Attorney Shao Shiwei | The State Administration of Foreign Exchange Takes Action! An Increasing Number of USDT Merchants May Be Convicted of Illegal Business Operations! — Qingdao Police Solve Underground Banking Case Involving RMB 15.8 Billion

Introduction:

The days of USDT merchants are becoming increasingly difficult.

Following the Guangdong High People’s Court’s release of typical cases on December 16, in which USDT merchants were convicted of illegal business operations (for attorney interpretation, see → “Has Illegal Business Operations Become a High-Frequency Criminal Charge for Crypto Circle USDT Merchants?》”), CCTV News reported another major story on Christmas Eve yesterday:Shandong Qingdao Solves Major Underground Banking CaseThe key perpetrators were market makers buying and selling virtual currencies, who are suspected of committing crimes of illegal business operations. The case has currently been transferred to the procuratorial organs for review and prosecution.

On December 24, 2023, according to reports from multiple official media outlets, the Qingdao Public Security Bureau and the Qingdao Branch of the State Administration of Foreign Exchange jointly solved an underground banking case involving an amount as high as RMB 15.8 billion. The 74 suspects arrested were distributed across 17 provinces and municipalities nationwide.

Although numerous virtual currency market makers/USDT merchants were arrested in this case, the initial incident did not originate from the USDT merchants.

Through investigation, the police found that Jin was suspected of using bank accounts under his control to provide illegal foreign exchange services, constituting suspected crimes of illegal business operations.

So, if Jin was suspected of underground banking transactions, why did it involve USDT merchants?

The transactions engaged in by Li and other USDT merchants were “arbitrage,” i.e., earning spread profits by buying low and selling high between fiat currencies and virtual currencies. In this case, due to the police’s investigation into the underground banking ring, they followed the trail and arrested multiple USDT merchants, including Li.

There are certain commonalities between the two cases released by the Guangdong High People’s Court and the Qingdao Police this time.

The Dabu Court in Guangdong Province convicted a USDT merchant of illegal business operations for buying and selling virtual currencies. When the Guangdong High People’s Court released this case, the description of the facts was very brief and did not explain under what circumstances buying and selling virtual currencies would violate the crime of illegal business operations in the Criminal Law. Furthermore, the title of the article was “This Spread Cannot Be Earned!” This indicates that, both in content and title, the court has expressed a negative and disapproving attitude towards the act of buying and selling virtual currencies:The model of buying and selling virtual currencies to earn spread profits is not permitted! Additionally, although the Dabu Court case did not mention whether the Foreign Exchange Bureau participated in handling the case, the presiding judge determined that the defendant’s actions constituted “disguised buying and selling of foreign exchange.”

(This may be a coincidence) Just eight days later, major official media outlets reported that Qingdao Police had solved an underground banking case involving virtual currency market makers, once again mentioning that USDT merchants played a role in assisting with foreign exchange conversions in others’ underground banking activities. Furthermore, this case involved joint law enforcement by the Public Security Bureauand the State Administration of Foreign Exchange. The Qingdao Branch of the State Administration of Foreign Exchange stated: “After collecting RMB from clients, underground banks purchase virtual currencies and then sell them through overseas trading platforms to obtain the foreign currency funds they need, thereby achieving the conversion between RMB and foreign currency, which constitutes the illegal act of buying and selling foreign exchange.”

Therefore, combining these two cases, Attorney Shao makes a bold prediction:

1. In the future, cases related to virtual currency market making will increasingly involve joint law enforcement by the State Administration of Foreign Exchange and public security organs.

More and more people are using virtual currencies as tools for cross-border payments. Meanwhile, due to the efficiency and anonymity of virtual currency payments, virtual currencies have become increasingly widely used as payment tools for online gray and black market industries.

In particular, criminals involved in online gambling and telecom fraud, in order to evade police investigation, have long moved their bases to foreign regions such as northern Myanmar. Using “underground banks” for money laundering, as well as converting virtual currencies into foreign exchange, has become a rigid demand for such groups. Therefore, the large-volume, batch orders that OTC merchants and on-exchange USDT merchants receive are inevitably dominated by such activities (ordinary crypto traders do not have such high-frequency conversion needs). RMB → Virtual Currency → Foreign Currency. The RMB is circulated through the buying and selling by USDT merchants on exchanges, ultimately converted into foreign currency. This objectively poses an impact and challenge to China’s foreign exchange management order. The Foreign Exchange Bureau has no choice but to take action.

2. Due to the involvement of the Foreign Exchange Bureau,the virtual currency trading activities of USDT merchants being characterized as “illegal buying and selling of foreign exchange,” thereby resulting in convictions for illegal business operations, will become common cases。

In current judicial practice, there is still significant controversy over whether the behavior of USDT merchants earning spreads through virtual currency transactions can be characterized as illegal business operations. Many police officers from various parts of the country have added me on WeChat to discuss this with me. The main reasons for the controversy are as follows:

First,Is the act of buying and selling virtual currencies to earn spreads an “business operation” within the meaning of the crime of illegal business operations? Does “buying and selling” necessarily equal “business operation”? The Criminal Law does not define what constitutes a “business operation.” If a USDT merchant has their own primary job and only engages in short-term, low-frequency (but with extremely high purchase/sale amounts and profit margins) buying and selling of virtual currencies, does this constitute a “business operation”?

Second,According to Chinese policy, virtual currencies are characterized as “virtual commodities.” Therefore, some viewpoints argue that virtual currencies do not fit the concept of “foreign currency” in the Regulations on Foreign Exchange Administration, cannot be recognized as foreign exchange, and thus there is no illegal buying and selling of foreign exchange.

Finally,No crime without explicit legal provision. According to the following regulations, acts of privately buying and selling foreign exchange and acts of illegally introducing the buying and selling of foreign exchange do not constitute the crime of illegal buying and selling of foreign exchange under criminal law. Furthermore, if the illegal business amount or the amount of illegal gains does not meet the standards prescribed by law, the case should not be filed for prosecution. However, in practice, if Act A cannot be convicted, it is possible to convict based on Act B (given the complex situations in practice,and because suspects, dominated by fear during interrogations, may not state all the complete facts, judicial organs may not be able to clearly distinguish whether the perpetrator was actually engaged in reselling, disguised buying and selling, private buying and selling, or illegal introduction of buying and selling. However, this determines whether the perpetrator faces administrative penalties or criminal liability. For detailed distinctions of related concepts, see “Is Digital Currency OTC Over-the-Counter Trading a Crime?》）

However, if judicial practice sees an increasing number of USDT merchants being convicted of illegal business operations, defenses based on theoretical foundations will appear pale and weak.

3. An increasing number of USDT merchants will become involved in cases due to connections with underground banks.

Illegal and criminal activities related to underground banks have always been a key focus of national crackdowns. Virtual currencies possess natural advantages for the flow of funds between domestic and overseas markets. For example, the 2019 Gansu major underground banking case, the 2021 “Strike 21” special campaign against underground banking crimes, and the 2023 “Summer Action” by the public security economic investigation system, which included ten major battles against underground banks, among others.

As Attorney Shao has mentioned multiple times in previous articles,USDT merchants cannot penetrate the transaction itself to see the story behind the transaction chain. Even if USDT merchants are unaware that the funds or virtual currencies they handle originate from underground banking flows, investigative organs, while cracking down on other illegal and criminal activities and tracing the flow of virtual currencies/funds, will inevitably investigate the “instrumental” USDT merchants. Even if they are not convicted of illegal business operations, there is always a charge in the Criminal Law that can be applied, including but not limited to aiding information network criminal activities, concealing or disguising the proceeds of crime, or being an accomplice to opening a casino, among others.

Buying and selling USDT is not illegal. This industry can only earn modest “arbitrage” profits. If the order volume is large and stable over a long period, it may be difficult for USDT merchants to convince the handling personnel that they were subjectively unaware that their counterparties were involved in underground banking.

Has Illegal Business Operations Become a High-Frequency Criminal Charge for Crypto Circle USDT Merchants?

Is Digital Currency OTC Over-the-Counter Trading a Crime?

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