Written by: Xu Xiaohui and Liu Fuqi, Mankiw LLP
Due to its anonymity and decentralized features, virtual currencies are widely used in illegal ways such as money laundering and cross-border funds. Therefore, countries and regions around the world often have a strong regulatory attitude towards the sale of virtual currencies. In the Chinese cryptocurrency circle, Web3 players are often exposed to criminal risks such as pyramid schemes, opening casinos, and illegal operations. Among them, illegal operations are one of the most common crimes for OTC merchants. Previously, the article published by Mankiw Law Firm (Web3 Entrepreneurship Criminal Risk Prevention Guide (II): Foreign Exchange Trading Type Illegal Operation Crime) analyzed one of the problems that are easily involved in arbitrage in the cryptocurrency circle.
However, illegal operations are far more than just foreign exchange trading. For example, the Chongqing court tried a case involving illegal operations of virtual currency and believed that the parties were suspected of illegal operations of payment and settlement. Once the case was disclosed, it not only triggered heated discussions, but also made many USDT merchants uneasy. So, does arbitrage of virtual currency constitute a payment and settlement of funds? In this article, Attorney Mankiw will further discuss the exchange of virtual currency by analyzing the crime of illegal operations of payment and settlement.
Chongqing case review
In early 2018, He was invited by Zheng to register as a "merchant" on a well-known virtual currency trading platform and began to engage in the exchange of virtual currency "$USDT" and RMB to earn the difference. In order to expand the scale of business, He rented venues, recruited employees, and registered multiple accounts and opened bank accounts in the names of relatives and friends to conduct a large number of virtual currency and RMB exchange transactions.
As of May 2019, the cumulative transaction flow of the bank accounts controlled by He had reached more than 14 billion yuan, and his personal profit had reached 4.77 million yuan.
The People's Court of Yubei District, Chongqing, sentenced him to three years in prison and a fine of 5 million yuan for illegal business operation. He later appealed. Although He argued that the exchange business between virtual currency and RMB he was engaged in did not constitute a fund payment and settlement behavior, the Chongqing No. 1 Intermediate People's Court did not support this claim and ultimately ruled to dismiss the appeal and uphold the original judgment.
What is fund payment settlement?
He's business of earning the difference is also a common business of U merchants: buying low and selling high on the exchange, and making a profit from the difference. In order to clarify the issue of arbitrage and illegal business operation, we must first understand what is fund payment and settlement, and how to identify payment and settlement business in the sense of criminal law.
Payment and settlement business is a common intermediary business in banks. The intermediary uses credit cards, foreign exchange, collection and agency collection, etc. to make monetary payments and clear funds for customers.
According to relevant regulations, the object of "fund payment and settlement" is legal tender, and the essence of its behavior is fund transfer and settlement. To engage in payment and settlement business, one must obtain a (payment business license) approved by the People's Bank of China; if one engages in this business without permission by using illegal means such as fictitious transactions, fictitious prices, and transaction refunds, etc., the person will be held criminally liable for the crime of illegal business operation if the circumstances are serious.
Can the payment and settlement of funds be determined?
Lawyer Mankiw once mentioned in (Web3 Startup Criminal Risk Prevention Guide (II): Foreign Exchange Trading Type Illegal Business Operation) that if other foreign currencies are involved in the entire transaction chain, it may be deemed that virtual currency is used as a medium of exchange to achieve cross-border conversion of local currency and foreign currency, constituting illegal foreign exchange trading, and thus suspected of illegal foreign exchange trading type business operation crime.
However, in He's case, although the transaction did not involve foreign currency and did not constitute the purchase and sale of foreign exchange, the court still found He suspected of illegal operation. The court held that He controlled multiple trading accounts and bank accounts, accepted capital injections from others to form a capital pool, and provided large-scale recharge and exchange services between RMB and virtual currencies for the platform involved as a central counterparty. The essence of this behavior is the provision of monetary funds transfer services based on fund aggregation, which is engaged in fund payment and settlement business.
So, could all virtual currency arbitrage be identified as engaging in fund payment and settlement business, and thus suspected of illegal business operation, like He's, regardless of whether it involves foreign currency circulation?
In fact, this is not entirely true. In light of relevant regulations and judicial practice, whether virtual currency arbitrage constitutes a payment and settlement-type illegal business crime should be considered from the following factors:
The "illegal" in the crime of illegal business operation usually refers to the violation of prohibitive or restrictive regulations of national laws and regulations. However, my country's current regulatory policies on virtual currencies are mostly notices and announcements, such as the 924 notice issued by ten ministries and commissions, which are not the "laws and administrative regulations" referred to in the crime of illegal business operation.
The core of "payment and settlement business" lies in the transfer and settlement of monetary funds. The business model of U Merchants is to buy and sell virtual currency, transfer RMB with bank accounts, and earn the difference in RMB. However, virtual currency is not legal tender and has no legal compensation, so U Merchants themselves do not directly contact and transfer funds; at the same time, U Merchants act as buyers and sellers of "buying U" and "selling U", and directly participate in the transaction as the transaction object, which is essentially different from the intermediary role of banks and other financial institutions independent of the payee and payee. Therefore, in the virtual currency arbitrage, U Merchants do not directly implement the transfer of funds and settlement.
In addition, in the common U-merchant arbitrage model, in addition to He who registered merchants in the exchange and traded extensively, there are also some more cautious U-merchants in the industry who only trade with some trusted "old customers". Attorney Mankiw believes that for this type of U-merchant, they often only conduct occasional transactions with specific people, and have neither built a special payment and settlement channel nor widely, frequently and continuously operated long-term business for unspecified objects, so they do not meet the "independent operation" characteristics of illegal operations.
In short, one of the important factors for illegally engaging in payment and settlement business to be classified as illegal operation is that such behavior itself has the nature of independent operation, providing monetary payment and conducting fund settlement, resulting in the prosperity of false transactions and disrupting the normal trading order. Therefore, taking the case of Mr. He as an example, whether ordinary virtual currency arbitrage can constitute the crime of payment and settlement type illegal operation is still questionable in terms of identification.
Attorney Mankiw's Conclusion
With the high incidence of cybercrime cases, criminals use virtual currency for illegal payment and settlement to transfer cybercrime funds, making virtual currency a focus of attention in judicial practice. It should be pointed out that although there are doubts about whether virtual currency trading constitutes payment and settlement-type illegal business crime, and He's case cannot serve as a guiding conclusion, in judicial practice, U-business transactions in common cases may also be suspected of assisting information crime activities, concealing criminal proceeds, money laundering, and obstructing credit card management.
Therefore, ordinary Web3 users should still be cautious when participating in virtual currency trading activities, and conduct thorough review and verification of transaction information such as counterparties and transaction funds to avoid being involved in illegal activities such as illegal fund transfers.
