Xiao Za: Does simply buying and selling USDT constitute a crime? Starting from a controversial case..

Author: Xiao Za Lawyer

Recently, Sister Za's team has received multiple consultations related to the buying and selling of USDT (Tether USD, a stablecoin issued by a foreign private company, pegged to the US dollar, hereinafter referred to as "USDT"). In several cases, the parties involved have been criminally detained by public security authorities on suspicion of committing crimes, while others have had their accounts frozen.

Sister Za's team believes that the increasing number of USDT-related cases is related to the intensified crackdown on telecom fraud by judicial authorities in recent years, as well as the large-scale "money laundering" of various upstream involved funds through cryptocurrency. As a special cryptocurrency, USDT not only has advantages such as peer-to-peer transmission, global transactions, and anonymous trading like other cryptocurrencies, but also has gradually become a discreet and useful settlement tool due to its 1:1 peg to the US dollar and stable exchange rate.

Today, Sister Za's team will analyze whether buying and selling USDT may involve the crime of illegal business operations through publicly available USDT-related case precedents, helping partners avoid pitfalls.

01. Basic Case Information

The first case to mention has caused quite a stir in the cryptocurrency circle, as it is the first case in which China's judicial authorities have convicted and punished purely for the buying, selling, and exchanging of cryptocurrency. The relevant judgment has been forwarded and publicized by the Guangdong Provincial High People's Court, making it of high reference value.

Basic Facts of the Case:

According to information released by the Guangdong Provincial High People's Court via WeChat public account, the defendant Chen, in collusion with Zou (not yet in custody) and Huang (not yet in custody), discussed using the virtual currency Tether as the trading object to exchange for RMB at the US dollar price. After reaching an agreement, Chen purchased Tether from retail investors on a virtual currency trading platform on the internet. Concerned about being robbed, he hired defendant Li to escort the cash for transactions with retail investors as a bodyguard. In February 2022, at a highway entrance in Zhongshan City, Chen used his mobile phone to conduct a transaction of approximately 814,000 Tether with Huang, exchanging a total of over 5.1 million RMB based on the day's exchange rate between RMB and USD. On their way back in a rented car, Chen and Li were caught red-handed by police at a checkpoint, and the transaction funds were seized on the spot.

Court Judgment:

The Dapu County People's Court found in the first instance that defendants Chen and Li ignored national laws and used the buying and selling of virtual currency to indirectly engage in foreign exchange trading, which was serious enough to constitute the crime of illegal business operations. The charges brought by the prosecution were established and supported. Based on the roles played by the two defendants in the joint crime and their attitudes towards confession, they were sentenced to corresponding punishments and fines for the crime of illegal business operations. After the verdict, both expressed their acceptance of the judgment. The court held that Tether is a virtual currency pegged to the US dollar, with a relatively stable price and the ability to circulate anonymously worldwide. However, the high liquidity, anonymity, and regulatory difficulties of Tether have attracted a large amount of criminal capital, making the social harm of buying and selling Tether extremely significant. Through the trial of this case, it was confirmed that the defendants' behavior of using virtual currency as a medium for converting foreign currency and RMB constituted indirect foreign exchange trading, which constituted illegal business operations. This classification and handling result has positive significance for combating new types of criminal cases involving virtual currencies.

02. USDT is not "foreign exchange," and the judgment in this case is controversial

Since we can only understand this case through publicly available information, Sister Za's team can only analyze based on the facts recognized and disclosed by the court. The team believes that the judgment result and viewpoint in this case are worth discussing. From the defendants' behavior in this case, it is a very ordinary OTC behavior, that is, exchanging legal currency for cryptocurrency. From the publicly disclosed facts of the case, the defendants did not engage in any foreign exchange trading (the case does not involve any exchange of foreign legal tender), nor is there any evidence to prove that the source of the defendants' funds was illicit.

First, we must clarify one point: does buying and selling foreign exchange constitute a crime in our country? The answer is affirmative. According to the provisions of the Supreme Court and the Supreme Procuratorate's "Interpretation on Several Issues Concerning the Application of Law in Criminal Cases of Illegal Engagement in Fund Payment and Settlement Business and Illegal Foreign Exchange Trading," Article 2 states: "Violating national regulations, engaging in illegal foreign exchange trading behaviors such as buying and selling foreign exchange or indirect foreign exchange trading that disrupts the financial market order, and is serious, shall be convicted and punished for illegal business operations according to the provisions of Article 225, Item 4 of the Criminal Law."

However, the most critical point in this case is: is USDT "foreign exchange"? China's laws and regulations have a clear definition of the concept of "foreign exchange." According to Article 3 of the "Regulations on Foreign Exchange Control of the People's Republic of China": "The term 'foreign exchange' as used in these regulations refers to the following payment means and assets expressed in foreign currency that can be used for international settlement: (1) Foreign currency cash, including banknotes and coins; (2) Foreign currency payment certificates or payment instruments, including bills, bank deposit certificates, bank cards, etc.; (3) Foreign currency securities, including bonds, stocks, etc.; (4) Special Drawing Rights; (5) Other foreign exchange assets." Sister Za's team believes that since there has been no legislation to clarify the legal nature of cryptocurrencies and various crypto assets in our country, USDT, as a cryptocurrency, a virtual asset that only benchmarks the US dollar in value, cannot be interpreted as "foreign exchange," and the act of buying and selling USDT cannot be automatically interpreted as "indirect foreign exchange trading."

Therefore, it is our opinion that convicting and punishing a purely OTC behavior as "illegal business operations" raises concerns about violating the "principle of legality."

03. Is there a need for criminal punishment in this case?

More importantly, is there a necessity for conviction and sentencing for the defendants' behavior? Regarding the social harm of the defendants' actions, the court believes: "Tether is a virtual currency pegged to the US dollar, with a relatively stable price and the ability to circulate anonymously worldwide. However, the high liquidity, anonymity, and regulatory difficulties of Tether have attracted a large amount of criminal capital, making the social harm of buying and selling Tether extremely significant."

Sister Za's team believes that the court's discussion of the social harm in this case is debatable. This logic actually assumes the premise that "buying and selling Tether must involve illegal or criminal behavior." The court, based on the tool attributes of USDT itself, preemptively considers USDT as a high-risk tool, and thus categorically identifies related behaviors as having high social harm and being punishable by law. In fact, this preset position does not align with objective facts. Cryptocurrencies like USDT are a double-edged sword; they also have the potential to drive economic development and promote technological progress. Moreover, not everyone holds and uses cryptocurrencies for illegal or criminal purposes. Therefore, it cannot be concluded that buying and selling USDT has significant social harm based solely on this.

According to Professor Zhang Mingkai's viewpoint, "social danger" refers to the possibility and likelihood of the actor engaging in illegal behavior. The connotation of "social danger" is a legal basis for applying specific coercive measures, with evidence proving the possibility of the suspect or defendant engaging in behavior harmful to society or others, as well as other behaviors that obstruct the normal conduct of criminal proceedings. Or the actor has a "tendency" to engage in illegal behavior. In this case, there is no evidence to prove that the defendants' behavior has social harm, and whether it is necessary to convict and punish them is worth discussing.

In Conclusion

Sister Za's team believes that there are currently no legal provisions in our country prohibiting individuals from holding or using crypto assets, nor are there any regulations against occasional exchanges of crypto assets between private parties. If the court preemptively considers USDT as a high-risk tool based on its tool attributes and categorically identifies related behaviors as having high social harm and being punishable by law, it will create uncertainty in the application of the law, which is detrimental to economic and emerging technological development.

This concludes today's sharing. Thank you to the readers!