Unveiling Over-the-Counter Trading of Virtual Currencies: Rapid Growth in Transaction Volume, Prevalence of Gray Industry

This article is from PeckShield, originally titled "Hidden Transactions ------ Uncovering USDT OTC Trading."

Face-to-face OTC trading of virtual currencies may seem safe but actually hides crises.

"Compared to transferring on virtual currency exchanges, face-to-face cash settlement can bypass bank scrutiny, ensure real-time transaction completion, and avoid either party running away with the money, which has become a popular trading trend in Hong Kong." said a representative from a virtual currency exchange shop in Hong Kong.

Purchasing Bitcoin on a legitimate virtual currency exchange requires real-name authentication, where investors must verify their personal information on the platform and upload documents such as ID cards, passports, and proof of address; using a Bitcoin ATM to buy Bitcoin incurs fees as high as 10% to 15%, and the ATM counts cash bill by bill, making the transaction traceable.

According to data from PeckShield's anti-money laundering report, the scale of unregulated virtual currency outflows reached $17.5 billion in 2020, a 51% increase from 2019, and it continues to grow rapidly. Virtual currencies are primarily used in three areas of the gray industry: drug trafficking, online gambling, and capital flight. This has given rise to a large OTC trading market within this hidden gray industrial chain.

Cash for Coins: The Hidden OTC Trading

"We deal in Hong Kong dollars," said Li Ying (pseudonym), who provides services to exchange Bitcoin and Tether (USDT) for cash (Hong Kong dollars). "Sellers only need to provide a virtual currency receiving address, and once the transfer is confirmed, the cash can be counted and received face-to-face. Compared to on-exchange trading, we do not inquire about the buyer's source of funds or identity information, and there is no upper limit on the amount, as long as the commission is agreed upon in advance."

More and more seasoned traders like Li Ying are turning into "businessmen" connecting the upstream and downstream of the black and gray industries, constantly "injecting blood" into the black and gray industries under the cover of virtual currencies.

"Many people believe that this cash-for-coins OTC trading is very safe, but in reality, there are many potential risks," said an expert from CoinHolmes, PeckShield's anti-money laundering situational awareness platform.

He explained that from the buyer's perspective, since they are unaware of the seller's background, it is easy to receive virtual currencies of unknown origin, thereby unknowingly getting involved in money laundering cases.

CoinHolmes has observed that some merchants and players who participated in OTC trading had their bank cards frozen during the "frozen card wave" initiated in China in 2020, and some even had to cooperate with law enforcement investigations due to involvement in money laundering cases.

From the seller's perspective, carrying a large box of cash on the street makes one an easy target. In cases assisted by CoinHolmes, it was found that the transaction amounts in OTC trading are often in the seven-figure range. Recently, CoinHolmes observed in cases assisted with police that OTC trading has begun to shift towards face-to-face cash transactions. If cash is not stored safely in time, there is a risk of robbery, and one may encounter "pig butchering" scams. Recently, there have been incidents of USDT OTC trading being robbed in both mainland China and Hong Kong.

"In a recent case we assisted in investigating, there were instances where buyers' identities were forged through social platforms, successfully conducting several cash-to-virtual currency OTC transactions worth hundreds of thousands. After establishing trust between the buyer and seller, they proposed large transactions to lure the seller into a pre-set trap. Generally, these transactions occur at dusk in sparsely populated areas, and once the transfer is received, accomplices would rob them. These buyers are mostly organized Southeast Asian gangs," said a CoinHolmes anti-money laundering expert.

It is worth noting that in cases involving the black and gray industries, criminals increasingly favor Tether (USDT), which is pegged to the US dollar, stable in value, and also possesses concealment properties.

According to data from China's Procuratorial Network, there have been 85 criminal cases associated with USDT since 2020, compared to only 5 cases before 2020.

In a case of USDT OTC trading robbery assisted by CoinHolmes, CoinHolmes quickly locked onto the target transaction addresses by combining existing tags for over a hundred million addresses, and assisted law enforcement and Tether, Inc. in judicial verification, blacklisting suspicious addresses, and timely and effectively intercepting and blocking suspicious USDT transfers, giving law enforcement more time to solve cases and increasing the chances of recovering victims' losses.

"Drive-by Gang" Sets a Trap: Experienced Traders Fall for It

According to CoinHolmes statistics, there were two incidents of virtual currency OTC trading robberies in Hong Kong within half a month.

On the evening of January 3, Mr. Li, 36, successfully traded Bitcoin worth 1 million Hong Kong dollars face-to-face with two South Asian buyers. The next day (January 4), the two South Asian buyers contacted Mr. Li again via WeChat, wanting to trade Bitcoin worth 3 million Hong Kong dollars.

The two South Asian buyers completed the transaction in the car they were driving, with Mr. Li transferring 15 Bitcoins to a designated account online, and the buyers giving him 3.6 million Hong Kong dollars in cash. As Mr. Li was counting the cash in the car, the buyers' private car stopped on a hillside, at which point another private car approached, and three South Asian men jumped out, broke in, and snatched the 3.6 million cash and two mobile phones before quickly fleeing, while the buyers kicked Mr. Li out of the car and drove away.

It is reported that the victim had successfully conducted 5 to 6 virtual currency transactions with South Asian buyers through online trading platforms between March and December 2020, making a profit of 100,000 Hong Kong dollars. After trading Bitcoin worth 1 million Hong Kong dollars, he was preparing for a big deal, only to fall into a trap.

Half a month later, on January 18, Ms. Yin was robbed of 3.5 million Hong Kong dollars by three men armed with knives and sticks while conducting cash transactions for the USDT stablecoin. The robbers locked her in a unit and quickly drove away. It is reported that Ms. Yin had completed three transactions with the "buyer," each worth about 600,000 to 700,000 Hong Kong dollars, and due to their long-term "pleasant cooperation," this led to the "large transaction."

According to Hong Kong media reports, there have been precedents of South Asians using virtual currency transactions as a cover for robbery. In 2018, a man was deceived by a robber posing as a seller and brought 1.4 million Hong Kong dollars in cash for a face-to-face transaction, only to be ambushed and robbed of the cash in the street.

CoinHolmes has observed that there have also been cases of "black eating black" in OTC trading in mainland China. According to the judgment documents, from July to September 2018, a hacker gang invaded a fraud platform under the guise of "blockchain" four times and stole assets worth 5.12 million yuan.

After successfully hacking, the hackers contacted an overseas money laundering platform. The overseas money laundering platform demanded a 70% commission, and after agreeing to the high fees, the hackers were surprised to find that the money laundering platform absconded with all the assets. The defendant, Deng, testified in court that at that time, they were in a car contacting the money laundering platform, which insisted it had not received the money, leading them to suspect they had been scammed.

Since 2020, China has been vigorously conducting "anti-money laundering" and card-cutting actions. Virtual currencies have become a focus of strict crackdown, affecting some virtual currency OTC businesses, which has forced OTC trading to shift to face-to-face transactions, putting themselves in even greater danger.