Why does buying and selling USDT virtual currency for profit constitute the crime of illegal foreign exchange business?
According to the work situation in the past six months, Lawyer Shao has a deep feeling: the number of cases involving illegal business operations due to the buying and selling of virtual currencies is increasing.Based on the work situation over the past six months, Lawyer Shao has a deep feeling: the number of cases involving the crime of illegal business operations due to buying and selling virtual currencies is increasing.
Since the end of 2023, various official media have continuously released typical cases of illegal business operations related to buying and selling virtual currencies. In practice, judicial authorities across the country seem to be intensifying their crackdown on such transactions.
However, many parties still do not understand why buying and selling USDT virtual currency is classified as illegal business operations. Why are they convicted even if they have not received any illicit funds? They are merely trading U, what does it have to do with foreign exchange? Therefore, this article will explore specific situations in practice and provide a simple explanation.
0 1. What is "buying and selling foreign exchange type" illegal business operations?
The "buying and selling foreign exchange type" illegal business operations, specifically in the context of virtual currency transactions, refer to disguised buying and selling of foreign exchange (also known as "foreign exchange round-tripping").
The so-called "disguised buying and selling of foreign exchange behavior" refers to not directly engaging in the buying and selling of RMB and foreign exchange, but instead using methods such as repaying RMB with foreign exchange or repaying foreign exchange with RMB, thereby achieving currency value conversion through the exchange of foreign exchange and RMB. In this model, funds circulate unidirectionally between domestic and foreign without physical movement, usually achieving "two-location balance" in the form of reconciliation.
China implements a strict foreign exchange management system (with annual total management for individual foreign exchange settlement and domestic individual foreign exchange purchases, limited to the equivalent of $50,000 per person per year). Off-the-books private currency exchange activities can be administratively illegal at best, and criminal at worst. The specific standards are:
If the disguised buying and selling of foreign exchange exceeds $1,000, it constitutes an administrative violation. If the amount of illegal business operations exceeds five million yuan, or the amount of illegal gains exceeds one hundred thousand yuan, it constitutes the crime of illegal business operations.
The USDT Tether coin used by U traders or ordinary cryptocurrency speculators is issued and managed by Tether Limited. As a type of cryptocurrency, it cannot be directly equated with foreign currency or foreign exchange concepts. However, by using U as an intermediary, it indirectly conducts the exchange between foreign exchange and RMB, achieving currency value conversion, which is currently regarded by domestic judicial authorities as "disguised buying and selling of foreign exchange" behavior, and there is no longer any dispute.
Due to the high threshold for filing this crime, ordinary people occasionally exchanging currency in this way generally find it difficult to constitute this crime. The common subjects of this crime are underground banks or U traders who engage in arbitrage by buying and selling virtual currencies.
Even if underground banks do not use virtual currencies, they have various methods of currency exchange, and they are inherently engaged in money laundering and earning exchange rate differences, so they are not innocent.
However, many U traders that Lawyer Shao has encountered originally intended only to earn the arbitrage difference, and they are actually unaware of touching this crime. Due to their lack of legal knowledge, they do not understand why they are "illegally operating" until they are arrested. As Lawyer Shao often says, the world seen by U traders is often just the "tip of the iceberg." Therefore, let us understand what the "buying and selling foreign exchange type" illegal business operations are from a holistic perspective, and what roles U traders play in this.
0 2. Scenarios of achieving "foreign exchange round-tripping" through buying and selling virtual currencies
1. Who has the need for private currency exchange?
Based on the cases handled by Lawyer Shao and the numerous consultations he deals with daily, they can be roughly categorized into the following four scenarios:
Person A is in China and wants to exchange foreign currency for RMB.
For example, foreign trade merchants or merchants or individuals whose clients are overseas groups (such as those providing overseas advertising services), where clients remit US dollars to their overseas accounts, and A wants to convert it into RMB.
Person B is in China and wants to exchange RMB for foreign currency.
For example, many wealthy individuals looking to transfer assets abroad find the $50,000 exchange limit insufficient. In August 2023, the largest immigration company in Shanghai was investigated, and its actual controller, He, was arrested. One of the gray businesses in the immigration industry is finding ways to help clients move money out.
Person C is abroad and wants to exchange foreign currency for RMB.
For example, C works abroad year-round, and his income is in US dollars. One day, his family back home suddenly has an emergency and needs money urgently, so C needs to quickly exchange a large amount of US dollars for RMB to send to his family.
Person D is abroad and wants to exchange RMB for foreign currency.
For example, international students or business groups (Lawyer Shao previously had a client who lived and worked in Myanmar. His business involved sourcing goods locally in Myanmar and importing them to China. Since he sold to domestic users, he received RMB, but he had to pay Myanmar merchants in Myanmar kyat, so even though he was abroad, he still needed a large amount of foreign currency).
2. What role do U traders play in this?
In the above four scenarios, if clients trade with underground banks/private currency exchange platforms, the flow of funds can be categorized into two types: either the client receives foreign currency abroad and pays RMB domestically, or the client pays foreign currency abroad and receives RMB domestically.
Virtual currencies have a natural convenience for cross-border transactions, and the illegal process of exchanging foreign currency and RMB only requires using U as an intermediary. Illegal currency exchange platforms act as a hub for funds; their currency (for convenience, we will refer to foreign currency or RMB collectively as currency) comes from clients with currency exchange needs. Clients want to exchange currency A for currency B or vice versa, so illegal currency exchange platforms need to have a large reserve of currencies from different countries to meet client demands.
Of course, this currency exchange business can be done without U, but it would require collecting currencies provided by users from different countries and then matching them. However, with U, currency exchange transactions can be conducted more discreetly, on a larger scale, and more conveniently—illegal currency exchange platforms acquire U from clients and then exchange U for the currency of the country the client needs.
In the virtual currency trading segment, those who connect with illegal currency exchange platforms are individuals looking to sell U or acquire U. This group can be divided into three categories:
Retail investors trading cryptocurrencies who occasionally need to liquidate funds but have no currency exchange purpose;
Individuals with currency exchange needs who "self-rely," selling currency A for U and then finding a trading partner to exchange U for currency B;
U traders who engage in arbitrage by buying and selling virtual currencies.
For the first category, if they have not received illicit funds, there is generally not much risk. Even if they trade with illegal currency exchange platforms, they will not be recognized as committing illegal business operations.
For the second category, since they are self-exchanging currency, if they have not received illicit funds and the amount does not reach the standards for criminal or administrative penalties, the risk is generally low.
The third category of U traders faces a higher risk of illegal business operations. Some U traders may argue that they did not know the other party they were trading with was engaged in currency exchange; they were merely trading virtual currencies and receiving or paying RMB. However, the following situations may be presumed to indicate that U traders subjectively knew the other party was involved in disguised buying and selling of foreign exchange:
The other party has stable and frequent transactions with you;
A single large order amounting to millions;
Abnormal transaction prices (higher or lower than market prices);
Even if the other party does not explicitly inform you, communication between both parties reveals that the other party's trading partners include overseas groups such as international students or cross-border trade;
……
In these situations, judicial authorities may determine that U traders have assisted illegal currency exchange platforms, thus both parties constitute a joint crime of illegal business operations.
With that said, we conclude here. This article only addresses one question: why is the business of earning price differences seen as illegal operations in the eyes of U traders?
As for the legal analysis of U traders' involvement in illegal business operations, you can click the link at the bottom of the article to read previous articles published by Lawyer Shao for more information.
Final Thoughts
Whether receiving illicit funds or involving foreign exchange, it is not something U traders subjectively wish to engage in. This business of earning price differences is indeed very difficult to operate.
In the past, Lawyer Shao would advise U traders to conduct KYC when trading, but after handling too many cases, he no longer wants to emphasize this, because there is really no perfect KYC. Who can achieve a god's perspective?
