Attorney Shao Shiwei | U.S. Merchants Beware! Are Offline Cash Transactions in Virtual Assets Truly Safe?

CCTV News recently reported[1] a case in which a woman engaged in an online romantic relationship with a man who claimed to work for a classified entity, only to be defrauded into investing in virtual currencies. The individuals involved have been arrested.

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The method of fraud employed against the victim in this case is not novel; it aligns with the “Pig-Butchering” telecommunications fraud schemes originating from northern Myanmar that are frequently reported in the news: perpetrators use online social networking to first screen for eligible victims (typically women with certain financial means who are single or experiencing emotional setbacks), exploit emotional needs as bait, induce emotional dependence and establish trust, and then, through the four steps of “finding the pig, feeding the pig, fattening the pig, and butchering the pig,” defraud the victim of their funds.

As public security organs have intensified their crackdown on telecommunications fraud and carried out the “Card-Breaking Campaign” over many years, perpetrators have been forced to upgrade their fraudulent methods. In this case, the perpetrators adopted a “virtual currencies + offline transactions” approach to transfer the victim’s funds, which is evidently more concealed than bank transfers. This demonstrates the strong counter-investigation capabilities of the individuals involved.

In this case, the perpetrators showed the victim their investment returns on a wealth management platform. Coupled with the trust the victim had built up over time, the victim developed an intention to invest.At this point, the “butchering” phase began: the perpetrators informed the victim that such investments required the use of USDT virtual currency, and that purchasing USDT could only be done through offline cash transactions with USDT merchants.

Because the victim opened the account in their own name (rather than using an account controlled by the fraudster) and withdrew cash from the bank personally (rather than transferring funds to the fraudster for conversion into USDT), the victim generally does not become suspicious at this stage. Moreover, after handing over the cash to the USDT dealer, the victim did indeed receive the corresponding virtual assets.

Subsequently, after the victim transferred the virtual assets to the investment platform, they might initially be able to withdraw small amounts of interest. However, after depositing a certain sum, they would discover that withdrawals from the platform were no longer possible, and their online romantic partner had disappeared. At that point, the only recourse was to report the matter to the police.

The report stated that “since July of this year, the syndicate, under the guise of so-called ‘USDT dealers,’ has carried out more than ten illegal payment-settlement schemes in Tianjin and surrounding provinces and municipalities, involving amounts exceeding RMB 500,000.”

The perpetrators of the fraud undoubtedly bear criminal liability, but why are USDT dealers also implicated?

Although news reports describe this modus operandi as a “new investment scam,” such methods have been in circulation for some time.Several months ago, Attorney Shao represented a USDT dealerwho became entangled in a case of this natureand was criminally detained by the local public security authorities on charges of concealing or disguising the proceeds of crime.

To state the conclusion first: if a USDT dealer is legitimately engaged in buying and selling virtual assets to earn a spread, and the funds received do not involve illicit proceeds or foreign exchange violations, then no crime is committed. In such “pig-butchering” fraud cases, the victims’ funds are typically their own savings, and thus do not constitute illicit proceeds. So where does the problem lie? It lies inissues with the introducer。

How do USDT dealers find these clients? To specialize in earning spreads, expanding client channels is indispensable.Telegram groups are often one of the primary channels through which USDT merchants seek customers.In Telegram groups, introducers, or upstream operators, post orders and contact USDT merchants, claiming that buyers wish to purchase USDT offline. The transaction methods between USDT merchants and buyers typically involve either face-to-face cash-for-USDT exchanges or buyers depositing cash into designated bank accounts provided by customer service representatives of wealth management platforms (these receiving accounts are, in essence, provided by the USDT merchants to the upstream operators for the sale of USDT).

USDT merchants often argue that they genuinely lacked subjective knowledge that others were defrauding victims of their funds, asserting that they were merely selling USDT to earn a spread. As Attorney Shao has previously noted on multiple occasions, the concept of "lack of subjective knowledge" from the perspective of USDT merchants differs significantly from that recognized by judicial authorities.

From the perspective of judicial authorities,Telegram is viewed as a communication platform rife with black-and-gray market activities, telecom fraud, online gambling, and other illegal crimes. Consequently, they hold a negative perception of suspects who use this software for communication. In the case discussed in this article, judicial authorities would likely determine that the upstream operators contacting USDT merchants on Telegram are highly probable to be affiliated with the "pig-butchering scam" teams that contacted the victims.

                                                                                                                                                                              Telegram is a melting pot of illicit activities!

Based on this conclusion, judicial authorities would consider that by providing USDT to the victims, the USDT merchants facilitated the criminals' ability to defraud the victims of their funds. Therefore, the USDT merchants also constitute criminal offenses.

If USDT merchants become involved in such cases, relevant defense strategies have been analyzed in several articles previously written by Attorney Shao. This article will not reiterate those points; readers may clickthe link at the end of the articleto read further.

Many USDT merchant friends ask Attorney Shao how to properly conduct KYC (Know Your Customer) procedures. However, as demonstrated by the case in this article, the suspicion of USDT merchants being accomplices to money laundering crimes far exceeds the scope that KYC measures can address.

As criminal defense lawyers, based on our case-handling experience, it can be said thatUSDT merchants have become the "scapegoats" for pig-butchering scam perpetrators.”。

Those who have not experienced such situations may perceive lawyers as spreading anxiety; only those who have been through them will recognize the accuracy of the analysis in this article.

[1] [Immediate Response] Frontline Anti-Fraud: Tianjin – Woman Defrauded of Over RMB 100,000 in “Virtual Currency Investment” via Online Romance Scam https://tv.cctv.cn/2024/12/01/VIDEIxJCqHjAFkQeHA2wfAgL241201.shtml