Why does exchanging foreign currency using stablecoins as a medium constitute illegal business operations?

Author: Liu Zhengyao

A recent case involving the use of cryptocurrency for foreign exchange conversion has drawn widespread attention. On July 16, the Pudong New Area People's Court in Shanghai disclosed a major case of illegal foreign exchange trading via cryptocurrency, ruled in March this year—amounting to a staggering 6.5 billion yuan! In this case, the defendants used Tether (USDT) as an intermediary to help individuals convert RMB into foreign currencies.

Why have judicial authorities recently intensified crackdowns on illegal forex trading and exchange cases involving virtual currencies? The reason is simple: China implements a foreign exchange control system, under which each individual citizen is allowed only a $50,000 annual convenience quota. Want more? It’s possible, but you’ll need to queue at banks, fill out numerous forms, and justify your purpose.

The emergence of cryptocurrencies objectively enables circumvention of China's foreign exchange controls, thereby creating opportunities for illegal arbitrage. Naturally, judicial authorities are vigilant against and actively combat such activities involving cryptocurrency-based forex trading and illegal exchange. As a web3 lawyer, I will discuss, within the framework of mainland China's legal regulations, the criminal logic and defense strategies regarding illegal business operations involving virtual currencies, hoping to benefit both web3 practitioners and fellow legal professionals.

I. Case Summary: The FX Conversion Mega-Case Reported by Pudong Court

According to reports by China Central Television citing the Huaxia Times, at the end of 2023, Ms. Chen from Shanghai needed to send money overseas to her daughter. However, due to China's annual $50,000 foreign exchange limit per person, she contacted a so-called "currency exchange company." The company instructed Ms. Chen to transfer RMB into Company A’s account, after which her daughter abroad quickly received an equivalent amount in foreign currency. Of course, the exchange company charged a commission as compensation.

According to disclosed case details, by the time of the incident, Yang, Xu, and others had manipulated domestic shell companies to provide unspecified clients with cross-border fund transfers using stablecoins (such as USDT) as intermediaries, gaining illegal profits. The total amount of illegal business reached 6.5 billion yuan. Specifically, after receiving RMB from domestic clients, these funds were not transferred overseas through banks or underground remittance networks, but instead were used by Yang, Xu, and associates to purchase USDT and other cryptocurrencies. Simultaneously, upon receipt of domestic funds, the exchange operation would instruct their overseas counterparts to disburse foreign currency from existing reserves to overseas recipients at market exchange rates—a method commonly known as "offset FX trading" or "mirroring." In crypto-friendly jurisdictions (such as regions permitting local fiat-crypto exchange services), this model of using cryptocurrencies to mirror RMB-to-foreign-currency conversions has become highly mature.

II. Threshold for Criminal Liability in Illegal Foreign Exchange Business Cases

(I) Legal Provisions

The crime of illegal business operations is stipulated in Article 225 of China’s Criminal Law, evolved from the former "speculative profiteering" offense. Anyone familiar with China’s criminal defense landscape would recognize this charge—it's often called the "catch-all" offense in economic crimes. It primarily regulates four types of conduct: (1) operating without authorization items subject to state monopoly, exclusive sale, or restricted trade; (2) buying or selling import/export licenses or certificates of origin; (3) illegally conducting securities, futures, insurance, or fund payment settlement businesses; and (4) "other acts of illegal business operations that seriously disrupt market order."

(II) Judicial Interpretations

The first three categories are straightforward. The key lies in the fourth—"other acts of illegal business operations that seriously disrupt market order." In earlier years, due to lack of uniform standards, judicial practices varied widely across regions, leading to novel business models being arbitrarily classified as illegal operations. In 2011, the Supreme People’s Court issued the "Notice on Accurately Understanding and Applying 'State Regulations' in the Criminal Law" (Fa Fa [2011] No. 155), requiring lower courts to strictly interpret paragraph (4) of Article 225 ("other acts..."):

First, "state regulations" refer specifically to laws and decisions enacted by the National People's Congress and its Standing Committee, and administrative regulations, measures, decisions, and orders issued by the State Council.

Second, where there is no explicit judicial interpretation for applying the phrase "other acts...," courts must seek approval from the Supreme People’s Court through hierarchical channels.

(III) Specific Thresholds for Criminal Liability

Per the "Two Highs" (Supreme People’s Court and Supreme People’s Procuratorate) "Interpretation on Several Issues Concerning the Application of Law in Handling Criminal Cases of Illegal Fund Payment Settlement and Illegal Foreign Exchange Trading," common criteria for determining "serious circumstances" (punishable by up to five years’ imprisonment or criminal detention) include: (1) illegal business volume exceeding 5 million yuan; or (2) illegal gains exceeding 100,000 yuan.

For "particularly serious circumstances" (punishable by over five years’ imprisonment), two common benchmarks are: (1) illegal business volume exceeding 25 million yuan; or (2) illegal gains exceeding 500,000 yuan.

The term "illegal business volume" refers to the total amount of funds involved in unauthorized foreign exchange trading, conversion, or disguised forex transactions; "illegal gains" simply means the defendant’s profit.

III. Why Does Buying/Selling USDT for FX Conversion Constitute Illegal Business Operations?

Returning to our main topic, let us step back from Yang, Xu, and their specific modus operandi. One common scenario leading to conviction for illegal business operations is using USDT to facilitate unauthorized foreign exchange conversion. As previously outlined, the transaction can be broken down into two steps:

• Step 1: Clients transfer RMB to a "domestic shell" entity in exchange for USDT;

• Step 2: An overseas group converts USDT into USD and credits it to the client’s overseas account.

Though seemingly independent, together these steps effectively convert RMB into USD. This method, known as "offsetting" or "mirroring," involves RMB entering domestically and USD exiting overseas—without going through official channels or undergoing required reporting and review. It thus evades national foreign exchange supervision and anti-money laundering controls. Such operations effectively achieve de facto foreign exchange conversion, constituting illegal forex trading. When thresholds are met, this constitutes the crime of illegal business operations.

However, another practical scenario exists: a mainland entity merely sells USDT to clients and collects RMB, while clients independently convert USDT into foreign currencies through their own channels. If the domestic seller is unaware—or even if possibly aware but does not participate—then we argue that the domestic party should not be held criminally liable for illegal business operations. See below for detailed reasoning.

IV. Defense Recommendations for Lawyers

As a web3 criminal defense lawyer, based on actual representation in cryptocurrency-related cases, I offer a brief summary of defense strategies for lawyers handling virtual currency-related illegal business operation cases.

First, in a judicial practice environment heavily reliant on confessions, defense counsel must scrutinize whether the defendant’s statements contain any admissions of "operational" or "profit-seeking" intent regarding their actions. If the domestic team denies having any intention of illegal forex conversion or unauthorized foreign exchange trading, and absent objective evidence proving otherwise, information obtained by investigative agencies via phone communications with overseas exchange groups (those who receive USDT from clients and convert them into foreign currencies) cannot be admitted as criminal evidence.

Second, reviewing objective evidence requires technical expertise. For example, blockchain transaction records during USDT trades, KYC information from centralized cryptocurrency exchange accounts, and whether timestamps, transaction volumes, and amounts align—all require careful analysis. Consider this example: an overseas cryptocurrency exchange provides registration data (name, ID number, phone, email) of an account to mainland investigators. But how can we verify the authenticity and legality of this data? Could identity information have been stolen or misused? Defense lawyers must understand specific KYC requirements of different exchanges, and even relevant KYC regulations in the jurisdiction where the overseas exchange operates.

Finally, treat materials such as forensic appraisals and audit evaluation reports from third-party institutions with caution. Currently, some judicial authorities adopt a wholesale "take what’s given" approach toward expert opinions and audit reports from third parties, treating them as automatically admissible criminal evidence. As defense counsel, with the consent of the defendant or family members, one may also engage "persons with specialized knowledge" to testify in court and challenge such third-party reports.

Of course, if the defense lawyer is well-versed in current domestic regulatory policies on virtual currencies, and common flaws in forensics and valuation in crypto-related cases, they can mount a stronger defense. Based on my practical experience, breakthroughs and effective defenses in novel virtual currency cases are most likely achieved through challenges to evidence and expert evaluations.