Recently, individuals have inquired whether U merchants in the cryptocurrency circle can operate and what legal risks exist. For U merchants, they provide a channel for a large number of cryptocurrency users to exchange fiat currency for USDT. During the transaction process, they may face frozen cards or even criminal risks due to receiving funds from unclear sources. Today, through real cases, we will outline the criminal risks faced by U merchants in the cryptocurrency circle.
Introduction to the business model of U merchants' OTC
From the perspective of domestic cryptocurrency users, wanting to invest in virtual currencies requires exchanging fiat currency for stablecoins like USDT through U merchants. The exchange channels for U merchants mainly include OTC products within exchanges and off-exchange OTC.
Both channels adopt a P2P model, where RMB and other fiat currencies circulate between merchants and users' bank cards, WeChat, and Alipay accounts. The difference is that OTC within exchanges can ensure the transaction is performed as agreed by temporarily freezing the seller's USDT account, eliminating the risk of who transfers money or currency first.
Moreover, exchange OTC requires both parties to undergo real-name authentication and has implemented anti-money laundering measures to mitigate risks. However, off-exchange OTC transactions are detached from the platform's anti-money laundering measures, and non-real-name funds entering the accounts can lead to card freezing or even criminal cases. For more on this, refer to previous articles (discussing why trading cryptocurrencies can easily involve aiding and abetting crimes).
From the perspective of U merchants, the challenge is to cycle their USDT and fiat currency. The logic of OTC business is to obtain profits through low buying and high selling arbitrage, so finding a large volume of low-priced funding sources is key to determining OTC business profits. In pursuit of larger price differences in OTC operations, many U merchants source their funds from currency exchange and unclear sources such as fraud and online gambling.
Real cases involving U merchants in criminal cases
Case One: U merchants trading foreign exchange using USDT sentenced for illegal business operations
Case Facts:
From August to October 2021, Chen, seeking illegal benefits, conspired with others to use virtual currency as a medium to illegally buy and sell foreign exchange outside the officially designated trading venues. Chen rented an office space, provided working phones, computers, and SIM cards, instructing defendants Wu, Xue, Chen, Chen, and Chen to receive RMB funds from Wang, Chong, Shao, and other currency exchange personnel through bank accounts, and used Wu's virtual currency trading account to buy and exchange Tether (USDT) and other virtual currencies, collaborating with overseas individuals through selling and withdrawing, eventually selling virtual currencies to exchange for foreign currency.
After auditing, from August to October 2021, defendants Wu, Xue, Chen, and Chen, during their work, had their bank accounts involved in transferring over 400 million RMB (same currency below), among which funds transferred by currency exchange personnel totaled over 60 million RMB. From September to October 2021, during defendant Chen's work, their involved bank accounts transferred nearly 300 million RMB, of which funds transferred by currency exchange personnel totaled over 60 million RMB.
From October 2021, defendant Wu knowingly allowed his bank account to be used by Chen and others for information network crimes, still utilizing his bank account to receive and pay RMB funds for them. It was discovered that Wu's bank account received over 50 million RMB in total, including over 10 million RMB transferred by currency exchange personnel Zhang and Wang.
Lawyer's Analysis:
Stablecoins like USDT and USDC can be exchanged at a 1:1 ratio with the US dollar, but they are essentially issued by the issuer through collateral such as BTC and bonds on the blockchain, and are not currencies issued by any country. Regulatory documents released by the central bank and other ministries clearly state that Bitcoin is not issued by monetary authorities and does not possess the currency characteristics such as legal tender and mandatory nature, and is not currency in the true sense but a specific type of virtual commodity. Therefore, these stablecoins, which can be exchanged for US dollars, do not fall under foreign exchange.
Ordinary cryptocurrency users deposit funds by purchasing USDT with RMB and exchange USDT back to RMB when withdrawing, with the entire process only involving trading between this virtual commodity and RMB, without engaging in foreign exchange trading to evade foreign exchange regulation or capital outflow. A specific analysis can be seen in previous articles (current criminal risks facing the OTC business in the cryptocurrency circle).
In this case tried by the Shanghai Putuo District Court, Chen instructed team members to receive RMB from currency exchange personnel through bank accounts, then deposited the exchange funds into an exchange's OTC and bought USDT, which was later exchanged for Japanese yen overseas. Throughout the transaction process, the criminal gang utilized the characteristics of USDT for instant cross-border transfers, using USDT as a medium to evade foreign exchange regulation, achieving the goal of exchanging domestic RMB for Japanese yen, which constitutes disguised foreign exchange trading.
According to the provisions of Article 2 of the (Interpretation on the Application of Law in Criminal Cases Involving Illegal Currency Payment Settlement and Illegal Foreign Exchange Trading), violating national regulations to engage in illegal foreign exchange trading behaviors such as buying and selling foreign exchange or disguised foreign exchange trading that disrupts the financial market order and is serious in nature shall be convicted and punished for illegal business operations in accordance with Article 225, Item 4 of the Criminal Law.
In addition, in this case, Wu was aware that his bank account might be used for information network crimes but still used his bank card to assist the illegal currency exchange criminal gang in receiving and paying RMB funds, ultimately being convicted of aiding and abetting crimes.
Many financial personnel working in small foreign trade companies are required by their bosses to use their personal bank accounts for receiving and making payments. If the company uses virtual currency as a medium for fund transfer, once the foreign trade company is suspected of illegal business operations, the employees using personal accounts to help the company with payments may face significant criminal risks.
Case Two: U merchants receiving fraud funds for OTC sentenced for concealment crimes
Case Facts:
Between March 2024, defendant Sun proposed trading USDT, discussing that Wei would provide funds and a bank card to receive payments; Sun would be responsible for buying and selling USDT; and Lou would provide identification to register an account on the exchange software and receive USDT in a way to profit from the price difference, with profits shared.
Between March 6 and March 8, 2024, defendants Sun, Wei, and Lou traveled from Shanghai to Maoming in Guangdong, using Wei's bank card at the Industrial and Commercial Bank of China, to assist telecom fraud activities by transferring a total of 225,000 RMB. It was found that victims Luo, Wu, and Wang were defrauded online under the guise of investment and financial management, collectively transferring 150,000 RMB into Wei's bank account, after which Wei transferred the funds to his postal and construction bank accounts, and then conspired with Sun and Lou to withdraw cash to transfer, illegally profiting over 1,400 RMB.
Lawyer's Analysis:
Telecom fraud criminal gangs urgently need to transfer victims' funds to evade police investigation. The anti-fraud center freezes bank cards to intercept defrauded funds. Therefore, cooperating with U merchants to exchange for USDT helps fraud gangs evade law enforcement tracking. For U merchants, receiving fraud funds means they can sell the USDT they hold at a relatively higher price compared to exchange prices, and then transfer the received fraud funds into the bank accounts of users selling currency, thus seeking a larger price difference.
In the case heard by the Han Chuan City Court in Hubei, defendants Sun and others engaged in U merchants' OTC business, receiving fraud funds from victims at abnormal prices, buying low and selling high to earn a significant price difference. This behavior constitutes knowingly assisting in the transfer of proceeds from fraud by providing bank cards and exchange accounts, and using cash withdrawals as an abnormal method, ultimately constituting the crime of concealing and disguising criminal proceeds.
Summary and Reflection
From the two real cases in this article, it can be seen that U merchants seeking to profit from OTC arbitrage are willing to take risks to pursue fraud, online gambling, or currency exchange from sources that are unclear or even illegal. For illegal currency exchange, USDT serves as a medium, using its instant cross-border payment characteristics to break through foreign exchange controls, posing a significant threat to social economic order and national financial security. From last year to this year, public security organs and foreign exchange management departments across the country have jointly enforced the law and severely cracked down on some U merchants involved in huge amounts of illegal currency exchange.
Using USDT to receive and transfer funds from fraud and gambling, the profit margin for U merchants is low, but the criminal risk is extremely high, and it is not difficult for law enforcement to conduct investigations. In summary, the operational model of domestic U merchants seeking profit through arbitrage leads some U merchants to take risks and engage with black and gray industrial chain funds. Therefore, when choosing to engage in domestic U merchant OTC business, it is crucial to carefully and seriously assess criminal risks and avoid breaking the law.
After analyzing this article, retail investors in the cryptocurrency circle should understand the legal risks during deposits and withdrawals. Investing in virtual currency itself is not illegal; deposits and withdrawals are merely exchanges between USDT and RMB. The risk lies in the possibility of receiving illegal criminal funds, frozen bank cards, or even being involved in criminal cases.
When trading OTC with U merchants, it is essential to require the other party to use their real-name card for payment to avoid trading through abnormal methods such as off-exchange OTC, cash deposits and withdrawals, or anonymous software which may have abnormal pricing. This can help reduce the risk of frozen cards and criminal liability during deposits and withdrawals. For specific analysis, refer to previous articles (under what circumstances buying and selling U in the cryptocurrency circle may involve concealment crimes).