Special Declaration: This article is an original work by Attorney Shao Shiwei. It represents only the personal views of the author and does not constitute legal consultation or legal advice on specific matters. For article reposts, legal consultations, or business exchanges, please add: sswls66.
Based on work over the past six months, Attorney Shao has a profound observation:Cases where individuals are convicted of illegal business operations due to trading virtual currencies are increasing.。
Since late 2023, when various state media outlets successively published typical cases of illegal business operations related to virtual currency trading, judicial authorities across different regions appear to have continuously intensified their crackdowns on such transactions in practice.
However, many parties still do not understand why trading USDT virtual currency can lead to convictions for illegal business operations. Why can one be convicted even without receiving illicit funds? If one is merely engaging in USDT trading, what does it have to do with foreign exchange trading? Therefore, this article provides a brief introductory explanation based on specific scenarios encountered in practice.
By Attorney Shao Shiwei
01
WhatIs the Crime of Illegal Business Operations Involving “Foreign Exchange Trading”
The crime of illegal business operations involving “foreign exchange trading,” specifically in the context of virtual currency transactions, refers to disguised foreign exchange trading (also known as “offsetting foreign exchange transactions”).
So-called “disguised foreign exchange trading” refers to acts that do not involve the direct buying and selling of Renminbi (RMB) and foreign currencies, but instead adopt methods such as repaying RMB debts with foreign currencies or repaying foreign currency debts with RMB, or swapping foreign currencies and RMB to achieve currency value conversion. Under this model, funds circulate unidirectionally domestically and overseas without physical movement, typically achieving “balance between two locations” through reconciliation.
China implements a mandatory foreign exchange management system (implementing annual quota management for individual foreign exchange settlements and domestic individual foreign exchange purchases, with an annual equivalent limit of USD 50,000 per person). Off-market private foreign exchange transactions may constitute administrative violations in less serious cases, and criminal offenses in more serious cases. The specific standards are as follows:
For disguised foreign exchange trading, if the amount exceeds USD 1,000, it constitutes an administrative violation. If the amount involved in illegal business operations exceeds RMB 5 million, or if the illegal gains exceed RMB 100,000, it constitutes the crime of illegal business operations.
USDT (Tether), used by USDT merchants or ordinary cryptocurrency traders in transactions, is issued and managed by Tether Limited. As a type of crypto asset, it cannot be directly equated with concepts such as foreign currencies or foreign exchange. However, by using USDT as an intermediary,foreign currencies and RMB are indirectly swapped, achieving currency value conversion,and thus domestic judicial authorities regard this as “disguised foreign exchange trading,” a view that is currently undisputed.
Due to the high threshold for initiating investigations for this crime, ordinary individuals who occasionally use this method for foreign exchange generally do not meet the criteria for this offense. Common subjects of this crime are underground banks, or USDT merchants whose profession involves arbitrage trading in virtual currencies to earn spreads.
Even without using virtual currencies, underground banks employ various methods for foreign exchange trading. Their business inherently involves money laundering and earning spreads on exchange rates, so they are not innocent.
However, many USDT merchants encountered by Attorney Shao originally intended only to earn spreads through arbitrage trading and had no intention of committing this crime. Due to a lack of legal knowledge, they remained unaware of why they were deemed to be engaging in “illegal business operations” until their arrest. As Attorney Shao often says, the world seen by USDT merchants is often just “the tip of the iceberg.” Therefore, we will next adopt aholistic perspectiveto understand what constitutes the crime of illegal business operations involving “foreign exchange trading,” and what roles USDT merchants play within it.
02
Scenarios Where “Offsetting Foreign Exchange Transactions” Are Achieved Through Virtual Currency Trading
1. Who Has Demand for Private Foreign Exchange?
Based on cases handled by Attorney Shao and the large volume of daily consultations, these can be broadly categorized into the following four scenarios:
Person A is in China and wishes to convert foreign currency holdings into RMB. For example, foreign trade merchants, or merchants or individuals whose clients are overseas groups (such as those providing overseas advertising services). Clients transfer USD to A’s overseas account, and A wishes to cash out into RMB.
Person B is in China and wishes to convert RMB holdings into foreign currency. For example, many wealthy individuals intending to emigrate find that the USD 50,000 foreign exchange quota is insufficient for transferring assets abroad. In August 2023, Wailian Company, Shanghai’s largest immigration company, was investigated, and its actual controller, Mr. He, was arrested. One of the gray-area businesses of such immigration companies is finding ways to help clients move money out of the country.
Person C is abroad and wishes to convert foreign currency holdings into RMB. For example, C works abroad long-term, and their income is in USD. If family members in China suddenly encounter an emergency requiring urgent funds, C needs to quickly convert a large amount of USD into RMB for their family in China.
Person D is abroad and wishes to convert RMB holdings into foreign currency. For example, international students or business groups (Attorney Shao previously had a client who lived and worked in Myanmar for many years. Their business involved sourcing goods locally in Myanmar and importing them into China. Since they sold to domestic Chinese users, they collected RMB. However, as they sourced goods from Myanmar, they needed to pay Myanmar merchants in Myanmar Kyat. Therefore, although located abroad, they still required substantial amounts of foreign currency).
2. What Role Do USDT Merchants Play?
In the above four scenarios, if clients transact with underground banks or private foreign exchange platforms, the fund flows fall into two categories: either the client receives foreign currency abroad and pays RMB domestically, or the client pays foreign currency abroad and receives RMB domestically.
Virtual currencies possess inherent convenience for cross-border transactions. The illegal process of exchanging foreign currencies and RMB requires only USDT as an intermediary. Illicit foreign exchange platforms act as fund aggregation centers. Firstly, their currency reserves (for ease of expression, referring collectively to foreign currencies or RMB as “currency”) come from clients with foreign exchange needs. These clients wish to convert Currency A into Currency B, or Currency B into Currency A. Therefore, illicit foreign exchange platforms need substantial reserves of currencies from different countries to meet client demands.
Of course, this foreign exchange business could operate without USDT by collecting currencies provided by users from different countries and matching them. However, with USDT, foreign exchange transactions can be conducted more discreetly, on a larger scale, and more conveniently—illicit foreign exchange platforms use currencies provided by clients to purchase USDT domestically and internationally, and then convert the USDT into the currency required by the clients’ respective countries.
In the virtual currency transaction phase, those interfacing with illicit foreign exchange platforms are individuals wishing to sell or acquire USDT. This group falls into three categories:
1. Retail cryptocurrency traders who occasionally need to liquidate funds but have no intent for foreign exchange;
2. Individuals with foreign exchange needs who “self-help” by independently selling Currency A for USDT, and then independently finding counterparties to convert the USDT into Currency B;
3. USDT merchants whose profession involves arbitrage trading in virtual currencies to earn spreads;
For the first group above, if they do not receive illicit funds, there is generally little risk. Even if they transact with illicit foreign exchange platforms, they will not be deemed guilty of illegal business operations;
For the second group, since they conduct foreign exchange independently, if they do not receive illicit funds and the amounts do not reach the thresholds for criminal or administrative penalties, the risk is generally low;
The third group faces a higher risk of involvement in the crime of illegal business operations. Some USDT merchants may argue that,“I did not know that the counterparty I traded with was engaged in foreign exchange trading; I merely traded virtual currencies with them, receiving/paying RMB.”However, the following circumstances may bepresumedto indicate that the USDT merchant subjectively knew that others were suspected of engaging in disguised foreign exchange trading:
The counterparty trades with you steadily and frequently;
A single large order worth millions;
Abnormal transaction prices (higher or lower than market rates);
Even if the counterparty did not explicitly inform you, communications between both parties reveal that the counterparty’s clients include overseas groups such as international students or cross-border traders;
...Under these circumstances, judicial authorities may determine that because the USDT merchant provided assistance to the illicit foreign exchange platform, the two partiesconstitute joint offenders in the crime of illegal business operations.
This concludes the discussion. This article addresses only one question: Why is a business perceived by USDT merchants as earning spreads classified as illegal business operations?
For legal analysis regarding USDT merchants’ involvement in the crime of illegal business operations, please click the link at the bottom of the article to read previous articles published by Attorney Shao.
Final Remarks:
Neither receiving illicit funds nor involvement in foreign exchange trading is something USDT merchants subjectively wish to encounter. This spread-earning business is indeed difficult to operate. Previously, Attorney Shao would advise USDT merchants to perform proper KYC during transactions. However, after handling numerous cases, he no longer emphasizes this, becausethere is no perfect KYC.Who can achieve a God’s-eye view?
Recommended Reading
How Is the Value of Involved Coins Determined in Virtual Currency Theft Cases?
Criminal Risks for OTC Merchants: Illegal Business Operations (Part I)
Criminal Risks for OTC Merchants: Illegal Business Operations (Part II)
