Buying and selling USDT does not constitute the crime of illegal business operations.

Author: Zhu Yong Andy

First of all, let me state my conclusion: I personally believe that buying and selling USDT does not equate to disguised foreign exchange trading and does not constitute the crime of illegal business operations.

As for why, let's take a look at the following text~

01 Cash trading of USDT is deemed illegal business operations

On December 16, 2023, the Higher People's Court of Guangdong Province issued an article titled "This kind of price difference cannot be earned!" This is an article about a criminal case that was already sentenced in 2022. The article emphasizes that the brick-and-mortar trading of USDT by U merchants is equivalent to trading US dollars, which constitutes disguised foreign exchange trading. Once the amount exceeds 5 million, it constitutes the crime of illegal business operations.

Before this, the understanding in the currency circle of why virtual currency trading could constitute a criminal offense was limited to the receipt of stolen money during the transaction, which was presumed to be either aiding and abetting or concealing a crime. (This discussion is limited to the crimes that pure U merchants can constitute)

However, the aforementioned case published by the Higher People's Court of Guangdong Province broke this understanding.

The case occurred in February 2022. A was a U merchant who often bought U from retail investors and then sold the U for cash to the buyer. This time, A made a deal with buyer C to exchange money and U in person in Zhongshan City, Guangdong Province. Since a large amount of cash would be carried after the transaction, A even hired bodyguard B for this purpose. A and customer C exchanged approximately 814,000 U according to the exchange rate between RMB and USD on that day, totaling 5.1 million RMB. As a result, A and B were arrested by the police at a checkpoint on their way back in a rented car.

This was a typical case of a U merchant selling U for cash offline, with the entire transaction not involving stolen money or currency exchange, only the buying and selling of USDT, yet it was judged to be illegal business operations. However, the defendant did not appeal, and the judgment has taken effect.

The court held that A and B used the form of buying and selling virtual currency to engage in disguised foreign exchange trading, which was a serious offense constituting the crime of illegal business operations. A was the principal offender, and B, as the bodyguard, was involved throughout and was aware of the situation, making him an accomplice.

Finally, A was sentenced to 8 months in prison for the crime of illegal business operations, and B was sentenced to 6 months in prison. The 5.1 million RMB confiscated in accordance with the law and Li Si's mobile phone, which was used as a tool in trading virtual currency, were also confiscated in accordance with the law.

The original trial judge believed that:

According to the provisions of Article 2 of the "Interpretation of the Supreme People's Court and the Supreme People's Procuratorate on Several Issues Concerning the Application of Law in Handling Criminal Cases of Illegal Business Operations and Illegal Foreign Exchange Trading," engaging in illegal foreign exchange trading such as selling foreign exchange at a discount or disguised foreign exchange trading that seriously disrupts the order of the financial market shall be convicted and punished for the crime of illegal business operations in accordance with the provisions of Article 225, Item 4 of the Criminal Law.

The defendant A used cash to purchase USDT from "currency circle" retail investors at a price lower than the platform's, and then resold it at the current exchange rate for USD, earning the price difference and making a profit. According to A's confession, in order to purchase USDT for resale and profit, he even borrowed money from the bank, with the loan amount reaching millions. This large amount of funds converted into USD through USDT would inevitably reduce the country's foreign exchange reserves, affect the country's macroeconomic management of foreign exchange, undermine the sole legal status of RMB in the domestic market, greatly disrupt the effectiveness of foreign exchange management and the stability of the legal exchange rate, disrupt the normal order of the financial market, and constitute disguised foreign exchange trading, which should be punished.

02 Buying and selling USDT = buying and selling USD?

I personally believe that the above inference of the applicable legal provisions contains obvious logical errors. I do not agree with the judgment that buying and selling USDT is equivalent to illegal foreign exchange trading.

First, we need to clarify what foreign exchange is.

According to Article 3 of the "Foreign Exchange Administration Regulations of the People's Republic of China":

Foreign exchange referred to in these Regulations means the following payment methods and assets denominated in foreign currency that can be used for international settlement:

(1) Foreign currency cash, including banknotes and coins;

(2) Foreign currency payment vouchers or payment instruments, including bills, bank deposit certificates, bank cards, etc.;

(3) Foreign currency securities, including bonds, stocks, etc.;

(4) Special drawing rights;

(5) Other foreign exchange assets.

Obviously, USDT is not included in this list. Furthermore, in our country, there are no laws, regulations, rules, or normative documents that classify USDT as foreign exchange.

In addition, the "Notice on Further Preventing and Dealing with the Risks of Speculation in Virtual Currency Trading" (924 Notice) issued by the People's Bank of China and other ten departments on September 24, 2021, also defines virtual currency. The first paragraph of the notice states:

(1) Virtual currency does not have the same legal status as legal tender. Virtual currencies such as Bitcoin, Ethereum, and Tether have the main characteristics of being issued by non-monetary authorities, using encryption technology and distributed accounts or similar technologies, and existing in digital form. They do not have legal tender status, should not and cannot be used as currency in the market.

It is clear that virtual currencies are specific virtual commodities, not currencies, and therefore cannot be foreign exchange. Therefore, buying and selling USDT does not equate to disguised foreign exchange trading.

03 Does buying and selling USDT constitute the crime of illegal business operations?

From the typical foreign exchange-related cases related to virtual currency jointly released by the State Administration of Foreign Exchange and the Supreme People's Procuratorate, the following points can be seen:

The situation in which buying and selling virtual currency constitutes the crime of illegal business operations:

Using USDT and other virtual currencies as a medium to realize the exchange between RMB and foreign exchange constitutes the crime of illegal business operations. The actor uses virtual currency as a medium to bypass national foreign exchange regulation, and through the "RMB-virtual currency-foreign exchange" exchange, realizes the value conversion between RMB and foreign exchange, which constitutes disguised foreign exchange trading and should be held criminally responsible for the crime of illegal business operations.

The situation in which buying and selling virtual currency constitutes the crime of illegal business operations:

If the provider of virtual currency and the person engaged in illegal foreign exchange trading conspire in advance, or if the provider knows that the other person is engaged in illegal foreign exchange trading but still provides substantial assistance through trading virtual currency, it constitutes the crime of illegal business operations as a joint offense. Providing virtual currency trading services to individuals engaged in illegal foreign exchange trading, but having only a general understanding of the criminal behavior being assisted and not specifically realizing the assistance in the crime of illegal foreign exchange trading, can be held criminally responsible for aiding and abetting cybercrime.

Only the above two situations can determine that it constitutes disguised foreign exchange trading and constitutes the crime of illegal business operations. The case of the Higher People's Court of Guangdong Province mentioned above only involves the model of "RMB-virtual currency," and does not involve the exchange into USD, which does not meet the first situation mentioned above, and has nothing to do with the second situation either.

Furthermore, the prerequisite for the crime of illegal business operations is "violating national regulations," according to Article 96 of the Criminal Law, which states that violating national regulations refers to violating laws and decisions formulated by the National People's Congress and its Standing Committee, administrative regulations, provisions, decisions, and orders formulated by the State Council.

In other words, only laws and regulations formulated by the National People's Congress, its Standing Committee, and the State Council are considered "national regulations." The "9.24 Notice" was issued by the People's Bank of China and other 10 departments, and this notice is a departmental regulation, not a national regulation. Furthermore, the "9.24 Notice" explicitly does not prohibit individual citizens from investing in virtual currency, which means that buying and selling USDT does not violate national regulations, let alone constitute the crime of illegal business operations.

04 Conclusion

Therefore, I personally believe that buying and selling USDT does not constitute the crime of illegal business operations. In the absence of clear relevant laws and regulations, the Criminal Law should adhere to modesty, uphold the principle of legality of crimes and punishments, adopt relatively strict standards for criminalization, and avoid infringing on the legitimate rights and interests of citizens.

The law should not favor the rich or bend the rules. This is the motto of the judge in this case, emphasizing that the law should be fair and impartial. However, upon re-examining this case, is it really so?

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