Attorney Shao Shiwei | Has the Crime of Illegal Business Operations Become a High-Frequency Criminal Charge for USDT Merchants in the Crypto Circle?

Introduction:

On December 16, 2023, the Guangdong High People’s Court published an article titled “You Cannot Profit from This Price Difference!” which caused an uproar in multiple WeChat groups dedicated to cryptocurrency trading. Whether they were over-the-counter (OTC) merchants, on-exchange USDT traders, or ordinary cryptocurrency speculators, anyone who had engaged in arbitrage through virtual currency trading (“brick-moving”) was discussing in these groups: What does the crime of illegal business operations mean? Can the business of “arbitrage through brick-moving” still be conducted in the future? Will continuing to do so lead to arrest?

In fact, the author analyzed this case from the Guangdong High People’s Court in an article published in August 2023, titled “Arrested for Profiting from Price Differences in Buying and Selling USDT (Tether): How to Conduct Effective Criminal Defense? — Criminal Risks for OTC Merchants: The Crime of Illegal Business Operations (Part II)”

The Guangdong High People’s Court has republished this case as a typical example, which will serve as a certain guide and demonstration for judicial adjudication in future practice.

Therefore, this article further analyzes whether the act of buying and selling virtual currencies to profit from price differences constitutes the crime of illegal business operations.

01

Basic Facts of the Case

Upon search, it was found that the judgment documents for this case have not been made public on the China Judgements Online website. Therefore, the facts of the case can only be understood through the content published on the court’s official WeChat account.

The Dapu County People’s Court determined that the defendants, Chen and Li, committed the crime of illegal business operations by engaging in disguised foreign exchange trading through the buying and selling of virtual currencies.

In the author’s article titled “Is Over-the-Counter (OTC) Trading of Digital Currencies a Crime?”, specific scenarios involving the crime of illegal business operations related to “foreign exchange trading” were listed in detail. According to regulations, among the four scenarios of illegal foreign exchange trading (private trading, disguised trading, speculative resale, and illegal introduction of trading), only speculative resale of foreign exchange and disguised foreign exchange trading are explicitly defined as criminal acts. In this case, the actions of the two defendants were classified as “disguised foreign exchange trading.”

02

Case Analysis

Since the court’s publication provided a relatively brief description of the case facts, it did not clarify the relationships between Chen and Zou or Huang, nor did it provide specific transaction details. It merely summarized the entire background of the case with the term “in collusion,” and Zou and Huang have not been brought to justice.

The author believes that the mere act of Chen trading USDT with Huang cannot, in itself, determine that Chen’s conduct constitutes the crime of illegal business operations. This is because, according to China’s policies on virtual currencies, cryptocurrencies such as Bitcoin and USDT (Tether) are defined as virtual commodities, and domestic law does not prohibit natural persons from exchanging virtual currencies for fiat currency. If OTC over-the-counter trading were illegal, would not every individual who has exchanged virtual currencies be considered a criminal offender?

Therefore, OTC merchants or cryptocurrency speculators need not be overly alarmed by this case. The key to determining whether a crime has been committed in this case lies precisely in the transaction background and trading model among the various parties, which were not mentioned in the text, rather than in the mere act of trading itself.

03

Illustrative Legal Interpretation

To facilitate understanding, we provide an illustrative explanation:

B is engaged in the business of a “matching-type” underground bank (where funds circulate unilaterally domestically and internationally without physical movement, typically achieving a “balance between two locations” through reconciliation). C approaches B and asks B to help convert C’s Renminbi (RMB) into US Dollars (USD).

Consequently, B takes the RMB provided by C and approaches OTC merchant A, telling A that B wishes to purchase USDT. After A receives the RMB from B, A transfers the USDT to an address designated by B.

Subsequently, B converts the USDT received from A into USD. Finally, B transfers the USD to C.

In this manner, the transaction between B and C is perfectly completed.

What is disguised foreign exchange trading? It refers to acts of converting currency value by repaying RMB with foreign exchange or repaying foreign exchange with RMB, or swapping foreign exchange and RMB (excluding direct buying and selling between RMB and foreign exchange).

In the process described above, B completed the transaction sequence of receiving RMB, converting it into USDT, and then converting the USDT into USD. In this process, USDT served as a medium of exchange.

Trading virtual currencies is not illegal per se. However, B used virtual currency transactions to achieve the purpose of converting RMB into USD, which is the reason for violating the provisions on the crime of illegal business operations related to “foreign exchange trading.” Therefore, if Chen in the aforementioned court case acted in the capacity of B, purchasing Tether from others, there is little controversy regarding the constitution of the crime of illegal business operations.

What if Chen acted in the capacity of A in the transaction diagram above? For instance, if A, as a USDT merchant, has long relied on arbitrage through buying and selling USDT virtual currencies to profit from price differences, and A purchased large quantities from others to meet the quantity of USDT required by B. If B is implicated in the crime of illegal business operations, thereby implicating A, does A constitute an accomplice to the crime of illegal business operations related to “foreign exchange trading”?

This can be divided into three scenarios:

① A knows that B is operating an underground bank, and A provides USDT to B solely to obtain profit from price differences;

② A does not know that B is operating an underground bank, but cooperates with B because B’s transaction volume is large, allowing A to obtain higher profits from price differences through high volume;

③ Because B’s quoted price is higher than the market price, in addition to the large volume, A can earn higher profits from price differences on each order, thus choosing to cooperate with B;

In the first scenario, A knows that B is operating an underground bank and trading foreign exchange. A’s act of providing USDT to B is equivalent to aiding and abetting, thus constituting an accomplice to the crime of illegal business operations;

In the second scenario, A chooses to cooperate with B merely because B can provide more business volume. A is unaware of the nature of B’s underlying business. This brings to mind a previous case encountered by the author, where the client was an on-exchange USDT trader at a virtual currency exchange. His client was a Chinese student studying in South Korea. This Korean-based Chinese student purchased a large amount of USDT from him over more than a year. Although he had asked the student why such a large amount of USDT was needed, the student did not explain. When the student was arrested, the USDT trader was also detained for the crime of illegal business operations.

The author believes that if the USDT merchant is unaware of the specific foreign exchange activities of the counterparty and their upstream providers, the merchant’s objectively presented indirect assistance in the counterparty’s foreign exchange conversion lacks the subjective intent required for the crime of illegal business operations. Therefore, it should not constitute the crime of illegal business operations. Furthermore, since there was no subjective willingness to provide assistance knowing that others might be illegally exchanging foreign currency, it also should not constitute the crime of aiding information network criminal activities. That is, the USDT merchant’s conduct does not constitute a crime;

In the third scenario, A chooses to cooperate with B because B offers a higher price. In judicial practice, it can be presumed that A knows that others are engaging in illegal or criminal activities. Combining this with chat records, transaction flows, witness testimonies, etc., it is necessary to determine whether A’s level of knowledge reaches the same criminal intent as the principal offender (crime of illegal business operations) or constitutes generalized criminal intent (such as the crime of aiding information network criminal activities, etc.).

Concluding Remarks:

Regarding the case circulated by the Guangdong High People’s Court where virtual currency trading was judged as illegal business operations, due to the extremely limited information available from public sources, the opinions expressed in this article do not constitute the author’s judgment on the case itself. This article uses the case as an example to analyze possible scenarios in judicial practice.

The business of arbitraging virtual currencies (“brick-moving”) is not illegal. The high risk of criminal liability arises because USDT merchants cannot look beyond the transaction itself to see the story behind the transaction chain.