Web3 Lawyer: China's State Administration of Foreign Exchange New Document – Is Cryptocurrency Trading Becoming a Focus of Foreign Exchange Regulation?

On December 27, 2024, China's State Administration of Foreign Exchange (SAFE) released the "Measures for the Administration of Banks' Reporting on Foreign Exchange Risk Transactions (Trial)" (hereinafter referred to as the "Measures"), explicitly categorizing illegal cross-border financial activities involving virtual currencies as foreign exchange risk transactions. The Measures require banks to monitor and report such activities involving domestic or overseas institutions and individual clients.

In response to the release of the Measures, many people’s immediate 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 scrutiny has indeed intensified.

So what exactly does the Measures say, and what signals does it send? In this article, Manqin Lawyers will provide an in-depth analysis.

The current regulatory document is not targeting virtual currency trading per se

If you read through the entire document carefully, you’ll find its core purpose is to require banks to pay attention to the transaction background and fund usage when identifying abnormal cross-border capital flows. Once suspicious risk transactions are detected, banks must promptly monitor, analyze, and submit risk transaction reports. In other words, the focus lies on identifying "risk transactions," rather than singling out any specific asset or instrument.

The document states that behaviors including fictitious trade, false investment and financing, underground banks, cross-border gambling, fraudulently obtaining export tax rebates, and illegal cross-border financial activities involving virtual currencies—all fall under the category of foreign exchange risk transactions. This reminds Manqin Lawyers of the earlier judicial interpretation issued by the Supreme People’s Court and Supreme People’s Procuratorate ("Two Highs") titled "Interpretation on Several Issues Concerning the Application of Law in Handling Money Laundering Criminal Cases." That document similarly emphasized using virtual currencies to transfer criminal proceeds as a form of money laundering. Thus, whether it's the current Measures or the Two Highs’ guidance, regulators are not concerned with the tools themselves, but rather how these tools are exploited for illegal purposes.

However, virtual currencies—especially stablecoins like USDT and USDC—due to their inherent borderless nature and high convertibility with most fiat currencies, are often used in cross-border transactions. Unfortunately, these very features have also been exploited by some individuals who use virtual currencies as intermediaries to conceal cross-border fund movements or profit from exchange rate arbitrage between different fiat currencies.

This explains why the Measures specifically call out illegal cross-border financial activities involving virtual currencies. For years, China has maintained strict oversight over foreign exchange arbitrage, and the emergence of virtual currencies has only heightened the need for such regulation.

Therefore, for institutions or individual participants, the key is to avoid engaging in illegal cross-border financial activities involving virtual currencies. Based on past cases and regulatory practices, such illegal activities typically include the following types:

· Cross-border money laundering and fund transfers via virtual currencies: Exploiting the anonymity and global liquidity of virtual currencies to move illicit funds across borders and evade anti-money laundering (AML) tracking. For example, converting RMB into stablecoins like USDT domestically, then selling them on overseas exchanges to cash out.

· Virtual currency underground banking operations: Using virtual currencies to facilitate cross-border fund transfers between domestic and international markets, treating virtual assets as a "bridge" for illegal remittance and arbitrage. These activities often obscure the source of funds, circumvent foreign exchange controls and tax regulations, and severely disrupt financial order.

· Cross-border gambling and illegal betting payments: Offshore gambling platforms accept payments in virtual currencies to bypass traditional banking system checks on cross-border payments. For instance, users top up gambling accounts with USDT and later transfer winnings back into China via virtual currencies for conversion.

· Fictitious trade and sham investment flows: Concealing true fund purposes by moving money through virtual currencies. For example, fabricating cross-border trade contracts, making "advance payments" via virtual currencies, and subsequently justifying fund repatriation due to failed trades or investment losses—effectively creating a path for money laundering.

· Arbitrage and tax evasion using virtual currencies: Capitalizing on price differences of virtual currencies between domestic and international markets to conduct cross-border transactions for exchange rate arbitrage, while evading capital controls and foreign exchange reporting requirements. A common scenario involves buying USDT cheaply within China and selling it at a higher price on overseas exchanges to capture the spread.

It becomes evident that these behaviors are no different from traditional forms of illegal cross-border financial activity. At their core, they all share common characteristics: bypassing foreign exchange controls, conducting arbitrage, concealing fund flows, and avoiding capital restrictions. The only difference is the substitution of virtual currencies for traditional fiat money.

After understanding the key points of the Measures, you may still wonder: “I haven’t engaged in any of the above activities—why would my bank flag my account for foreign exchange risk?” This confusion is shared by many individuals whose accounts have been frozen without clear explanation.

Potential foreign exchange risk indicators associated with virtual currency transactions

According to the Measures, banks do not focus on the transaction instruments themselves, but instead examine the background, pathways, and patterns of fund flows when identifying foreign exchange risk transactions. Therefore, even if virtual currency transactions are involved, banks won't automatically classify them as risky. Instead, they assess whether the transaction behavior exhibits abnormal characteristics.

Given that virtual currency transactions are inherently cross-border and highly liquid, some users leverage these traits for short-term arbitrage or rapid fund movement. However, such habits can easily display typical red flags of foreign exchange risk transactions:

1. High-frequency trading and fund circulation

In virtual currency trading, complex fund flows are normal—especially among swing traders who frequently deposit and withdraw funds. But in banks’ risk control systems, such activities are easily labeled as "abnormal": high-frequency transactions, complicated fund paths, routing through multiple accounts, or direct connections to overseas exchanges. When combined with large-value transfers, split deposits, and lack of reasonable commercial justification, these patterns are likely to be flagged as foreign exchange risk transactions.

2. Mismatch between fund sources and purposes

In virtual currency investments, users often receive or make payments through various informal channels—for example, peer-to-peer transfers or over-the-counter (OTC) dealer transactions. However, these non-standardized fund flows lack verifiable business backgrounds in the eyes of banks, raising questions about transaction authenticity. For instance, if an account sees repeated inflows and outflows within a short period without supporting documents such as contracts or invoices, it may be suspected of involvement in fictitious trade or underground banking operations.

3. Complex and concealed fund pathways

Virtual currency transactions often pass through multiple wallet addresses and trading platforms before ultimately reaching overseas accounts or foreign exchanges. This complexity makes tracing fund flows difficult. If funds further go through mixers or tumblers, the trail becomes even more opaque. For example, a user buys USDT via OTC, sends it through a decentralized wallet to several on-chain addresses, and finally cashes out on an overseas exchange. Such multi-step routing raises strong suspicions of evading foreign exchange controls.

4. Frequent conversion between virtual currencies and fiat currencies

Arbitrage opportunities in the virtual currency market lead some users to repeatedly convert fiat into digital assets and trade across different exchanges to capture price spreads. As Manqin Lawyers have previously highlighted, cases where individuals engage in USDT arbitrage ("brick-moving") and are later prosecuted for illegal foreign exchange trading fall precisely into this category. These transactions typically involve frequent deposits and withdrawals within short periods, with funds flowing across multiple accounts or platforms—patterns that easily trigger suspicion of abnormal foreign exchange activity and prompt further investigation.

If you think simply avoiding the above behaviors ensures safety, think again. One of the most unpredictable risks comes from unknowingly receiving "tainted" USDT or dirty money—accidentally becoming part of a money laundering scheme. Moreover, because it's extremely difficult to verify counterparty identities and fund origins in virtual currency transactions, users often end up receiving illicit funds. Once implicated, individuals usually struggle to effectively explain the situation to authorities, increasing the likelihood of crossing the red line for foreign exchange risk transactions.

Can mainland users still participate in virtual currency trading?

The door to virtual currency trading hasn’t been fully closed—but compliance thresholds have risen significantly.

Legally speaking, personal ownership of virtual currencies and participation in related transactions are not deemed illegal. However, with the introduction of the "Measures for the Administration of Banks' Reporting on Foreign Exchange Risk Transactions (Trial)," illegal cross-border financial activities involving virtual currencies will face increasingly stringent scrutiny.

Moreover, characteristics common in virtual currency markets—such as cross-border transactions, high-frequency trading, and complex fund flows—naturally align with the risk monitoring logic of foreign exchange regulators. With the new requirement for banks to strictly monitor and report on complex transaction patterns, unclear fund trails, or suspected cross-border arbitrage, mainland users must exercise extreme caution regarding their transaction routes and fund usage. Even if there is no intention to break the law, transaction behaviors resembling those of illegal cross-border activities could result in being placed under bank review.

Once again: investing carries risks—trade cautiously.