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Recently, Mankun lawyers received a client inquiry. The client had registered a company overseas whose primary business was selling prepaid cards from around the world, with payments accepted in virtual assets. Many of the buyers were Chinese nationals. The client sought to understand whether his business posed any legal risks.
Is buying and selling prepaid cards illegal?
Prepaid cards are categorized into single-purpose commercial prepaid cards and payment institution prepaid cards, which are regulated respectively by the Measures for the Administration of Single-Purpose Commercial Prepaid Cards (Trial) (2016 Revision) and the Measures for the Administration of Prepaid Card Business of Payment Institutions.The term "prepaid cards" in this article refers to single-purpose commercial prepaid cards, namely the various gift cards commonly seen in daily life.。
Depending on the circumstances, enterprises issuing prepaid cards are required to file records with the Market Supervision Administration or commerce departments and comply with relevant fund management requirements. In addition to the regulation of issuance activities,there are no prohibitive regulations on the trading of prepaid cards; that is, reselling prepaid cards is a completely lawful market activity.
Previously, prosecutors in Jiangsu Province initiated public prosecution against a citizen for profiting from the large-scale recovery and resale of shopping cards. However, the defendant, Wen, was ultimately found not guilty and released in court. In that case, the court carefully analyzed why engaging in the business of recovering shopping cards did not constitute the crime of illegal business operations (see [Criminal Trial Reference] Wen Fusheng Case of Concealing and Disguising Criminal Proceeds [No. 1093]—Does the act of recovering and reselling shopping cards for profit constitute a crime? See the final section for the court's reasoning).
Does buying and selling prepaid cards constitute illegal business operations?
Before interpreting whether this may constitute the crime of illegal business operations, it is necessary to first understand this business model.Why use virtual assets to sell prepaid cards? There may be various reasons, such as conducting global business, or facilitating small-value cash-outs?
It is an established fact that in mainland China, bank accounts are easily frozen during the virtual asset cash-out process due to the receipt of illicit funds, among other reasons. Therefore, during the cash-out process, not only do buyers guard against sellers, but sellers also guard against buyers. For users seeking only small-value cash-outs, the business model of selling prepaid cards for virtual assets ingeniously addresses the concerns of both parties. Buyers receiving prepaid cards face absolutely no risk of account freezing. Sellers receive small amounts of virtual assets, significantly reducing the likelihood of involving illicit funds.
This model perfectly addresses the pain points of market demand for small-value cash-outs, but does it constitute illegal business operations?
First, Mankun lawyers wish to clarify that the scope of application of the Criminal Law of China is extensive.As long as any link in the business model has some connection to China, it could theoretically fall under the jurisdiction of Chinese criminal law. However, increasing foreign-related factors in the business model, such as having an overseas corporate entity, can significantly reduce the probability of Chinese criminal risk.。
Secondly,even though the scope of application of Chinese criminal law is broad, it still adheres tothe fundamental principle of legally prescribed punishment for a specified crime。namely, Article 3 of the Criminal Law stipulates: "Acts expressly defined as crimes by law shall be convicted and punished in accordance with the law; acts not expressly defined as crimes by law shall not be convicted or punished."
Does buying and selling prepaid cards constitute illegal fund payment and settlement?
So, does this business model fall under the illegal business operations expressly stipulated in the Criminal Law of China? Based on Mankun lawyers' previous analysis of the market demand underlying this business model,the aspect of this business model most likely to be implicated is the act of "illegally engaging in fund payment and settlement business" within the crime of illegal business operations.。
According to the judicial interpretations by the Supreme People's Court and the Supreme People's Procuratorate regarding illegally engaging in fund payment and settlement business, Mankun lawyers believe that this business model does not fit any of the behaviors listed in the judicial interpretation: "(1) Using acceptance terminals or online payment interfaces, etc., to pay monetary funds to designated payees through illegal means such as fictitious transactions, inflated 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; (3) Illegally providing services for cashing out checks."
The reasons are: (1) The transactions corresponding to this business model are genuine, and prices follow market rates; (2) It does not involve providing bank accounts or check cashing services;An important point emphasized by Mankun lawyers is (3) it is not a "money-to-money" transaction.。
What is a non-"money-to-money" transaction? When feeling anxious, friends of Mankun must remember that regulation or penalization in any jurisdiction (including in China) tends to prioritize "substance over form." Therefore, when encountering issues, ask yourself: What is the essence of my conduct? What is the substance of the punishment for this illegality or crime? Penetrating the substance of the criminal law's regulation of "illegally engaging in fund payment and settlement business," it is essentially unauthorized direct money-to-money exchange.
The client's business model, plainly speaking, may only involve one link of the money-to-money process. Whether users who buy prepaid cards will subsequently seek other merchants to convert the prepaid cards back into RMB is entirely unrelated to the client's business model—and ideally should remain so. Once related, a closed loop of money-to-money exchange is formed, and no matter how elaborate the form, it cannot conceal the substance of "direct money-to-money exchange," thereby crossing the baseline of criminal law.
Therefore, in the view of Mankun lawyers, merely selling prepaid cards for virtual assets does not constitute illegal business operations. However, if one further intervenes in or facilitates the transaction link converting prepaid cards into RMB on this basis, the legal assessment becomes uncertain.
Of course, friends of Mankun reading this may activate their flexible commercial minds. You might further ask: What if a domestic company conducts exactly the same activity? Domestic law does not prohibit all trading activities involving virtual assets as subject matter, but rather prohibits virtual asset-related business activities deemed illegal financial activities. That is all for now. If you have further questions, you are welcome to consult Mankun lawyers.
1. Criminal Law of the People's Republic of China (2020 Amendment)
2. Interpretation of the Supreme People's Court and the Supreme People's Procuratorate on Several Issues Concerning the Application of Law in Handling Criminal Cases of Illegally Engaging in Fund Payment and Settlement Business and Illegally Trading Foreign Exchange
3. [Criminal Trial Reference] Wen Fusheng Case of Concealing and Disguising Criminal Proceeds [No. 1093]
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