Web3 Lawyer: New document from the China Administration of Foreign Exchange, has cryptocurrency trading become the focus of foreign exchange supervision?

On December 27, 2024, China's State Administration of Foreign Exchange issued the "Measures for the Administration of Bank Foreign Exchange Risk Transaction Reports (Trial)" (hereinafter referred to as the "Measures"), which clearly classified illegal cross-border financial activities of virtual currencies as foreign exchange risk transactions, and Banks are required to conduct risk monitoring and reporting on domestic/foreign institutions and individual customers involved in such activities.

Faced with the introduction of the Measures, many people’s first reaction may be: “Has virtual currency trading been completely controlled?” The good news is that this is not the case; but the bad news is that supervision has indeed increased.

So what exactly does "Method" talk about? What signals are sent? Attorney Mankiw will provide an in-depth explanation in this article.

This regulatory document is not aimed at virtual currency transactions

If you read the entire article, you will find that the core of the document is to require banks to pay attention to the background of the transaction and the use of funds when identifying abnormal cross-border capital flows . Once suspected risky transactions are discovered, banks must promptly monitor, analyze and submit risky transaction reports. In other words, the focus is on judgments about "risk trades" rather than non-specific assets or instruments.

The document points out that any behavior involving false trade, false investment and financing, underground banks, cross-border gambling, fraudulent export tax refunds, and illegal cross-border financial activities with virtual currency are classified as foreign exchange risk transactions. This made Lawyer Mankiw think of the "Interpretations on Several Issues Concerning the Application of Laws in Handling Criminal Cases of Money Laundering" issued by the two top officials. There is also a similar description in the document, and the transfer of criminal proceeds through virtual currency is money laundering. Therefore, whether it is the current "Measures" or the copywriting of the two high authorities, supervision is not focused on specific tools, but on the use of these tools to achieve illegal purposes.

However, virtual currencies, especially stablecoins such as USDT and USDC, are often used in cross-border transactions because of their natural borderless nature and mutual convertibility with most legal currencies. However, these characteristics are exploited by "smart people", using virtual currency as an intermediary to hide cross-border capital flows or earn the exchange rate difference between legal currencies.

This is why this document specifically points out the illegal cross-border financial activities of virtual currencies - my country has always maintained a high-pressure regulatory stance on the use of foreign exchange arbitrage, and the emergence of virtual currencies has strengthened this regulatory need.

Therefore, for institutions or individual players, staying away from illegal cross-border financial activities with virtual currencies is the key. Judging from past cases and regulatory practices, illegal cross-border financial activities involving virtual currencies usually include the following categories:

·Cross-border money laundering and fund transfer of virtual currency , using the anonymity and global liquidity of virtual currency to transfer illegal income across borders and avoid anti-money laundering tracking. For example, domestic funds can be converted into virtual currencies through stable coins such as USDT, and then sold and cashed out on overseas exchanges.

·Virtual currency underground banks use virtual currency to complete fund allocation in domestic and overseas markets, using virtual currency as an "intermediary bridge" to conduct cross-border exchange and illegal arbitrage. This type of behavior often conceals the source of funds, circumvents foreign exchange supervision and tax control, and seriously undermines financial order.

·Cross-border gambling and illegal gambling payments . Overseas gambling platforms use virtual currency to receive and make payments to bypass the cross-border payment review of the banking system. For example, users use USDT to recharge their gambling website accounts, and then transfer gambling funds or profits back to China through virtual currency for cash out.

·Disguise trade and false investment flows , use virtual currency to transfer funds, and conceal the true use of funds. For example, fictitious cross-border trade contracts are used to pay "advance payments" through virtual currency, and then the funds are returned on the grounds of trade failure or investment losses, forming a path for money laundering.

·The use of virtual currency arbitrage and tax evasion , through the existence of domestic and foreign price differences in the virtual currency market, cross-border transactions to achieve exchange rate arbitrage, while evading capital controls and foreign exchange declarations. It is particularly common to buy USDT at a low price domestically and then sell it at a high price through an overseas exchange to earn the price difference.

It can be found that these behaviors are no different from traditional illegal cross-border financial activities. In the final analysis, these behaviors have common characteristics such as bypassing foreign exchange arbitrage , concealing capital flows, and evading capital controls . The only difference is that virtual currency replaces traditional legal currency.

After clarifying the key points of the "Measures", you may have another question: I have never encountered the above behavior, why does the bank still determine that my account contains foreign exchange risk transactions? This must be something that many frozen players are puzzled about.

Potential foreign exchange risk characteristics of virtual currency

trading

According to the Measures, when banks identify foreign exchange risk transactions, the core focus is not on the trading instruments, but on the background, path and pattern of capital flows. Therefore, even if virtual currency transactions are involved, banks will not identify them as risky transactions across the board, but will focus on analyzing whether there are abnormal characteristics in the transaction behavior.

Cryptocurrency transactions naturally have cross-border and high liquidity attributes, and some users often take advantage of this feature for short-term arbitrage or capital flow. However, this kind of trading habit can easily show the typical characteristics of foreign exchange risk trading:

1. High-frequency trading and capital flow

In virtual currency transactions, complex capital flows are the norm, especially for users who engage in swing trading. Frequent recharges and withdrawals are commonplace. However, in the bank's risk control system, this type of funds is easily labeled as "abnormal" - high-frequency trading, complex capital paths, bypassing multiple accounts or directly connecting to overseas exchanges. If large-amount remittances, split accounts, and lack of reasonable commercial background explanations are added to the mix, it is likely to be identified as a foreign exchange risk transaction by the bank.

2. Fund sources and uses do not match

In virtual currency investment, users often receive or make payments through different channels, such as transfers between friends and OTC traders. However, this kind of "informal" channel capital flow lacks the support of standardized business background in the banking system, and it is easy to question the authenticity of the transaction. For example, if funds enter and exit an account multiple times in a short period of time, but no clear transaction contract or payment voucher can be provided, the bank may regard it as a manifestation of false trade or underground bank operations.

3. The capital path is complex and hidden

Cryptocurrency transactions often go through multiple wallet addresses and trading platforms, and eventually flow to overseas accounts or overseas exchanges. This complex transaction path makes the flow of funds difficult to track. If it coincidentally flows through a currency mixer, the flow of funds will be even more complicated. secret. For example, a user first buys USDT through OTC transactions, then sends it to multiple on-chain addresses through a decentralized wallet, and finally withdraws cash on an overseas exchange. This type of model that bypasses multiple links can easily be suspected of circumventing foreign exchange controls. risk.

4. Frequent exchange of virtual currency and legal currency

The arbitrage opportunities in the virtual currency market prompt some users to frequently exchange fiat currencies into virtual currencies, and then repeatedly buy and sell through different exchanges to earn the price difference. Lawyer Mankiw often mentioned the use of USDT for arbitrage, and was eventually found guilty of illegal foreign exchange trading operations. This is the type of problem. This kind of capital flow is often characterized by frequent entries and withdrawals in the short term, as well as capital flows to multiple accounts or platforms, which can easily be regarded as abnormal foreign exchange transactions by banks, thus triggering further review.

If you think that by following the above characteristics and doing the opposite, you will have nothing to worry about, you are totally wrong. The most difficult thing to guard against is buying black U or black money, which inexplicably becomes a part of the money laundering play. At the same time, it is difficult to verify the real counterparty and source of funds in virtual currency transactions, and it is indeed easy to receive related stolen money in actual transactions. In addition, once involved, it is difficult for users to effectively explain to the relevant departments, which often leads to triggering a red line for foreign exchange risk transactions.

Can mainland users still participate in virtual currency transactions?

The door to virtual currency trading has not been closed, but the compliance threshold has been significantly raised.

Although at the legal level, individuals holding virtual currencies and conducting related transactions are not considered illegal. However, with the promulgation of the "Measures for the Management of Bank Foreign Exchange Risk Transaction Reports (Trial)", illegal cross-border financial activities involving virtual currencies will face more stringent screening.

At the same time, in the virtual currency market, characteristics such as cross-border transactions, high-frequency buying and selling, and complex capital flows naturally overlap with the risk control logic of foreign exchange supervision. In addition, this document requires banks to strictly monitor and report on behaviors such as complex transaction patterns, unclear fund flows, or cross-border arbitrage. Therefore, mainland users need to be extra vigilant about transaction paths and fund uses when participating in virtual currency transactions. Otherwise, even if the virtual transaction itself has no illegal intent, it may be included in the bank's review list because the behavior pattern is similar to illegal cross-border activities.

Again, investment is risky and trading needs to be cautious.