The official announcement of criminalizing "virtual asset trading" — what does it mean for the cryptocurrency community?

Author: Xiao Za Lawyer

On the morning of August 19, the Supreme People's Court and the Supreme People's Procuratorate of China jointly held a press conference to officially announce the "Interpretation on Several Issues Concerning the Application of Law in Handling Criminal Cases of Money Laundering" (hereinafter referred to as the "Interpretation" or "new regulations").
The Interpretation consists of thirteen articles, concise yet impactful, comprehensively targeting money laundering crimes. It is worth noting that Article 5 of the Interpretation clearly stipulates the catch-all clause for the crime of money laundering and explicitly includes "virtual asset transactions."

What does this mean for the cryptocurrency community? Does trading cryptocurrencies constitute a crime? Can OTC transactions still be conducted? Today, the team led by Za Jie will clarify these issues based on actual cases they have handled, providing all essential information, which is recommended for saving and reading.

Can we still trade cryptocurrencies after the new regulations take effect?

According to Article 13 of the Interpretation: This interpretation shall come into effect on August 20, 2024. It was announced on the same day and will be implemented the next day, which is indeed quite fast.

So, for our cryptocurrency partners in China, the urgent question is: Can we still trade cryptocurrencies after the new regulations?

Here’s the conclusion: Yes, we can.

First of all, the Interpretation is not specifically aimed at the cryptocurrency community. From its title and the associated penal provisions, it is clear that its target is the crime of money laundering and the crime of concealing and disguising criminal proceeds, rather than deliberately attacking the cryptocurrency or blockchain, Web3 industries.

Secondly, Article 5 of the Interpretation has made it clear: Only those who use virtual asset transactions to conceal the proceeds of the specific seven types of upstream crimes defined for money laundering may constitute the crime of money laundering. The upstream crimes defined in Article 191 of the Criminal Law include: (1) drug crimes; (2) organized crime of a mafia nature; (3) terrorist activity crimes; (4) smuggling crimes; (5) corruption and bribery crimes; (6) crimes that disrupt financial management order; (7) financial fraud crimes.

The Za Jie team believes that the reason "virtual asset transactions" are explicitly included as one of the catch-all clauses for the crime of money laundering (Article 191, Paragraph 1, Item 5 of the Criminal Law) is primarily because: when cryptocurrency is used as a tool for money laundering, it is extremely effective.

In recent years, with the technological advantages of blockchain enabling peer-to-peer and global transmission, cryptocurrencies are increasingly becoming a "tool" for money laundering and concealing criminal proceeds.

According to a research report by Zhongke Chain An, in 2021 alone, the amount involved in cases of money laundering, pyramid schemes, and online gambling using cryptocurrencies reached 298.542 billion RMB, with USDT, BTC, and ETH accounting for a significant portion. To this day, this number continues to expand rapidly.
Additionally, according to an article published in PoliceTechnology's 2023 second issue, among the types of virtual currency crimes, the crime of assisting in money laundering ranks first, while the crime of concealing criminal proceeds ranks second, with numbers far exceeding other crimes.
Besides money laundering, pyramid schemes, and online gambling, the Za Jie team has also handled various cases involving illegal and criminal activities using cryptocurrencies:

(1) One spouse using cryptocurrency to conceal and transfer joint property;

(2) A high-net-worth individual using cryptocurrency to evade China's foreign exchange controls, transferring assets abroad to purchase real estate, securities, and other assets;

(3) A company and its actual controller using cryptocurrencies to evade statutory foreign exchange settlement channels, transferring overseas income back to China to evade taxes;

(4) A person subject to enforcement of a judgment using cryptocurrencies to evade property inquiries from the court and creditors, maliciously refusing to fulfill debts determined by effective judgments;

…

Additionally, there is a well-known case—the Tianjin Blue Sky Ge Rui illegal public deposit case. The culprit, Qian Zhimin, before the collapse in 2017, used just one mobile hard drive to convert hundreds of billions into Bitcoin, easily taking it out of the country and living a lavish life until he was arrested by British police in 2024.

This clearly shows that once cryptocurrencies are used as a money laundering tool, they are incredibly effective.

What are the riskiest behaviors in the cryptocurrency community after the new regulations are released?

First are cryptocurrency merchants, followed by those with high OTC demand and frequent transactions.

According to China's Criminal Law, both the crime of money laundering and the crime of concealing and disguising criminal proceeds must involve the perpetrator "knowing or should have known" that the relevant funds are derived from the upstream crimes of money laundering committed by others. The upstream crimes for the crime of concealing and disguising criminal proceeds refer to other criminal proceeds apart from those related to money laundering, such as proceeds from telecom fraud.

For a long time, cryptocurrency merchants and those with high OTC demand and frequent transactions have been troubled by the issue of receiving involved illicit funds, with the saying in the cryptocurrency community that "if you haven't had your card frozen, you haven't really traded cryptocurrencies."

Since receiving illicit funds has become an unavoidable and objectively difficult-to-avoid situation, how to define "knowing or should have known" in the context of the crimes of money laundering and concealing and disguising criminal proceeds under China's Criminal Law is extremely important.

Article 3 of the Interpretation provides a clear definition of "knowing or should have known": It should be determined based on the information the actor has encountered and received, the circumstances of handling others' criminal proceeds and their benefits, the types and amounts of criminal proceeds and their benefits, the transfer and conversion methods of criminal proceeds and their benefits, abnormal transaction behaviors, fund accounts, and other situations, combined with the actor's professional experience, relationships with upstream criminals, and their statements and defenses, as well as the testimonies of co-defendants and witnesses.

To illustrate with a real case handled by the Za Jie team before the Interpretation was issued: In 2023, a student, referred to as A, was criminally detained by judicial authorities in a certain region of China on suspicion of "concealing and disguising criminal proceeds" for selling USDT (referred to as "U"). During the meeting with A, he clearly informed us that his U was earned from trading cryptocurrencies, and he was simply selling U, completely unaware of the source of funds from underground banks. After the Za Jie team intervened, it was found that the reason A was suspected of "concealing and disguising criminal proceeds" was primarily due to the following reasons:

(1) The funds transferred to A's account from the underground bank were derived from telecom fraud;

(2) A had a specific relationship with the underground bank, and their chat records could prove that A had some understanding of the source of funds from the underground bank;

(3) The funds transferred to A's account from the underground bank were far greater than the amount he earned from selling U (calculated at the exchange rate at the time of selling U);

(4) A could not provide a reasonable explanation for the excessive funds transferred in and out and did not retain objective evidence;

(5) After receiving the illicit funds, A engaged in activities to retain the funds, transferring them out only after a long period.

Based on the above objective evidence, the judicial authorities determined that A "knew or should have known" that the funds transferred to his account from the underground bank were derived from telecom fraud, leading to his conviction.

Coincidentally, in 2023, the Dongsheng District People's Court in Ordos City also ruled on a case that was very similar to one handled by the Za Jie team—(2023) Nei 0602 Criminal Initial 203. In this case, the defendant, Xu, provided his three bank cards to others for use between February 27, 2022, and March 3, 2022, resulting in over 900,000 yuan of telecom fraud funds being frozen in his accounts. Subsequently, on March 5, 2022, when he sold U online, he received 200,000 yuan of fraud proceeds and withdrew cash from the bank that same day.

The court's reasoning for determining Xu's subjective "knowing" intent in the crime of concealing and disguising criminal proceeds was as follows:

(1) Because Xu was already aware that "in the process of trading virtual currencies, both the seller's receiving account and the buyer's payment account could potentially be related to telecom fraud, meaning that the funds paid by the buyer for purchasing virtual currencies could be proceeds from telecom fraud."

(2) Therefore, "in the virtual currency transaction on March 5, 2022, the defendant Xu should have known that the funds paid by the buyer were criminal proceeds."

The Za Jie team cannot agree with this reasoning. While Xu's act of providing his card for profit is indeed wrong and may involve the crime of assisting in money laundering, there is no evidence to prove that the person using the card and the seller of U are part of the same group, nor is there evidence to prove that the two funds related to telecom fraud originated from the same or related telecom fraud cases. How can Xu's awareness of the improper source of funds in the crime of assisting in money laundering be directly "pushed" to the crime of concealing and disguising criminal proceeds?

Simply stating in the judgment that "the funds paid by the buyer for purchasing virtual currencies could potentially be proceeds from telecom fraud" to convict him raises concerns about violating the principle of legality in criminal law.

How should cryptocurrency traders protect themselves?

In recent years, due to rampant telecom fraud, a large amount of illicit funds has flowed into underground banks, increasing the likelihood that cryptocurrency traders will receive dirty money. However, in most cases, they only face card freezing and occasionally being questioned as witnesses by investigative authorities. But criminal risks are like black swans lurking nearby, and one must be cautious.

Therefore, based on practical experience, the Za Jie team offers some suggestions for cryptocurrency traders to prevent criminal risks.

First, keep records of the sources of funds used for trading cryptocurrencies. From what the Za Jie team understands, most cryptocurrency traders have clean sources of funds, whether from salary income, legal business income, or idle funds from disposing of real estate or stocks in previous years. Therefore, the urgent task is to document the sources of funds used for trading cryptocurrencies so that if questioned, they can provide clear explanations.

Second, keep records of your purchases and sales of cryptocurrencies on platforms. This evidence is very important, as some cryptocurrency platforms only provide record queries for the recent three months, and further inquiries may not be accommodated. Therefore, cryptocurrency traders must develop the habit of taking screenshots and recording transactions every month to avoid last-minute scrambling.

Third, ensure that the relevant records are coherent and the funds' flow is complete. For whatever reason, there should not be large amounts of funds with unclear sources that far exceed trading profits and cannot be explained.

Finally, if not necessary, reduce the frequency of OTC transactions and only choose reliable channels for currency conversion when needed. When converting currencies, both parties can sign relevant agreements to provide evidence of the clean sources of both cryptocurrencies and fiat currencies and make commitments, keeping records for future reference.

In Conclusion

The official announcement of "virtual asset transactions" as a crime straightforwardly means an increase in criminal risks for those in the cryptocurrency community. Cryptocurrency merchants now have an added Damocles' sword hanging over them, and cryptocurrency traders need to be more cautious, avoiding the direct application of previous currency conversion experiences to the current situation. Keeping records is the best way to protect oneself.

Additionally, do not shy away from seeking help from trusted professional lawyers when risks arise. When communicating with lawyers, it is essential to be honest and comprehensive in preventing the emergence of criminal risks.

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