The future is here. How can the cryptocurrency industry survive and innovate under strict regulations?

Author: 137Labs

Against the backdrop of constantly changing global cryptocurrency regulations, on August 19, the Supreme People's Court and the Supreme People's Procuratorate of China jointly issued an interpretation regarding several issues concerning the application of laws in handling money laundering criminal cases, which explicitly lists transactions involving "virtual assets" as one of the methods of money laundering. The "interpretation" has sparked widespread discussion within the community, with some media outlets and users misunderstanding its implications.

In light of the market and community reactions, we are also considering how to promote the industry's robustness and transparency on the basis of compliance while driving growth and innovation. On the evening of August 28 at 10 PM (UTC+8), 137Labs, in collaboration with OKLink and several industry experts, held an X Space themed "In-depth Interpretation of the 'Two Highs' Judicial Interpretation Clarifying the Standards for Identifying Money Laundering Crimes: The Inclusion of 'Virtual Asset' Transactions and the Future Direction of the Cryptocurrency Industry."

This event invited the following five guests:

Ji Fengjian | Lawyer at Beijing Yizhun Law Firm, former legal advisor to Huobi Group, PhD in Law

Liu Honglin | Founder & Director of Shanghai Mankun Law Firm

Yang Mingzhen | Executive Director of Beijing Zhongkai (Hangzhou) Law Firm

Amber | OKLink Community Lead

Xiaoxiao | OTC Representative This article records the discussions during the Space regarding the role of new regulations in promoting industry practices and transparency, potential areas for growth and innovation under compliance requirements, and an in-depth exploration of how these changes may impact China's position in the global cryptocurrency market. Through this discussion, you will gain a better understanding of how various parties in the industry respond to challenges and seize new development opportunities in the new regulatory environment. Q1 The historical background of China's money laundering laws. Key changes in the new judicial interpretation, particularly the inclusion of virtual assets. Why have virtual assets become the focus of money laundering regulation?

Dr. Ji pointed out that the historical background of China's money laundering laws can be traced back to 2009, when the Supreme People's Court had already issued interpretations regarding the assistance in transferring and converting criminal proceeds through "other means," which included situations related to virtual assets. The latest judicial interpretation in 2024 explicitly identifies virtual asset transactions as a method of money laundering. While this clarification is formal, it does not mean that there were no relevant legal provisions before. In fact, as early as after the 2020 amendment to the Criminal Law, the use of virtual currencies could already be recognized as money laundering, although it may have previously been classified as embezzlement or bribery.

The new judicial interpretation further clarifies the definition of virtual assets. Although virtual currencies have been confirmed at the press conference, it remains to be seen whether broadly defined virtual assets such as NFTs are included, pending further clarification from the "Two Highs." This judicial interpretation, jointly issued by the Supreme People's Court and the Supreme People's Procuratorate, has a broader effect than the 2009 interpretation, thus its application in practice will also be stricter.

Dr. Ji analyzed that the reason virtual assets have become the focus of money laundering regulation is mainly due to their significant role in money laundering activities. For example, corrupt officials may use virtual currencies to launder bribery proceeds or clean assets through transfers overseas. Previously, these actions might have only been classified as embezzlement or bribery, but the newly revised Criminal Law allows for simultaneous recognition as both embezzlement or bribery and money laundering. This judicial interpretation further clarifies the specific role of virtual assets in money laundering.

Dr. Ji mentioned that although the new judicial interpretation makes the regulation of virtual assets clearer, it does not mean a complete withdrawal from the virtual asset field is necessary. He believes that despite the tightening of laws, there is still space for the virtual asset market to exist. He suggests that practitioners minimize OTC (over-the-counter) operations, especially frequent OTC transactions, to reduce legal risks.

Overall, the new judicial interpretation strengthens the regulation of virtual assets but does not completely eliminate the space for their legitimate use. Industry professionals should pay attention to complying with the new regulations to avoid legal risks arising from the use of virtual assets.

Lawyer Liu analyzed the reasons why virtual assets have become the focus of money laundering regulation. He pointed out that the use of virtual currencies as tools for money laundering is becoming increasingly common, with data indicating that about 60% of money laundering criminal groups utilize virtual currencies for laundering. This phenomenon has made virtual assets a regulatory priority. Lawyer Liu also noted that media reports on the new judicial interpretation are misleading, equating virtual currency transactions with money laundering, whereas this interpretation does not mean that virtual asset transactions themselves constitute money laundering. The public should not be misled by such unprofessional reporting.

Additionally, Lawyer Liu believes that the new judicial interpretation does not mean that the policies and regulations regarding virtual currencies in mainland China will be significantly tightened. While the policy has refined the regulation of virtual assets, from the perspective of overall industry development and practitioners, there is no need for excessive worry or panic. As regulation of virtual assets strengthens, the demand for security services may also increase, which means that security service providers like OKLink may see a boost in business. For individual users, ensuring the safety of their trading counterparties' assets becomes particularly important, reflecting the market demand for security services. Q2 What are the impacts of the new regulations on virtual asset trading platforms and exchanges? What challenges do OTC merchants and users face, especially when dealing with "black U"? How does the globalization of virtual asset trading volumes attract government attention?

Dr. Ji analyzed the impacts of the new regulations on virtual asset trading platforms and exchanges, discussing the challenges faced by OTC merchants and users when dealing with "black U." He pointed out that during law enforcement, many investigators often mislead involved parties by incorrectly suggesting that the holding and trading of virtual currencies are completely prohibited, which is not the case. The new judicial interpretation and documents confirm that holding and even trading virtual currencies is legal, but when trading, one should avoid involving "dirty money" and "black coins." Therefore, users and merchants need to be particularly cautious during transactions, especially since price fluctuations in extreme market conditions may lead to unnecessary legal risks.

Regarding the risks for exchanges, Dr. Ji mentioned that exchanges, due to the existence of centralized wallets and related businesses, may touch upon policy risks related to illegal fundraising or other criminal activities. Exchanges need to strictly implement KYC policies, comply with anti-money laundering (AML) regulations in various countries, and fulfill their responsibilities in preserving relevant data and cooperating with investigative units to prevent being identified as accomplices in money laundering or other crimes. Although exchanges can prevent illegal activities by identifying specific addresses and taking other internal management measures, completely eliminating risks remains challenging due to the anonymity and decentralization of virtual currencies.

Dr. Ji also emphasized that the globalization of virtual asset trading volumes has attracted government attention. As more transactions occur globally, regulators are concerned that cross-border transfers of virtual assets may be used to evade regulations and legal restrictions, which is one of the reasons virtual assets have become a regulatory focus. Governments around the world are actively taking measures to ensure the maintenance of financial order and security in this emerging market.

Amber analyzed the impacts of the new regulations on virtual asset trading platforms and exchanges, particularly the challenges users face when dealing with "black U." She pointed out that users often need to check the on-chain details of transactions when using certain trading platforms, during which they may encounter risks such as unclear asset sources or being scammed into granting authorization. Therefore, Amber emphasized the importance of on-chain data queries, especially using tools that support multi-chain queries like the OKLink browser, which can help users verify asset sources and avoid losses caused by misplaced trust or operational errors.

Amber further pointed out that identifying and labeling transaction addresses is crucial for user safety. The "private label" feature provided by OKLink allows users to customize labels that are only visible to themselves, effectively recording and tracking suspicious addresses. This is particularly useful when dealing with assets like USDT (Tether), as users can view detailed information such as on-chain transaction volumes, market capitalization, and circulation. This identification mechanism helps users avoid interacting with high-risk addresses.

Amber mentioned the need to enhance user risk awareness and the demand for transparency in on-chain data. With the globalization of virtual asset trading and the increase in trading volumes, governments are gradually realizing the risks of money laundering and other illegal activities that these transactions may bring. This global consensus has prompted regulatory agencies to intensify their oversight of exchanges and platforms to maintain the security and order of financial markets.

In summary, Amber advises users to enhance their risk prevention awareness in virtual asset trading, utilize on-chain data query tools and private label features to better understand and manage transaction addresses, and promptly contact platform customer service to report issues to mitigate risks such as "black U." Her suggestions are practically guiding in addressing regulatory challenges under the new regulations and ensuring user safety.

Xiaoxiao analyzed the impacts of the new regulations on virtual asset trading platforms and exchanges, particularly the challenges faced by OTC merchants and users, especially the difficulties encountered when dealing with "black U." She pointed out that the new regulations have the greatest impact on OTC merchants, as exchanges generally do not directly participate in the profit distribution of the OTC sector. Exchanges typically allow merchants to trade freely, earning profits while transferring risks to the merchants. Xiaoxiao mentioned that the biggest challenge posed by current regulations lies in the withdrawal issues for OTC merchants and users. Due to the high circulation of dirty money in exchanges, new users find it increasingly difficult to purchase U on exchanges.

Xiaoxiao further explained how this regulatory pressure affects the entry and operations of newcomers in the industry. As virtual currencies are defined as a means of money laundering, many new users encounter various issues when attempting to purchase USDT, such as strict identity verification and increased risks of transaction freezes. She also mentioned that OTC merchants often review buyers' transaction histories, paying particular attention to the number of transactions by new users. If the transaction history is limited or there are other suspicious circumstances, merchants are usually reluctant to trade with them. This situation makes it difficult for new users to smoothly deposit funds through the OTC sector, negatively impacting the entire industry.

However, Xiaoxiao also noted that the new regulations have certain positive aspects for OTC merchants and users. The regulations help eliminate non-compliant merchants, allowing those who survive the regulatory reshuffle to provide users with safer and more trustworthy services, thereby enhancing the overall health of the market. She suggests that users, especially in OTC transactions, can confirm the legitimacy of funds by requesting the counterparty to conduct transfer tests or transferring to exchanges for verification.

When discussing how the globalization of virtual asset trading volumes attracts government attention, Xiaoxiao described the challenges and risks, particularly concerning "dirty money" and money laundering activities, reflecting the potential issues brought about by virtual asset trading in a globalized context. These issues are key driving forces behind governments' strengthening of regulations and the introduction of new laws. Therefore, the implementation of new regulations globally aligns with governments' focus on virtual asset exchanges and platforms and their risk prevention strategies.

Overall, Xiaoxiao emphasized the profound impact of the new regulations on OTC merchants and users, particularly the challenges and opportunities in addressing "black U" and industry reshuffling.

Q3 What are the best practices to avoid association with illegal activities, particularly in the virtual asset space? The importance of using professional on-chain tracking tools to ensure compliance. Case studies of companies successfully navigating similar regulatory environments. Amber introduced best practices for avoiding association with illegal activities in the virtual asset space, particularly emphasizing the importance of using professional on-chain tracking tools to ensure compliance.

She first mentioned that users should conduct thorough independent research (DYOR) during their investment processes, similar to how doctors rely on examination reports. On-chain data can reveal many clues. Therefore, utilizing on-chain tracking tools is crucial for virtual asset users.

Amber introduced some on-chain tools provided by OKLink to assist users in compliance checks. She specifically mentioned several important tools and features:

Token Authorization Management Tool: Users can use this tool to view the counterparties their wallet address has previously authorized. This is crucial for preventing assets from being inadvertently transferred to malicious actors. Many times, users may accidentally click links or scan QR codes, resulting in unauthorized asset transfers. This tool helps users manage and revoke unnecessary or risky authorizations.

Address Analysis Tool: This tool acts like an on-chain "Tianyan" (a Chinese term for a tool that provides insights), primarily for institutional use, but regular users can also access it through OKLink's Web3 toolkit. This tool can analyze the flow of funds associated with on-chain addresses, including the sources and destinations of funds, as well as counterparties. Through this tool, users can clearly track every aspect of fund movement, identify risky addresses, and detect potential illegal activities. For example, it can provide on-chain information related to USDT scam cases and hacker bankruptcies, as well as the flow of funds associated with celebrity addresses.

Amber emphasized that the visualization features of these tools can help users better understand on-chain data. She pointed out that while the process of querying on-chain data may seem overwhelming, using OKLink's compliance analysis tools allows users to see the flow paths of funds and the related relationship chains more intuitively, enabling them to make more informed decisions.

She encourages users to make full use of these on-chain tracking tools to ensure the safety of their funds and adhere to compliance practices. If users have any data query needs, the OKLink team can also provide support to assist users in data analysis and problem-solving. Q4 In-depth discussion of the legal consequences for individuals and businesses in the cryptocurrency industry under the new regulations. What actions constitute crimes under the new regulations, and what actions do not? How to protect oneself and businesses in the new legal environment?

Dr. Ji clarified some misunderstandings when discussing the legal consequences of the new regulations for individuals and businesses in the cryptocurrency industry. He pointed out that for most ordinary investors, the provisions and related offenses in the new judicial interpretation do not pose a direct threat, as they do not come into contact with funds related to the seven types of crimes. Therefore, ordinary investors need not overly worry about the impact of these regulations on themselves. Instead, they should focus more on whether their investment behaviors are compliant and ensure they do not cross legal red lines.

However, for OTC merchants, the risks are relatively higher. Dr. Ji specifically mentioned that some OTC merchants have indescribable connections with underground banks and other illegal activities, and may have already participated in money laundering activities related to the seven types of crimes. The introduction of the new judicial interpretation is aimed at cracking down on these money laundering behaviors conducted through virtual currencies. The implementation of this policy helps reduce the possibility of dirty money existing in the industry and purifies the market environment. Nevertheless, Dr. Ji believes this is actually a good thing for the cryptocurrency industry, as it can enhance the transparency and legitimacy of the industry.

Regarding how to protect oneself and businesses in the new regulatory environment, Dr. Ji provided specific legal advice. First, it is essential to clarify what actions constitute crimes under the new regulations and what actions do not. Actions involving money laundering with virtual currencies will be recognized as crimes, especially those cooperating with underground banks or assisting in the transfer of funds. Conversely, ordinary users engaging in legal transactions on compliant trading platforms and adhering to KYC (Know Your Customer) and AML (Anti-Money Laundering) laws typically will not be deemed criminal behavior. For OTC merchants, it is crucial to ensure the legality of transactions and the clarity of fund sources, avoiding transactions with any counterparties that may be involved in money laundering or other illegal activities.

Dr. Ji also advised ordinary investors to choose reputable exchanges that comply with regulatory requirements for trading. Additionally, using on-chain tracking tools to ensure the legitimacy of trading counterparties and avoiding any suspicious activities or unauthorized links and websites is recommended. For businesses, the new regulations require them to strengthen anti-money laundering measures and ensure compliance in their operations. Businesses need to establish sound internal controls and compliance review mechanisms to ensure the legality of all transactions and the clarity of fund sources, and regularly train employees on the latest laws and regulations.

Overall, while the implementation of the new regulations may bring some negative impacts on short-term market liquidity, Dr. Ji believes that in the long run, these provisions will help purify the market and enhance the transparency and safety of the entire industry. He encourages industry practitioners to view the new regulations positively and looks forward to the judicial interpretation playing its intended role in regulating and purifying the entire cryptocurrency industry.

Lawyer Liu emphasized the changing environment surrounding the use of cryptocurrency assets when discussing the legal consequences of the new regulations for individuals and businesses in the cryptocurrency industry. He believes that the current cryptocurrency industry, particularly mainstream stablecoins like USDT, faces increasingly high risks from gray and black markets. Compared to traditional virtual asset users, most current users are actually merchants engaged in foreign trade, compliant regions, and overseas gray and black market institutions. As a result, individual investors may face a higher probability of encountering "black U" during transactions, which is not beneficial for the short-term healthy development of the market.

However, Lawyer Liu pointed out that this situation will gradually improve. In traditional financial systems, the compliance responsibilities for anti-money laundering typically fall on financial institutions and businesses, not ordinary users. Similarly, in the cryptocurrency industry, the future compliance pressures for anti-money laundering and KYC will also shift to B-end enterprises, such as stablecoin issuers, cryptocurrency trading platforms, and licensed OTC merchants. This means that end users only need to choose platforms or service providers with high security levels for transactions, thereby reducing the compliance burden on individual users. Therefore, the importance of security service providers and API service providers will become increasingly prominent.

Lawyer Liu's second point focuses on advice for Web3 entrepreneurs, particularly those planning to go overseas or engage in native Web3 projects. He emphasized that the greatest legal risks for these projects do not stem from token issuance or business models themselves, but rather from anti-money laundering compliance work on-chain. Although each country has different attitudes toward ICOs or token issuance, they are consistent in anti-money laundering regulation. Therefore, for DApp developers conducting fund inflows and outflows and asset interactions on-chain, how to effectively manage anti-money laundering and compliance becomes a critical issue. This includes ensuring the legality of user funds and ensuring that various asset interactions on the platform are safe and transparent.

In summary, Lawyer Liu advises individual investors to prioritize compliance and security when choosing platforms, while businesses and Web3 entrepreneurs should focus on anti-money laundering compliance on-chain. He believes that only by achieving compliance in the new regulatory environment can one develop long-term in the cryptocurrency industry. Q5 Please address common misconceptions among cryptocurrency users regarding the new regulations. Clarifying that not all virtual asset transactions are criminal acts, understanding the prerequisites for legality is crucial, helping them correctly understand these legal distinctions.

Lawyer Liu clarified common misconceptions among cryptocurrency users regarding the new regulations and provided relevant advice. First, he pointed out that there have been no significant changes in China's regulatory policies regarding virtual currencies since 2013, which clearly prohibits three behaviors: public fundraising for token issuance, the operations of virtual currency exchanges in mainland China, and high-energy-consuming virtual currency mining. However, this does not mean that all virtual asset transactions are criminal acts; legality depends on specific operations and transaction behaviors. For example, private token issuance is tolerated in China, and low-energy-consuming mining activities can still be conducted legally. Therefore, understanding the boundary between compliance and illegality is crucial for cryptocurrency users.

Building on this, Lawyer Liu further explained common legal pitfalls in the cryptocurrency space. He warned users to be cautious of so-called "investment opportunities," especially those led by intermediaries. These behaviors are not protected by law in China, and if issues arise, such as running away or refusing payment, investors typically cannot seek legal recourse. Additionally, he mentioned some on-chain scam activities, where users may fall victim to phishing when participating in staking, airdrops, or other on-chain activities. Initially, there may be some returns, but when users increase their investments, the counterparties may suddenly disappear. In such cases, recovering losses is also quite difficult.

Regarding how to educate users and the community, Lawyer Liu suggested that users take some preventive measures. For example, when participating in on-chain activities, use dedicated wallets or phones to avoid concentrating all assets in one place, thus reducing risks from hacking or virus infections. Furthermore, he reminded users to be particularly cautious when choosing OTC traders, as some unscrupulous merchants may lead to the contamination of users' bank accounts or exchange accounts, resulting in asset freezes.

Finally, Lawyer Liu provided two specific suggestions for cryptocurrency users. First, try to earn profits within the cryptocurrency community and spend them, avoiding fund withdrawals to reduce compliance risks. Second, if withdrawals are indeed necessary, consider opening accounts with licensed institutions or crypto-friendly banks overseas, as these banks typically offer virtual asset accounts and traditional legal accounts, facilitating conversions between accounts. Although the costs may be higher, the security is also greater.

In summary, Lawyer Liu advises users and the community to maintain a clear understanding of the legal issues surrounding virtual asset transactions, familiarize themselves with relevant domestic and international regulations, and adopt compliant and secure investment and trading methods to reduce potential legal risks. Q6 How do the new regulations promote more robust and transparent industry practices? What areas of growth and innovation may emerge under compliance demands within the industry? How might these changes impact China's position in the global cryptocurrency market?

Amber mentioned that with the continuous improvement of data infrastructure, the on-chain address labeling system will become more precise and comprehensive. By integrating advanced AI technology, it will be possible to analyze the trading behaviors of on-chain addresses and intelligently add more granular labels. This will significantly enhance risk detection capabilities, allowing Web3 users to conduct deeper risk assessments when accessing links or querying addresses, thereby minimizing risks.

Additionally, Amber pointed out that as the on-chain ecosystem diversifies, an increasing number of blockchain network platforms are emerging, providing users with access to a more diverse array of assets. In this context, it is particularly important to provide users with intelligent and efficient data tools. For example, OKLink recently launched the EaaS (Explorer as a Service) service, a zero-cost blockchain browser solution. Any network platform, especially public chains or rollup platforms, can build its own blockchain browser within days. This will greatly facilitate users in querying and obtaining diverse data, providing data support for rational investment decisions.

Amber further emphasized that APIs are also an important direction for future development. She mentioned that OKLink's Open API has recently been upgraded to accommodate more diverse scenarios. The newly upgraded API provides developers with more call opportunities and different tiers, making it competitive in the industry. These improvements are based on extensive data research and aim to better serve project parties and users with technical needs, allowing them to conveniently access various data such as transaction addresses and block contracts.

In summary, driven by compliance demands, Amber believes that in the future, users will be able to access on-chain address data in a more intelligent and convenient manner, while the richness and granularity of the data will further improve. These advancements will not only help users better manage risks but also promote rapid development in the Web3 industry. The driving effect of the new regulations makes the industry more robust and transparent in terms of data infrastructure and risk management, while also encouraging growth in more innovative areas, thereby enhancing China's position in the global cryptocurrency market.

Xiaoxiao pointed out that the core of the new regulations lies in restricting capital outflows and combating cryptocurrency fraud. He believes that these new regulations help make industry funds cleaner and eliminate non-compliant OTC merchants. He mentioned that as a compliant OTC merchant that has already addressed banking risk control and sources of funds since 2017, the new regulations are actually beneficial.

Xiaoxiao further explained that the introduction of the new regulations demonstrates that domestic regulation of cryptocurrencies in China is still intensifying. In the short term, he does not believe this regulatory attitude will change, and it may even become more refined. Although Hong Kong is gradually opening up cryptocurrency-related policies, the risks of capital outflows and fraud make it difficult for these policies to flow into the mainstream market in mainland China.

From another perspective, Xiaoxiao believes that these policies may be preparing for future market access. Just as gold was once used as a means of money laundering, despite the risks of money laundering, as long as the source of funds is legitimate, users need not worry. For example, purchasing or selling game equipment would not be considered money laundering. Therefore, the key issue lies in the cleanliness of the funds.

He also mentioned that most people do not engage in large-scale capital outflows, so for ordinary users, as long as they follow normal procedures, the risks are controllable. If large transactions are necessary, users can choose to withdraw funds through crypto-friendly institutions in places like Hong Kong.

In summary, Xiaoxiao believes that the impact of the new regulations will not be particularly significant, as these regulations are, to some extent, merely a further refinement of previous regulations. He emphasized that the focus of regulation is on the legality of the source of funds, rather than suppressing all cryptocurrency traders. His conclusion is that the new regulations will help promote the robust development of the industry, but the actual impact on ordinary users is minimal. Conclusion Through an in-depth discussion of the new judicial interpretation in the field of virtual asset regulation, we can see that the introduction of this new regulation establishes a clearer and stricter compliance framework for China's cryptocurrency market. The new judicial interpretation not only enhances the transparency of regulation but also strengthens the crackdown on money laundering activities, laying the foundation for the healthy development of the market. In this discussion, experts unanimously agreed that while regulation is tightening, there is still space for compliant development in the virtual asset market. This presents both challenges and opportunities for practitioners and users—within the framework of compliance, the use of virtual assets still has its legitimate and reasonable aspects. As the demand for security services increases, the market will continue to evolve and develop. Whether you are an investor or a practitioner in the virtual asset field, you should keep up with policy changes and seek compliant operations and business opportunities under the new regulations. We collectively look forward to the new regulations bringing a more robust and transparent development path for the industry.

This article is for sharing and communication purposes only and does not constitute investment advice.