The Legal Dilemma of Virtual Currency OTC Merchants
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The Legal Dilemma of Virtual Currency OTC Merchants
OTC transactions are easily exploited by criminals to facilitate money laundering, circumvent foreign exchange controls, and conduct illicit trading.
Navigating Web3 tides with focused insightsAuthor: Zhang Chengjun
On February 2, 2024, Hong Kong's Financial Secretary Christopher Hui stated that the government sees a need to regulate over-the-counter (OTC) virtual currency exchanges. A public consultation on the proposed regulatory framework will be launched shortly, and he encouraged citizens and stakeholders to actively share their opinions.
This news at the beginning of the year stirred quite a reaction within the crypto community. Yet for veteran Chinese OTC traders, it caused little ripple—they continue cautiously playing their role as crypto middlemen. Meanwhile, many crypto enthusiasts reading various entry-level guides eventually come to me and ask: "OTC seems so simple—just buy low, sell high, pocket the spread. Seems like a sure thing, right?" Whenever I see someone who thinks they've cracked the code to wealth, I feel obliged—as a legal professional—to tell them seriously: "Friend, if getting rich were that easy, far fewer people would still be searching for the door."
Even seasoned OTC traders might sigh and say: "Do you have any idea how I’ve lived all these years?" I’m not trying to discourage anyone from exploring web3. But please don’t oversimplify it either.
What is Virtual Currency OTC?
To understand this, we first need to clarify what OTC means.
OTC (over-the-counter) literally means off-exchange trading. The “exchange” here refers specifically to centralized cryptocurrency platforms. Whether a trade happens “on” or “off” the exchange depends entirely on whether it goes through such a platform. Based on this, OTC can take two forms:
1. Peer-to-peer (P2P) transactions conducted online. This method still relies on a digital asset platform for posting offers and communication, but the actual transaction occurs directly between buyer and seller. After mutual confirmation, the buyer transfers funds to the seller via Alipay, WeChat Pay, or bank transfer—bypassing the platform’s internal settlement system.
2. Traditional offline trading, typically arranged through personal referrals. Buyers and sellers privately agree on terms and conduct the transaction freely without involving any platform.
Now that we understand what OTC is, some newcomers might think: “Even better—it’s such an old-school model! Is this really web3? Isn’t this just being a ‘scalper’?” And I’d reply: Friend, you’ve actually hit the nail on the head. The era that gave rise to scalpers was China’s early reform period, when market mechanisms were underdeveloped and consumer demand couldn’t be met through official channels.
Common Legal Risks for OTC Traders
Back to the main point: in today’s mainland China context, while cryptocurrency trading itself hasn’t been legally classified as illegal, the high anonymity, investment risks, secrecy, and cross-border mobility of digital assets make OTC transactions vulnerable to exploitation by criminals—for money laundering, evading foreign exchange controls, or other illicit purposes. This is why we must pay close attention to the associated legal risks.
This also explains why the Hong Kong government wants to establish regulations. Though it may seem restrictive, proper rules actually create smoother operations. An industry without healthy rules is like a highway without guardrails—too easy to veer off course, with disastrous consequences.
While Hong Kong is moving toward regulated OTC markets, there has been no similar development in mainland China. Conducting virtual currency transactions on the mainland remains fraught with risks related to “illegal business operations,” “aiding information network crimes” (“Bangxin”), “organizing pyramid schemes,” and “concealing criminal proceeds,” among others.
That’s precisely why the risk is so high—no one wants authorities showing up unannounced. Of course, if you're simply trying to operate honestly as an OTC trader, I believe it’s still manageable.
From conversations with experienced OTC traders, I learned that “Bangxin” (aiding information network crime activities) has already become—or is becoming—the top legal threat facing OTC operators. So let’s dive into this issue today.
In 2017, the “Announcement on Preventing Risks Associated with Token Issuance Financing” stated in its first clause: “Tokens or virtual currencies are not issued by monetary authorities, lack legal tender status and compulsory attributes, do not have the same legal standing as money, and cannot or should not be used as currency in market circulation.” Accordingly, in China, virtual currencies lack monetary attributes and payment/settlement functionality. However, the announcement only explicitly bans ICOs (Initial Coin Offerings) and prohibits exchanges from providing conversion or intermediary services. Therefore, individuals engaging in peer-to-peer buying and selling of cryptocurrencies as OTC traders are not automatically committing illegal acts under current laws.
How Can OTC Traders Commit “Bangxin” Crimes?
Let’s first understand the crime of “aiding information network criminal activities.” The word “aiding” stands out immediately in the full name. So OTC traders become suspects not because they’re doing OTC trading per se, but because they “aided” information network criminal activities.
At this point, many OTC traders protest: “But I didn’t help anyone! I had no idea!” Our only possible mode of assistance is receiving payments. This is the core dilemma for all OTC traders: How do you ensure the money you receive is clean? I once asked a veteran in the industry this same question, and got a half-serious, half-absurd answer: “Take cash.” Indeed, accepting cash physically cuts off ties to cybercrime. But what about large-scale or platform-based OTC traders? Purely offline operations represent only a tiny fraction of total business.
So we must implement rigorous KYC (Know Your Customer) procedures—review every client, every transaction thoroughly. Yet even this may not fully shield us from liability.
According to the Supreme People’s Court and Supreme People’s Procuratorate’s “Interpretation on Several Issues Concerning the Application of Law in Handling Criminal Cases Involving Illegal Use of Information Networks and Aiding Information Network Crime Activities,” the criteria for prosecution under this crime include:
1. The number of recipients assisted reaches a certain threshold.
2. The total amount involved in payment settlements meets a specified standard.
3. Advertising or funding support provided reaches a certain value.
4. The offender’s illegal gains meet a defined threshold.
5. The individual has previously been administratively penalized within two years for illegal use of information networks, aiding such crimes, or damaging computer information systems, yet repeats the behavior.
6. The crime aided results in serious consequences.
Moreover, since the offense requires proof that the suspect “knew” their actions supported criminal activity, seven specific circumstances are recognized as evidence of “knowledge”:
1. Continuing to provide support after being notified by regulators (e.g., cyberspace, telecom, or police authorities), regardless of whether the notice was written.
2. Failing to fulfill statutory management duties upon receiving reports of misuse.
3.明显 abnormal transaction prices or methods—such as rates significantly deviating from market norms or unusual transaction patterns.
4. Providing programs, tools, or technical support specifically designed for illegal activities (e.g., phishing websites, custom malware).
5. Frequently using stealth browsing, encrypted communications, data deletion, or fake identities to evade supervision.
6. Assisting others in avoiding regulatory scrutiny or investigations.
7. Any other situation sufficient to establish knowledge.
My advice: If you're currently doing OTC, compare your practices against these points. For example, if a customer contacts you via platform requesting immediate large-sum payment—could this be considered明显 abnormal in price or method?
OTC Traders Beware: Risk of Illegal Business Operations
Relevant legal provisions: Article 225 of the PRC Criminal Law defines the crime of illegal business operations as engaging in any of the following acts in violation of state regulations, disrupting market order, under serious circumstances—punishable by up to five years imprisonment or criminal detention, plus a fine of one to five times the illegal gains; for especially serious cases, more than five years imprisonment, plus a fine or confiscation of property:
(1) Operating exclusive or restricted goods without authorization;
(2) Buying or selling import/export licenses, certificates of origin, or other permits;
(3) Engaging without approval in securities, futures, insurance, or unauthorized fund payment and settlement services;
(4) Other seriously disruptive illegal business activities.
Looking at past cases, clause (3) is often cited to charge OTC traders. But earlier we noted that both OTC models involve direct buyer-seller transactions settled via third-party platforms like WeChat Pay or Alipay—licensed payment institutions. Thus, ordinary OTC traders aren’t directly conducting payment settlement services themselves.
The 2022 revision of the “Provisions on Standards for Filing and Prosecuting Criminal Cases under the Jurisdiction of Public Security Organs (II)” adds another potential basis in Article 71: “Engaging in illegal foreign exchange trading, including arbitrage or disguised forex trading, thereby disrupting financial markets.” This applies where OTC traders use foreign currencies. But does typical OTC activity constitute “disguised forex trading”? I argue it does not. Although stablecoins like USDT are pegged to the U.S. dollar, they are not foreign currency per se. There is fundamentally no foreign exchange issue here.
OTC traders still work hard to avoid dirty money and frozen accounts, tirelessly implementing risk mitigation measures. Hence, the title of this article comes from genuine concern: How are OTC traders really doing? For veteran OTC players, this piece may offer little new insight—you’ve long walked this tightrope. For newcomers, I hope this provides a clearer understanding of legal risks. As for those considering entering the field: my clear advice remains—don’t.
ManQin Lawyers
Stay grounded. KYC is extremely important—apply it rigorously to every client, every transaction. While OTC traders play a vital role in advancing cryptocurrency circulation, they face enormous risks. When navigating these challenges, ManQin strives to apply legal principles and statutory frameworks to resolve issues faced by OTC traders. Throughout this article, we may seem to portray OTC trading as inherently guilty—but it is not, in itself, a crime.
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