’ core trading businesses constitutes their sophisticated “advance.”

Following the issuance of the “September 24 Notice” in 2021, leading exchanges such as Huobi, Binance, and OKX issued statements announcing the delisting of mainland China users, an event widely referred to as the crypto industry’s “Great Retreat.” Yet several years later, the outcomes have diverged markedly.

Huobi (then under the leadership of Li Lin) implemented the most thorough delisting policy, directly closing existing trading accounts for mainland users. As a result, Huobi lost its core market, experienced liquidity depletion, and was ultimately forced to sell to capital affiliated with Sun Yuchen.

Binance and OKX adopted more flexible strategies—“Nominal delisting, actual operations”They temporarily suspended new user registrations using +86 mobile phone numbers, but left technical backdoors. For example, users could register using an email address and subsequently bind a +86 mobile phone number as a “security verification method” rather than as an “indicator of identity jurisdiction.” Although authentication using mainland China resident identity cards was prohibited, for users holding Chinese passports, the system would often approve the registration if a non-Chinese region was entered in the “country of residence” field (even if Egypt or Argentina was entered). Moreover, a gray-market industry chain has emerged online involving the buying and selling of “overseas KYC documentation,” with exchanges typically alternating between periods of stringent enforcement and lax oversight.

To support this operational model, exchanges have constructed extremely complex offshore corporate structures. This is not merely for tax avoidance, but rather tosever the chain of transmission of legal liabilityA typical structure is as follows:

When confronted with regulatory inquiries such as, “Why are you still serving Chinese users?” all offshore exchanges invoke the same shield—“reverse solicitation”。

Their core argument is: “We did not actively market to clients in China (Active Marketing). It was these Chinese users who, by using circumvention tools, traveled great distances to our website (registered in Seychelles) and voluntarily requested to use our services. According to international commercial practice, this constitutes the users’ autonomous conduct and is not subject to the jurisdiction of Chinese law.”

This stance somewhat disregards the reality perceived by observers. It should be noted that these exchanges offer full simplified Chinese interfaces, employ large Chinese-language customer service teams, and conduct extensive promotional campaigns on Chinese-language Telegram groups and Chinese self-media platforms, not to mention hosting KOLs from Japan, South Korea, Southeast Asia, and Dubai with reimbursed travel and accommodation expenses.

In late 2022, Hong Kong issued the Policy Statement on Development of Virtual Assets in Hong Kong, seeking to reclaim its position as Asia’s crypto hub. For institutions with mainland China backgrounds, Hong Kong serves both as a “bridgehead” and as a “besieged city.”

Hong Kong’s strategy is very clear:to incorporate cryptocurrencies into the formal financial regulatory frameworkThe Securities and Futures Commission of Hong Kong (SFC) has introduced a licensing regime for virtual asset service providers (VASPs), permitting licensed exchanges (such as OSL and HashKey) to provide services to retail investors.

While this may appear to be a significant boon for Web3 institutions, it is in fact a tighter regulatory constraint. Among the SFC’s detailed regulatory rules, there is a clear red line that requires complete separation:Licensed institutions must ensure that they do not provide services to residents of jurisdictions where cryptocurrency trading is prohibited (particularly mainland China). 。

This creates a significant paradox:

• For compliance: Institutions must apply for a Hong Kong license.

• To generate revenue: Institutions must rely on users from mainland China (because the local Hong Kong market is too small to support the substantial operating expenses of exchanges).

• To obtain a license: Institutions must remove users from mainland China.

Faced with this dilemma, institutions have once again demonstrated sophisticated “selective compliance” techniques, which I refer to as the “dual personality” strategy:

On one hand, they prominently announce their applications for Hong Kong licenses, praise Hong Kong’s policies, lease expensive offices in Central, Hong Kong, and host lavish Web3 summits. The purpose is to cultivate a brand image of “embracing compliance” and “strong financial capability,” thereby gaining the trust of capital markets and attracting retail investors who are unaware of the underlying realities.

The true profit centers (high-leverage contract trading, wealth management products, and businesses serving users in mainland China) remain within offshore entities (such as those in Seychelles or the British Virgin Islands). The Hong Kong entity often serves merely as a "shell" or is responsible only for extremely limited, low-leverage spot trading activities.

This explains why many exchanges in Hong Kong, even after obtaining licenses (or approvals in principle), offer Hong Kong versions of their apps with extremely rudimentary features and poor liquidity. They never intended to generate profits through their Hong Kong compliance entities; these entities serve merely as expensive "billboards."

Of greater concern is that when institutions successfully evade stringent external regulatory scrutiny through "selective compliance," they simultaneously shed the constraints of external regulation.constraintsIn this shadowy corner, internal corruption and market manipulation flourish.

In traditional financial markets (such as NASDAQ), exchanges, brokers, market makers, and custodians are strictly separated and provide mutual checks and balances. In Web3, however, leading exchanges consolidate all these roles into a single entity:

It acts as an exchange, providing the matching engine.

It acts as a broker, directly holding user assets.

It acts as a market maker, maintaining its own quantitative trading teams (although these often appear under the guise of independent entities, such as Alameda Research in relation to FTX).

It acts as the arbiter, deciding which tokens are listed and which are delisted.

This concentration of power gives rise to extreme moral hazard. Attorney Hong Lin previously, in"How Do Virtual Currency Exchanges Exploit Token Issuers?", exposed the "predatory" nature of certain exchanges: exchanges possess complete data on user holdings and open orders. During periods of severe market volatility, exchanges leverage this "god's-eye view" to execute targeted attacks by creating extremely brief price anomalies (known as "wicks"), thereby forcing the liquidation of highly leveraged positions—a practice commonly referred to as "pulling the plug" or "slaughtering pigs."

Furthermore, to list on certain leading exchanges, project sponsors are not only required to pay substantial listing fees but also to provide large quantities of tokens as "liquidity support." These tokens are often ultimately sold to retail investors, generating additional profits for the exchange.

In the U.S. market under SEC regulation, a former product manager at Coinbase was sentenced for insider trading. However, in offshore exchanges, such conduct is an open secret. Prior to the listing of new tokens, on-chain data often reveals precise purchases by mysterious addresses. Due to the lack of investigative and enforcement authority by regulatory agencies, this "front-running" behavior incurs virtually no cost. Employees exploit information asymmetry to extract value from retail investors in the secondary market.

They dare to act so brazenly precisely because they know that their primary user base (such as users in mainland China) occupies a legally disadvantaged position. A user participating in "illegal financial activities," even if defrauded by an exchange, would not dare report the matter to public security authorities, as doing so would be tantamount to walking into a trap.

 

Conclusion

The crypto world resembles a dark forest. You may think "compliance" is a matter of values, only to discover it is more akin to an arithmetic problem: retain whatever generates profit and where risks can be borne; immediately sever ties with anything that triggers fiat currency clearing, foreign exchange regulation, or the iron fist of upstream banks, cutting cleanly and decisively.

Thus, you observe a phenomenon that is both surreal and real: trading functions may turn a blind eye to mainland Chinese users, whereas channels involving fiat settlement, such as deposits, withdrawals, and USDT cards, must be "cut off at the wrist." This is not about who is kinder, more responsible toward users, or better understands the spirit of compliance, but rather about the differing costs of risk.

So-called "selective compliance" is essentially a survival optimization strategy: conducting business within regulatory cracks, pushing responsibility and compliance costs outward as much as possible, while retaining profits internally. User experience is never the top priority; the paramount priority is always "can I continue to survive and make money." As for whether you can compliantly buy a cup of coffee—sorry, that is your problem, not the platform's KPI.

But this model is not a perpetual motion machine. Regulatory approaches will converge, clearing systems will tighten, risk controls by Visa/Mastercard and upstream banks will become increasingly stringent, and the buffering effect of offshore structures will continue to diminish.Arbitrageopportunities will ultimately vanish, not due to a moral awakening, but because rising costs are forcing everyone to reclassify their accounts from “gray profits” to “compliance costs.” The dark forest will not disappear, but the lights within it will surely multiply.

As for ordinary users: while you may observe as bystanders, do not mistake “still usable” for “legal,” nor interpret “beneficial to you” as “accountable to you.” In the dark forest of the crypto world, the most expensive lessons are often paid when you are most convinced that “everything is fine.”

 

Author

Liu Honglin, Founder of Mankun Law Firm. Member of the Young Lawyers Working Committee of the Shanghai Bar Association, Member of the Information Technology Working Committee of the Shanghai Bar Association, and Member of the Legal Technology Committee of the Shanghai Bar Association. Lawyer Liu has ten years of experience in law and internet entrepreneurship, having previously served as Vice President of a strategic investment legal technology company at Tencent and as Legal Manager for a private equity fund at a listed company. He specializes in proposing practical, actionable solutions for cases from the perspectives of business models and legal practice, thereby maximizing commercial interests for clients.

 

About Mankun

Mankun Law Firm was established in 2015 as a boutique law firm in China focusing on the new Web3 economy and deeply engaged in the blockchain industry. Members of the Mankun team possess unique and diverse industry backgrounds, hailing from renowned legal service institutions, state judicial organs, internet technology companies, crypto asset institutions, and blockchain industry think tanks.

Leveraging a profound understanding of the new economy, continuous attention to and research on policies and regulations, and extensive practical experience, the Mankun team excels in providing comprehensive legal services to enterprises in the new economy sectors—including Web3, blockchain, AI, NFTs, digital collectibles, crypto funds, crypto payments, DeFi, real-world assets (RWA), and GameFi. These services cover business structure design, project financing and investment, transaction planning, operational compliance, resolution of complex civil and commercial disputes, prevention and control of criminal risks, and criminal defense, all approached from the perspectives of business models and legal practice.

Mankun Law Firm is headquartered in Shanghai, with branch offices in Hong Kong (China), Silicon Valley (United States), Shenzhen, Hangzhou, Zhengzhou, Chengdu, and other locations. To meet the global compliance development needs of Web3 industry clients, Mankun has established local offices in major global crypto-financial cities and selected local professional blockchain service partners, providing clients with professional legal and compliance services characterized by global breadth and Chinese depth.