Attorney Shao Shiwei | Does Promoting and Selling Virtual Credit Cards (VCCs) Domestically Constitute the Crime of Illegal Business Operations?

 The Past and Present of Virtual Credit Cards

"The Past"

In China, virtual credit cards (VCCs, short for Virtual Credit Card) are not a new phenomenon emerging only in the last two years. As early as around 2013, pioneers represented by Xinrenbao began attempting to introduce them, but these efforts were quickly hindered due to domestic policy restrictions. Subsequently, commercial banks, consumer finance companies, and fintech companies also engaged in continuous exploration, launching related products such as virtual credit cards.

"The Present"

In recent years, driven by the vigorous development of blockchain technology, cross-border e-commerce, and artificial intelligence, virtual credit cards have entered a period of rapid growth, becoming a new payment tool for an increasing number of user groups. The virtual credit cards discussed in this article refer to payment tools that can be used for online payments and shopping globally, are compatible with mainstream payment networks such as MasterCard or VISA, and are accepted by most merchants and e-commerce platforms worldwide.

What Are the Use Cases for Virtual Credit Cards?

Although VCCs are called "credit cards," they do not allow overdrafts; users must pre-load funds to use them. Their main use cases include:

• Cross-border shopping: Virtual credit cards are suitable for international e-commerce platforms (such as Amazon, eBay, etc.), especially when users need to avoid exchange rate fluctuations and foreign exchange controls, or wish to keep their real bank card information private;

• Subscription services and digital content purchases, such as payments deducted by various overseas subscription platforms like Netflix, ChatGPT, and Steam;

• Various online booking expenditures, including car rentals, hotel reservations, and travel;

• Online advertising and marketing payments, such as directly binding virtual cards to advertising platforms like Google Ads and Facebook Ads for deducting advertising fees;

• Foreign exchange trading and crypto assets payments: Virtual credit cards typically support multiple currencies, helping users bypass traditional banks' foreign exchange controls and facilitating cross-border transactions. Some virtual credit cards support binding with crypto assets platforms (such as Coinbase, Binance, etc.), allowing users to load fiat currency into their virtual credit card accounts to purchase crypto assets, or convert crypto assets into fiat currency for payments.

Overseas Entity + Licensed Qualifications = Legal Operation?

Is establishing an entity overseas and obtaining relevant qualified licenses sufficient for legal operation?This is a question Attorney Shao is frequently asked by clients. Establishing a corporate entity in a country or region outside mainland China and obtaining the licenses and qualifications required by local laws and regulations,does this permit conducting business within mainland China?

Sun Tianqi, Director of the Financial Stability Bureau of the People's Bank of China, stated at the 3rd Bund Finance Summit in 2021[i] that, "As a licensed industry, finance must operate with licenses.Financial licenses have national boundaries; operating domestically with only an overseas license constitutes illegal financial activity.He argued that overseas institutions are prohibited from operating financial businesses within China that are banned for both domestic and foreign investors, or that have not been opened to the outside world. For financial businesses that have been opened to the outside world, overseas institutions must hold relevant domestic licenses to operate legally and in compliance. Overseas institutions engaging in prohibited or unopened financial businesses within China, or operating domestically with only an overseas license, constitute illegal financial activity."

So, does the virtual credit card business belong to "financial businesses that have been opened to the outside world"? Can virtual credit card businesses obtain relevant licenses within China? This requires analysis in conjunction with the "past" of virtual credit cards mentioned at the beginning of this article.

Previously, virtual credit cards in China were issued by banks or internet finance institutions in collaboration with banks. Such virtual credit cards were no different from the traditional concept of credit cards that allow overdrafts. Besides concerns about exacerbating assisted lending practices, regulatory authorities halted them due to the following concerns[ii]:

Harm to user rights and interests.For virtual credit cards requiring real-name authentication, if criminals impersonate others' identity information for registration or theft, leading to malicious consumption or cash-out schemes, there is a lack of explicit legal provisions on how users can protect their legitimate rights and interests;

Difficulty in executing anti-money laundering tasks. The application process for virtual credit cards is simple, and users are not required to provide extensive personal information. Criminals can exploit this loophole to open multiple virtual credit cards for money laundering activities.

These issues persist in virtual credit cards issued overseas today. For instance, one of the selling points promoted by some virtual credit cards on the market isno KYC verification is required, offering users higher privacy protection,which clearly contradicts China's regulatory principles.

Why Does the Virtual Credit Card Business Involve the Risk of the Crime of Illegal Business Operations?

In addition to the aforementioned issues, virtual credit cards supporting cross-border payments currently face numerous problems. Solely from the perspective of the legal risk of the crime of illegal business operations mentioned in this article, if a platform operates within China and provides services to mainland Chinese users, it may involve "payment and settlement-type" or "foreign exchange trading-type" illegal business operations. The following is a detailed analysis:

1. "Payment and Settlement-Type" Illegal Business Operations

Based on the above analysis, we can see that virtual credit cards with entities established overseas, even if they have obtained relevant overseas qualifications and licenses, still constitute illegal financial activities if they operate within mainland China. According to the following provisions, such business activities fall under "engaging in payment and settlement services without obtaining payment business permits."

2. "Foreign Exchange Trading-Type" Illegal Business Operations

This scenario refers to engaging in foreign exchange buying, selling, conversion, trading, and other activities without legally obtaining permits related to foreign exchange management or financial services, thereby violating foreign exchange management regulations and constituting illegal business operations.

Virtual credit cards on the market support top-ups in RMB, foreign fiat currencies, and virtual currencies. Although their usage scenarios are generally limited to online payments and consumption, there remains the possibility for users to withdraw cash through third-party platforms. For example, users may be allowed to transfer funds from virtual cards to e-wallets such as PayPal or Skrill, and then withdraw these funds to bank accounts through these platforms. If virtual credit cards support top-ups and withdrawals in virtual currencies, some users may transfer funds via virtual credit cards into virtual currency wallets and then convert them into fiat currency for withdrawal.

Through these methods, users can bypass China's foreign exchange controls and achieve the goal of converting one fiat currency into another.

Risk Prevention Recommendations

As an innovative payment tool, virtual credit cards offer diverse usage scenarios and indeed provide significant convenience to users, holding considerable development potential. However, if service providers operate within mainland China, they may face legal risks such as the crime of illegal business operations.

Therefore, it is recommended that virtual credit card service providers focus their operations overseas when conducting such business. Meanwhile, they must ensure strict compliance measures during cross-border operations, such as completing reasonable anti-money laundering procedures including KYC (Know Your Customer), KYB (Know Your Business), and KYT (Know Your Transaction), improving user service agreements, setting conditions for card top-ups and usage, and ensuring adherence to the laws and regulations of the countries and regions where they operate, so as to prevent potential legal risks.