Currently, OTC exchanges are the main channel for investors in the cryptocurrency circle to deposit and withdraw funds. Before the release of the September 4th Announcement in 2017, investors directly transferred legal currency to exchange accounts to purchase virtual currencies such as Bitcoin. After the release of the September 4th Announcement, the country increased its supervision of the industry, so the OTC business of exchanges was derived. The exchange no longer accepts users' legal currency, but has become a platform similar to Taobao that only provides OTC buying and selling order information, assisting users and merchants in depositing and withdrawing funds. The exchange does not charge any fees during the whole process.
However, with the popularity of virtual currencies such as USDT and their own advantages, more and more black and gray industries use virtual currencies as a medium for illegal and criminal activities such as money laundering and fraud, and the exchange OTC has become the business with the greatest criminal risk in the cryptocurrency circle. Recently, the Supreme People's Procuratorate and the State Administration of Foreign Exchange jointly released typical cases of punishing foreign exchange-related crimes, including two cases involving cryptocurrency OTC business. Below, the author will analyze the legal risks of cryptocurrency OTC business based on the case.
1. Exchange OTC business logic
Before analyzing legal risks, we first need to understand the business logic of the exchange's OTC. From the figure, we can clearly see that the buyers and sellers in the entire OTC business are users and OTC merchants. The exchange, as a platform, provides transaction matching and guarantees transaction security for both parties. Users and merchants obtain transaction order information on the platform and transfer money through bank cards, Alipay, WeChat and other channels off-site. The transaction target, such as USDT, is equivalent to transferring virtual currencies from one account on the platform to another. Where exactly does this trading model involve illegal and criminal behavior?
II. Crimes of illegal business operations involving cryptocurrency OTC businesses
The two typical currency-related cases released by the Supreme People's Procuratorate and the State Administration of Foreign Exchange both involved the crime of illegal business operations.
Article 225 of the Criminal Law stipulates that the crime of illegal business operation refers to violating state regulations and engaging in any of the following illegal business operations, which disrupts the market order. If the circumstances are serious, the offender shall be sentenced to fixed-term imprisonment of not more than five years or criminal detention, and shall be fined not less than one times but not more than five times the illegal gains; if the circumstances are particularly serious, the offender shall be sentenced to fixed-term imprisonment of not less than five years and shall be fined not less than one times but not more than five times the illegal gains or have his property confiscated:
(1) operating, without permission, any monopoly or exclusive sale of goods or other goods the sale of which is restricted as provided for by laws or administrative regulations;
(2) Buying or selling import or export licenses, import or export certificates of origin, or other business licenses or approval documents prescribed by laws or administrative regulations;
(3) illegally operating securities, futures, or insurance businesses, or illegally engaging in fund payment and settlement businesses without the approval of the relevant state authorities;
(4) Other illegal business activities that seriously disrupt market order.
The legal interest protected by the crime of illegal business operation is the market order. Article 96 of the Criminal Law stipulates that violation of state regulations refers to violation of the laws and decisions formulated by the National People's Congress and its Standing Committee, administrative regulations formulated by the State Council, administrative measures prescribed, and decisions and orders issued. At present, industry regulatory documents such as the 94th Announcement and the 924th Notice issued by the Supreme People's Court, the Supreme People's Procuratorate, and the People's Bank of China and other ministries and commissions do not belong to state regulations.
Regarding the behavior of "illegally engaging in fund payment and settlement business" in the third paragraph, Article 1 of the "Interpretation on Several Issues Concerning the Application of Law in Handling Criminal Cases of Illegal Engagement in Fund Payment and Settlement Business and Illegal Foreign Exchange Purchase and Sale" stipulates that if it violates national regulations and has any of the following circumstances, it shall be deemed as "illegally engaging in fund payment and settlement business" as stipulated in Article 225, Paragraph 3 of the Criminal Law:
(1) Using acceptance terminals or online payment interfaces to pay monetary funds to designated payees through illegal means such as fictitious transactions, fictitious prices, transaction refunds, etc.;
(2) illegally providing others with services for cashing out their corporate bank settlement accounts or transferring corporate bank settlement accounts to personal accounts;
(3) illegally providing check cashing services to others;
(IV) Other circumstances of illegally engaging in fund payment and settlement business.
In an article published in the Shanghai Legal Daily, the Pudong New Area Prosecutor believed that accepting funds from others through accounts actually controlled, and then exchanging virtual currency for legal currency according to customer order requirements and making profits from it, acting as an "intermediary", such as using mainstream virtual currencies such as Bitcoin and Tether as stablecoins to realize cross-border payment and settlement of legal currency, violated the relevant provisions of the "Commercial Bank Law" and endangered the order and security of the payment market. It falls under the circumstances of "other illegal fund payment and settlement business" in the fourth paragraph of Article 1 of the above-mentioned "Interpretation" and can be convicted and punished for the crime of illegal business operation.
However, I believe that users and OTC merchants complete the purchase and sale of USDT through the transaction matching information provided by the exchange, thereby investing in virtual currencies. Virtual currencies such as USDT and BTC are a kind of virtual goods, which are essentially equivalent to users buying goods on platforms such as Taobao and Pinduoduo. In this process, the RMB of the buyer and seller is circulated through channels such as bank cards, Alipay, and WeChat outside the platform, while the purchased USDT, BTC and other virtual goods are transferred from the seller's platform account to the buyer's account. I believe that this behavior should not be identified as illegal fund payment and settlement business in illegal operations.
Article 2 of the "Interpretation on Several Issues Concerning the Application of Law in Handling Criminal Cases of Illegal Fund Payment and Settlement Business and Illegal Foreign Exchange Trading" stipulates that if anyone violates national regulations and engages in illegal foreign exchange trading such as speculating in foreign exchange or trading in foreign exchange in disguised forms, thereby disrupting the order of the financial market, and the circumstances are serious, he shall be convicted and punished for the crime of illegal business operation in accordance with the provisions of Article 225, Paragraph 4 of the Criminal Law.
Although stablecoins such as USDT and USDC are pegged to the U.S. dollar and issued through the issuer's collateral in the bank, stablecoins cannot be equated with foreign exchange. Article 3 of the "Foreign Exchange Management Regulations" gives a clear definition of foreign exchange. Foreign exchange refers to the following means of payment and assets denominated in foreign currency that can be used for international settlement:
(1) foreign currency notes, including paper money and coins;
(2) foreign currency payment vouchers or payment instruments, including bills, bank deposit vouchers, bank cards, etc.;
(3) Foreign currency-denominated securities, including bonds, stocks, etc.;
(iv) Special Drawing Rights;
(V) Other foreign exchange assets.
The "Notice on Preventing Bitcoin Risks" issued by the People's Bank of China and five other ministries and commissions clearly stated that Bitcoin is not issued by monetary authorities, does not have monetary attributes such as legal compensation and compulsion, and is not a real currency, but a specific virtual commodity. Cases in some judicial practices also clearly state that virtual currency is a virtual commodity. Buying and selling virtual currency with RMB is equivalent to buying and selling virtual commodities. After investors obtain investment returns, they withdraw virtual currency and exchange it back to RMB. In the whole process, there is no foreign exchange trading, which evades foreign exchange supervision, so it should not constitute illegal foreign exchange trading.
III. Typical cases of illegal business operations
Although stablecoins such as USDT and USDC are not foreign exchange, the two typical cases of the Supreme People's Procuratorate and the State Administration of Foreign Exchange were both found guilty of illegal business operations because of disguised foreign exchange transactions. Why is this? First, let's sort out the OTC business processes of these two cases.
Typical case 1: Illegal business operation by Zhao et al.
From the above picture, we can see that Zhao's team collected dirhams in cash from customers in Dubai, then paid RMB to customers' domestic accounts, and then used virtual currency as a medium to realize capital repatriation in the form of "dirham-USDT-RMB", which is equivalent to using virtual currency as an intermediate tool to realize the exchange of foreign exchange and RMB, which is a disguised foreign exchange transaction, and he was ultimately held criminally responsible for the crime of illegal business operation.
Typical case 2: Guo Mouzhao and others illegally operated and assisted in information network criminal activities
In Case 2, the customer placed an order through the payment platform and paid foreign currency to an overseas account controlled by the platform. The platform used the foreign currency to purchase USDT, which was converted into RMB through illegal channels by OTC merchants and transferred to the customer's designated domestic account. The payment exchange platform also used USDT as an intermediary tool to help customers circumvent national foreign exchange supervision and indirectly realize the exchange of foreign currency and RMB, which is a disguised form of foreign exchange trading.
The above typical cases are similar to the major underground money laundering case uncovered by the Qingdao police in Shandong some time ago. The criminal gangs used virtual currency as a medium for exchanging foreign currency and RMB, evading the state's foreign exchange supervision, and transferring funds for various upstream crimes and money laundering teams, posing a major threat to social and economic order and national financial security.
In addition, it can be seen that in several cases, the public security organs cooperated with the foreign exchange management departments, and assisted in investigating the on-chain transaction records through third-party technology companies, comparing the on-chain wallet transaction records with the off-chain bank account statements, and fixing the evidence of the entire illegal foreign exchange exchange. This also reflects the idea of regulatory authorities to crack down on virtual currency OTC business.
IV. Summary and Suggestions
In summary, the author suggests that some entrepreneurial projects under the banner of cross-border payment and payment platforms that support virtual currency recharges such as USDT need to carefully evaluate their own businesses. If users are assisted or supported to open various foreign currency debit cards and prepaid cards, users use RMB to deposit to obtain USDT, and then exchange foreign currency for payment on the platform, the entire transaction process realizes the exchange of RMB-USDT-foreign currency. This behavior is the same as the above typical cases, using virtual currency as a medium tool to evade foreign exchange supervision, and is very likely to be suspected of disguised foreign exchange trading, constituting the crime of illegal business operations.
And because these platforms support on-chain recharges of virtual currencies, they need to conduct on-chain anti-money laundering compliance reviews and use KYT on-chain fund review tools to provide advance warnings for virtual currencies flowing into the platform and trace the source afterwards, so as to avoid black U suspected of illegal crimes from entering the platform to the greatest extent and increase the criminal risk of the platform.
(WeChat public account: Chuyan)
