This article takes you back to the in-depth investigation articles of Deep Tide TechFlow in 2020, and enters the hidden corner of USDT.
Recently, the "anti-fraud propaganda film" "All In" set in northern Myanmar has been released, which has also brought attention to the mention of USDT in the film, and has focused people's attention on the connection between crypto and the black industry. This is not a new phenomenon. As early as many years ago, "USDT money laundering" has become the focus of police crackdown. This article takes you back to the in-depth investigation articles of Deep Tide TechFlow in 2020, and enters the hidden corner of USDT.
Cryptocurrencies such as USDT are becoming a "green channel" for collecting drug money.
"Compared to WeChat and Alipay transfers, the flow of cryptocurrencies has no completely verifiable information. Both buyers and sellers are safe," wrote a person involved in drug-related activities on his self-built blog website.
Cryptocurrency, a great experiment in financial history. Its invention began with a paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System" written by an account named "Satoshi Nakamoto" in 2009. It was born with a mission of deleveraging and hard currency, but it also planted a time bomb—due to its anonymity, it has gradually become the favorite of criminals, among which USDT (Tether) is the most popular.
USDT is not limited to buying and selling drugs, it is also used in black industries such as online gambling, money laundering, and capital flight.
Deep Tide TechFlow interviewed and investigated people involved in the cryptocurrency black industry chain, trying to present the hidden corner of USDT.
Buying Marijuana with USDT
"Compared to WeChat and Alipay transfers, the flow of cryptocurrencies has no completely verifiable information. Both buyers and sellers are safe," wrote Zhou Xiao (pseudonym) on his self-built blog website.
Zhou Xiao said that because of Bitcoin, people who buy "marijuana" from him don't have to worry. Buying Bitcoin on an exchange requires real-name authentication, but this only proves that you have bought Bitcoin (invested in Bitcoin). As for where the Bitcoin went and why, "if you don't say it actively, no one knows."
"You can say that you saw the rise of Bitcoin this year and invested some Bitcoin to play. Then transfer it to your other Bitcoin wallet. I wrote the password for the other wallet on paper, and it's gone. I'm still looking for it these days," he explained.
Zhou Xiao runs an online drug trading platform, mainly helping domestic players to purchase marijuana, LSD, and other new drugs.
There are many people like Zhou Xiao who use cryptocurrencies to buy and sell drugs and "earn a living."
According to a report by Zhengyi Net, a couple in Changchun used a Bitcoin address to collect and transfer drug money.
The wife, Liu, provided her Bitcoin account to her husband, Ma. Ma used the account to collect drug money and transferred it to Liu's bank card, totaling over 100,000 yuan.
After reviewing the case, the prosecutor believed that Liu, knowing that Ma was selling drugs, still provided the Bitcoin account to Ma for collecting drug money and transferring it to the bank card, which constituted the elements of money laundering.
On January 20th of this year, the court adopted the sentencing recommendation of the prosecution. Ma was convicted of drug trafficking and sentenced to three years and two months in prison, while Liu was convicted of money laundering and sentenced to six months in prison.
The reason Zhou Xiao has been at large is because his Bitcoin address is difficult to trace. He stated that his Bitcoin address is generated in batches through elliptic encryption algorithms, and the addresses and corresponding keys are generated arbitrarily without restrictions.
Zhou Xiao had initially chosen three types of cryptocurrencies for transfers: Bitcoin, USDT, and his own issued E-RMB.
He initially chose Bitcoin, but later, due to the bear market and the decline in BTC prices, the seller requested a value-preserving transaction, so he used the stablecoin USDT for transfers.
USDT is a cryptocurrency launched by Tether company that is pegged to the US dollar. 1 USDT = 1 USD, meaning that for every 1 USDT token issued, there is a fund guarantee of 1 USD in the bank account.
He also plans to launch the electronic RMB (E-RMB). He explained that the currency is secure, with high privacy, stable value, always anchored at a 1:1 price with the RMB, and only available for use by old customers who have made purchases.
People like Zhou Xiao, who are proficient in cryptocurrencies and use them flexibly, are becoming more and more common in the gray industry. They operate on the edge of the law, "earning a living" under the concealment of cryptocurrencies.
The Gray World of Cryptocurrencies
"I have 900,000 USDT in my account," Aiba (pseudonym) operates an offline casino in Mengla, Myanmar. He told the author that he needs to convert cash into foreign exchange or USDT every day.
Chainalysis report data shows that from July 2019 to June 2020, over $50 billion in cryptocurrencies were transferred from addresses in East Asia to overseas addresses. Of this, over $18 billion was in USDT.
Cryptocurrencies in the gray industry mainly have three uses: drug trafficking, online gambling, and capital flight. This is a secretive gray industry chain, with a mix of good and bad.
As an example of cross-border transfers, a user on Zhihu introduced his own cross-border transfer operation in 2016: buying Bitcoin on a domestic exchange, transferring it to Bitfinex, before withdrawing, the platform requires personal information verification, filling in ID, passport, and address proof as prompted. After withdrawal, the platform charges a 0.1% fee, with a minimum of $20. This completes the entire process of Bitcoin cross-border remittance.
An insider told Deep Tide TechFlow that the above is practical. He has tried to transfer from a Chinese address to a US exchange, exchange to USD, "but this is just an example."
If the above operation is limited to personal exploration and the individual bears the risk, with the popularization and development of digital currencies, there are now industrial chains for cross-border cryptocurrency remittances.
"We deal in USD and AUD," Ji Nan (pseudonym) said, providing services to convert USDT to foreign currency (foreign exchange), only needing to "inform us of the receiving bank, whether it is a private or public account, which bank it is registered with, and in which region it is registered. It will be credited within one working day." If the customer is an individual account, it is done under the guise of borrowing or debt, and if the customer is a corporate account, it is done under the guise of service fees.
Ji Nan explained that compared to traditional bank wire transfers, the fees for USDT transfers are lower (close to 0) and the transfers are immediate.
"The minimum is 5,000 USDT, with no upper limit. If the single transaction exceeds 1 million USDT, just inform me in advance," Ji Nan said. The usual purpose of customer transfers is for trading in US stocks or for buying houses and immigration.
Compared to the "simple" operations used for cross-border transfers mentioned above, professional scalping groups for cryptocurrencies are even more secretive and extensive.
The term "scalping" originates from performance testing of computers or mobile phones, but in the payment field, it has a new meaning.
In the past, online gambling platforms would acquire a large number of bank cards to collect money. However, this was costly—acquiring one bank card cost hundreds or thousands. Once the bank card was frozen, the money would be lost.
Since 2018, the scalping model has begun to rise. Many scalping platforms have emerged on the market, using a crowdsourcing approach to significantly reduce the cost of money laundering. These scalping platforms claim that "with just a QR code, you can make money at home."
Scalping players deposit a deposit (e.g. 10,000 yuan) on the scalping platform and upload their WeChat and Alipay receipt QR codes. Recharging players transfer money to the scalping players through the payment platform, and once they reach 10,000 yuan, the scalping ends. The scalping platform will give the scalping players a certain percentage of the payment commission and transfer the 10,000 yuan deposit to the gambling platform.
"Similar to Didi Chuxing for transporting funds, Didi Chuxing transports people, and we transport money," a scalping person explained. Throughout the process, the gambling platform does not participate in the flow of funds, and the scalping players become money laundering tools.
USDT scalping is a new model of payment using digital currency for scalping. In traditional scalping, it is RMB; in USDT scalping, it is USDT.
The above scalping person explained that the biggest advantage of USDT scalping is decentralized trading, "all transactions occur between the customer and our driver (acceptance merchant), with no fund pool in the middle, effectively preventing large-scale freezing of funds. And with USDT as a barrier, the entire process is a traceless transaction, and the destination cannot be traced. Our transaction volume is large and diversified enough."
"We provide deposit and withdrawal services for gambling platforms," a scalping person on QQ said, using the cryptocurrency USDT for transactions, "earning commissions with the principal, one transaction, one settlement, earning 150-200 yuan in commission for every 10,000 yuan principal, directly returned to your bank card."
According to Deep Tide TechFlow, these scalping groups attract traffic on QQ groups, Baidu Tieba, and Xianyu, and then communicate transaction details on communication software such as Bat, Telegram, and Paper Plane, and buy cryptocurrencies on exchanges, with the most commonly used cryptocurrency being USDT.
"There are scalping groups that use USDT, accepting USDT and paying in RMB. Those are very rare, and over 90% are scams or frauds," Aiba said, and even face-to-face transactions can result in sudden disappearances.
The law is strict and comprehensive, and a crackdown on cryptocurrency money laundering is imminent.
Crackdown Imminent
"It's not as rampant as before," Aiba explained. The wind has been tight recently, and he no longer accepts USDT transactions, but instead uses cash to exchange for foreign exchange at a ratio of 100:105.
On September 24th, at the 9th China Payment and Clearing Forum held in Beijing, Liao Jinrong, Director of the International Cooperation Bureau of the Ministry of Public Security, pointed out that the outflow of gambling funds from China exceeds 1 trillion yuan every year, and specifically mentioned that cryptocurrencies are being used to transfer gambling funds.
"In recent cases, it has been found that some gambling groups use virtual currencies to collect and transfer gambling funds, and even engage in online gambling in some areas of Myanmar under the guise of investing in virtual currencies. These new types of digital currency channels cannot be frozen, and their anonymity makes it difficult to trace, posing a great challenge to our crackdown and governance work."
Since the beginning of this year, there has been a vigorous "anti-money laundering" and card-cutting operation nationwide.
On October 10th, the Inter-Ministerial Joint Conference of the State Council for Combating and Governing New Types of Illegal Crimes in the Telecommunications and Internet Networks deployed a "card-cutting" operation nationwide to crack down on illegal operations of selling phone cards and bank cards.
Cryptocurrencies are undoubtedly a key area of crackdown. Some cryptocurrency OTC traders have also been affected, with their cards being frozen or investigated.
According to the Criminal Law's standards for initiating money laundering cases, providing a "funding account" for money laundering activities will result in prosecution, with the maximum penalty being "a fixed-term imprisonment of more than five years but less than ten years, and a fine of five to twenty percent of the laundered amount."
On June 8th of this year, the Huizhou police cracked down on a criminal group operating a fourth-party payment platform using USDT digital currency, arresting 76 criminal suspects, investigating and handling four network payment studios, and dismantling two online gambling groups.
This was the first case in the country to crack down on a case of providing network payment services for illegal criminal activities using USDT digital currency. After preliminary verification, the platform had been in operation for nearly 15 months, providing fund settlement services for 120 overseas gambling websites and 70 investment fraud platforms, involving an amount of 120 million yuan.
Deep Tide TechFlow found that due to its stable value and anonymity, USDT is increasingly favored by criminals. Regardless of drug trafficking, online gambling, or cross-border transfers, all of the activities mentioned above use USDT without exception.
Is USDT the Main Culprit?
Contrary to popular belief, the most popular cryptocurrency among Chinese people is not Bitcoin, but USDT.
According to the Chainalysis report, in June of this year, USDT surpassed Bitcoin to become the most popular cryptocurrency in East Asia, with China accounting for the highest proportion. The report stated, "Tether has become the de facto fiat substitute for Chinese cryptocurrency users and is the main means of transitioning to Bitcoin and other standard cryptocurrencies."
Currently, the total market value of USDT exceeds $19.1 billion, but in 2017, this number was only around $100 million. In just 3 years, the market value of USDT has achieved a staggering 191-fold increase.
Where are these rapidly issued USDT being used?
As early as July 2019, Coindesk reported a case of USDT being used for cross-border trade in Russia, with "20% of the sales in Bitcoin and 80% in USDT." A Russian OTC trader stated, "Chinese companies purchase USDT in amounts ranging from $10 to $30 million per day."
In fact, USDT has become the most "out-of-the-box" cryptocurrency and is most closely associated with the gray industry. Criminal incidents related to USDT are escalating. According to data from the China Prosecutorial Network, there have been 85 cases of USDT-related criminal cases this year, compared to only 5 cases before 2020.
This trend has been noticed by regulatory authorities in various countries, and legislation is approaching.
In September, the EU officially proposed a regulatory framework for crypto assets and stablecoins, explicitly stating that all crypto assets not covered by existing EU financial laws will be regulated.
Recently, the UK Treasury issued a statement, stating that it is drafting regulations for private stablecoins and is also studying the possibility of central bank digital currencies as a substitute for cash.
Back in China, the draft revision of Article 22 of the "People's Bank of China Law," publicly announced on October 23, 2020, stipulates: "No unit or individual may create or issue tokens or digital tokens to replace the circulation of the RMB in the market."
As mentioned above, USDT has replaced the status of the RMB fiat currency in areas such as cross-border transfers and money laundering in the gray industry, and is effectively the fiat substitute for Chinese cryptocurrency users.
Will USDT collapse? When will it collapse? This is probably the question hanging over the heads of every cryptocurrency user.
In the eyes of some geeks, technology is neutral, only used by those with ill intentions. However, the increasing number of cryptocurrency criminal cases reminds us that technology cannot completely absolve human nature of its responsibility for evil.
"The Genie is out of the Bottle." This is how Ted Rogers, President of the Bitcoin wallet company Xapo, described the BCH fork civil war. This proverb comes from the story of Aladdin's lamp in "One Thousand and One Nights," meaning that once the genie is released from the bottle, it will have irreversible negative effects on the world. Today, this statement can still be applied to cryptocurrencies such as USDT.
"Bitcoin was born with a mission of deleveraging and hard currency, while USDT is the source of high leverage on exchanges. It's theoretically a good thing for more people to use a currency, but if its use is limited to the gray industry and speculation, should we reconsider the original intention of cryptocurrencies?" commented Pan Chao, the head of MakerDAO China.
(Respecting the opinions of the interviewees, Zhou Xiao, Aiba, and Ji Nan are all pseudonyms)
*Deep Tide TechFlow reminds investors to guard against chasing high risks, and the views expressed in this article do not constitute any investment advice.
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