On December 27, 2024, China's State Administration of Foreign Exchange issued the (Management Measures for Reporting Foreign Exchange Risk Trading by Banks (Trial)) (hereinafter referred to as (regulation)), clearly listing illegal cross-border financial activities involving virtual currencies as foreign exchange risk trading and requiring banks to monitor and report risks associated with domestic/foreign institutions and individual customers involved in such activities.
In response to the introduction of the (regulation), many people's first reaction might be: 'Has virtual currency trading been completely shut down?' The good news is that this is not the case; however, the bad news is that regulatory efforts have indeed intensified.
So what exactly does the (regulation) talk about? What signals does it convey? Lawyer Mankun will conduct an in-depth interpretation in this article.
This regulatory document is not aimed at virtual currency trading.
If you read through the document, you will find that the core of the document is to require banks to pay attention to the trading background and fund usage when identifying unusual cross-border capital flows. Once suspicious risk trading behavior is detected, banks must promptly monitor, analyze, and report risk trading reports. In other words, the focus is on the judgment of 'risk trading' rather than unspecified assets or tools.
The document states that any involvement in false trading, false investment and financing, underground banks, cross-border gambling, fraudulently obtaining export tax rebates, and illegal cross-border financial activities involving virtual currencies is classified as foreign exchange risk trading. This naturally reminds lawyer Mankun of the earlier release by the two high courts regarding (Several Issues Concerning the Application of Laws in Handling Money Laundering Criminal Cases). The document similarly describes that transferring criminal proceeds through virtual currencies constitutes money laundering. Therefore, whether it is this (regulation) or the document from the two high courts, the regulatory focus is not on specific tools but on the illegal purposes achieved through the use of these tools.
However, virtual currencies, especially stablecoins like USDT and USDC, due to their natural borderless nature and the ability to exchange with most fiat currencies, are often used in cross-border transactions. However, these features are exploited by 'smart people' who use virtual currencies as intermediaries to hide cross-border capital flows or profit from the exchange rate differences between fiat currencies.
This is why this document specifically points out illegal cross-border financial activities involving virtual currencies—historically, China has maintained a high-pressure regulatory stance on foreign exchange arbitrage, and the emergence of virtual currencies has further strengthened this regulatory demand.
Therefore, for institutions or individual players, avoiding illegal cross-border financial activities involving virtual currencies is key. Based on past cases and regulatory practices, illegal cross-border financial activities involving virtual currencies typically include the following categories:
· Cross-border money laundering and fund transfers using virtual currency, leveraging the anonymity and global circulation of virtual currencies to transfer illegal gains across borders, avoiding anti-money laundering tracking. For example, converting domestic funds into virtual currency through stablecoins like USDT, and then selling it for cash on overseas exchanges.
· Underground banks for virtual currencies, using virtual currencies to complete fund allocations in domestic and foreign markets, treating virtual currencies as 'intermediary bridges' for cross-border currency exchange and illegal arbitrage. Such behaviors often conceal the source of funds, evade foreign exchange regulation and tax controls, and severely disrupt financial order.
· Cross-border gambling and illegal gambling payments, where overseas gambling platforms use virtual currencies for payments to bypass the banking system's cross-border payment reviews. For example, users use USDT to recharge gambling website accounts and then convert their gambling funds or winnings back into cash domestically using virtual currencies.
· Disguised trading and false investment flows, using virtual currencies to transfer funds and conceal the true purpose of the funds. For example, fabricating cross-border trade contracts, making 'advance payments' using virtual currencies, and then using trade failures or investment losses as reasons to repatriate funds, forming a path for money laundering.
· Arbitrage and tax evasion using virtual currencies, taking advantage of price differences in domestic and foreign markets to achieve exchange rate arbitrage while evading capital controls and foreign exchange declarations. It is especially common to buy USDT at a low price domestically and then sell it at a high price on overseas exchanges to earn the difference.
It can be seen that these behaviors are no different from traditional illegal cross-border financial activities. Ultimately, these behaviors all share common characteristics of circumventing foreign exchange arbitrage, concealing the flow of funds, and evading capital controls. The only difference is that virtual currencies have replaced traditional fiat currencies.
After clarifying the key points of the (regulation), you may still have another question: If I have never engaged in the above behaviors, why does the bank still identify my account as having foreign exchange risk trading? This is likely a point of confusion for many players who have had their cards frozen.
Potential foreign exchange risk characteristics of virtual currency trading
According to the (regulation), when banks identify foreign exchange risk trading, the core concern is not the trading tools but the background, paths, and patterns of capital flow. Therefore, even if it involves virtual currency trading, banks will not simply classify it as risk trading but will focus on analyzing whether the trading behavior exhibits abnormal characteristics.
However, virtual currency trading inherently possesses cross-border and high liquidity attributes, and some users often exploit this feature for short-term arbitrage or fund circulation. But this trading habit easily exhibits typical characteristics of foreign exchange risk trading:
1. High-frequency trading and capital circulation
In virtual currency trading, the complexity of capital flow is the norm, especially for users engaging in swing trading, where frequent deposits and withdrawals are commonplace. However, in the bank's risk control system, this type of capital can easily be labeled as 'unusual'—high-frequency trading, complex capital paths, routing through multiple accounts, or directly interfacing with overseas exchanges. If this is further compounded by large remittances, split deposits, and a lack of reasonable commercial background explanation, it may very likely be identified by banks as foreign exchange risk trading.
2. Mismatch between source and use of funds
In virtual currency investment, users often receive or make payments through different channels, such as transfers between friends or transactions with OTC dealers. However, this 'informal' channel of capital flow lacks standardized business background support in the banking system, making it easy to question the authenticity of the transactions. For instance, if an account has funds entering and exiting multiple times in a short period but cannot provide clear transaction contracts or payment vouchers, it may be viewed by banks as a sign of false trading or underground banking operations.
3. Complex and hidden capital paths
Virtual currency trading often passes through multiple wallet addresses and trading platforms, ultimately flowing to overseas accounts or exchanges. This complex trading path makes it difficult to trace the flow of funds; if it coincidentally passes through a mixer, the flow of funds will become even more obscure. For example, a user first buys USDT through OTC trading, then sends it to multiple on-chain addresses via a decentralized wallet, and finally withdraws it at an overseas exchange. This type of model, which routes through multiple steps, is easily suspected of evading foreign exchange controls.
4. Frequent exchange between virtual currencies and fiat currencies
The arbitrage opportunities in the virtual currency market prompt some users to frequently exchange fiat currency for virtual currency, and then repeatedly buy and sell through different exchanges to earn price differences. The arbitrage using USDT often mentioned by lawyer Mankun, which was ultimately judged as illegal foreign exchange trading, is this type of issue. This characteristic of capital flow often manifests as frequent deposits and withdrawals in a short period, as well as funds flowing to multiple accounts or platforms, making it easy for banks to view it as unusual foreign exchange trading, thus triggering further scrutiny.
If you think that following the above characteristics in reverse will keep you safe, then you are gravely mistaken. The most unpreventable situation is buying black U or dirty money, and suddenly becoming a part of a money laundering scheme. Moreover, because it is difficult to verify the true trading counterparties and sources of funds in virtual currency trading, it is indeed easy to receive related illicit funds. Additionally, once involved, users find it challenging to provide effective explanations to the relevant authorities, often triggering the red line for foreign exchange risk trading.
Can users in mainland China still participate in virtual currency trading?
The door to virtual currency trading has not been completely closed, but the compliance threshold has been significantly raised.
Although, from a legal standpoint, individuals holding virtual currencies and engaging in related transactions have not been deemed illegal. However, with the introduction of the (Management Measures for Reporting Foreign Exchange Risk Trading by Banks (Trial)), illegal cross-border financial activities involving virtual currencies will face more stringent scrutiny.
At the same time, in the virtual currency market, characteristics such as cross-border trading, high-frequency buying and selling, and complex capital flows naturally overlap with the risk control logic of foreign exchange regulation. Furthermore, the document requires banks to strictly monitor and report behaviors involving complex trading patterns, unclear capital flows, or cross-border arbitrage. Therefore, mainland users participating in virtual currency trading need to be particularly vigilant about trading paths and fund uses; otherwise, even if the virtual trading itself has no illegal intent, it may still be placed on the bank's review list due to similarities in behavioral patterns with illegal cross-border activities.
Still, the saying goes: investment has risks, trading requires caution.