Web3 Startup Criminal Risk Prevention Guide (2): Illegal Business Operations Related to Foreign Exchange Trading
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Web3 Startup Criminal Risk Prevention Guide (2): Illegal Business Operations Related to Foreign Exchange Trading
It's not easy being a middleman.
Navigating Web3 tides with focused insightsAuthors: Liu Zhengyao, Liu Fuqi, ManQin Law Firm
In our previous article, we discussed "Guide to Preventing Criminal Risks for Web3 Startups (I): Identifying and Avoiding Pyramid Scheme Risks." In this article, we continue with another topic: virtual currency exchange services. Due to the volatility of both the virtual currency market and foreign exchange markets, exchange rate spreads can become even wider when these two intersect. This creates opportunities for individuals seeking to profit from arbitrage during multiple conversions—leading some to become USDT dealers (commonly known as "U Merchants") or providers of virtual currency exchange services. However, when virtual currencies intertwine with foreign exchange transactions, complexity and risk increase significantly, potentially resulting in serious legal consequences—even if only small profits were made.
Therefore, in this article, ManQin lawyers will discuss virtual currency exchange activities by starting with the crime of illegal business operations related to foreign exchange trading.
Review of Illegal Foreign Exchange Trading Cases
Case A
From January 2018 to September 2021, Guo Mouzhao and others built websites such as the "TW711 Platform," using the virtual currency Tether USD (USDT) as an intermediary to provide customers with foreign currency-to-RMB exchange services. After placing orders on these platforms, currency exchangers would send foreign currency to overseas accounts designated by the platform. The platform then used that foreign currency to purchase USDT overseas. Fan Moubin subsequently sold the USDT through illegal channels to obtain RMB, which was transferred at agreed exchange rates into third-party domestic payment accounts specified by clients—earning profits from exchange rate differences and service fees. These platforms illegally exchanged over 220 million RMB. Among them, Fan Moubin operated virtual currency trading accounts and RMB bank accounts provided by Zhan Mouxiang, Liang Mouzuan, and others, receiving more than 6 million USDT from Chen Mougou and converting over 40 million RMB.
On June 27, 2022, Baoshan District People's Court of Shanghai sentenced Guo Mouzhao to five years in prison and imposed a fine of 200,000 RMB; Fan Moubin received a sentence of three years and three months in prison with a fine of 50,000 RMB; Zhan Mouxiang was convicted of aiding information network criminal activities, sentenced to one year and six months in prison, and fined 5,000 RMB; Liang Mouzuan received ten months in prison and a fine of 2,000 RMB.
Case B
From February 2019 to April 2020, Zhao’s gang provided exchange and payment services between UAE Dirham and RMB, operating both in the United Arab Emirates and within China. The group collected cash in Dirhams in Dubai, UAE, while simultaneously transferring equivalent amounts of RMB into domestic RMB accounts designated by counterparties. They then used the Dirhams to purchase "Tether" (USDT, a stablecoin pegged to the U.S. dollar) locally, immediately selling the purchased USDT through their associates inside China via illegal channels to recover RMB—thereby achieving cross-border capital circulation. By exploiting exchange rate differences, the group earned over 2% profit per transaction. Investigations revealed that Zhao and others exchanged approximately 43.85 million RMB between March and April 2019, generating total profits of about 870,000 RMB.
On March 24, 2022, Xihu District People's Court of Hangzhou City, Zhejiang Province, ruled that the individuals involved were guilty of illegal business operations.
Summary: As seen above, the defendants did not directly exchange RMB and foreign currencies but instead used virtual currency as an intermediary to earn exchange rate spreads. But why does this kind of activity constitute illegal business operations, leading to criminal conviction?
How Is Illegal Foreign Exchange Trading Defined?
Let us examine the definition and constituent elements of illegal foreign exchange trading under administrative law and its corresponding criminal liability under criminal law.
According to 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 Involving Illegal Fund Payment Settlement and Illegal Foreign Exchange Trading" (hereinafter referred to as the "Interpretation"), anyone who violates state regulations by engaging in unauthorized buying and selling of foreign exchange or disguised foreign exchange trading, thereby disrupting financial market order and committing the act under serious circumstances, shall be deemed guilty of illegal business operations.
Thus, the definition of illegal foreign exchange trading is straightforward and includes two scenarios:
① Unauthorized Buying and Selling of Foreign Exchange: Offenders buy low and sell high in underground foreign exchange markets, profiting from exchange rate differences;
② Disguised Foreign Exchange Trading: Conduct involving repaying RMB with foreign currency, repaying foreign currency with RMB, or swapping foreign currency and RMB to achieve monetary value conversion.
If any of the above acts reach a level of seriousness, they constitute the crime of illegal business operations, punishable by up to five years’ imprisonment or criminal detention, along with a fine of one to five times the unlawful gains, either alone or in addition to the imprisonment.
According to Article 225 of the Criminal Law of the People's Republic of China, Article 71(3) of the Standards for Filing and Prosecuting Criminal Cases under the Jurisdiction of Public Security Organs (II) issued by the Supreme People's Procuratorate and the Ministry of Public Security, and Article 3 of the aforementioned "Interpretation," the criteria for "serious circumstances" are met if any of the following conditions are satisfied:
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The amount of illegal business operations exceeds 5 million RMB;
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Unlawful gains exceed 100,000 RMB;
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The amount of illegal business operations exceeds 2.5 million RMB, or unlawful gains exceed 50,000 RMB, and any of the following circumstances apply: having been criminally prosecuted previously for illegal foreign exchange trading; having received administrative penalties for such illegal acts within the past two years; refusing to disclose the whereabouts of illicit funds or refusing to cooperate with recovery efforts, making it impossible to recover the proceeds; or causing other severe consequences.
For "particularly serious circumstances," the punishment is imprisonment of more than five years, plus a fine of one to five times the unlawful gains or confiscation of property. The thresholds are (meeting any one of the following):
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Illegal business volume exceeding 25 million RMB;
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Unlawful gains exceeding 500,000 RMB;
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Illegal business volume exceeding 12.5 million RMB, or unlawful gains exceeding 250,000 RMB, coupled with any of the four aggravating factors listed under the third criterion for "serious circumstances."
As shown in the earlier cases, although Guo Mouzhao’s group and Zhao’s group did not directly trade RMB and foreign currencies, they used virtual currency transactions as a medium to effectively carry out currency swaps—repaying RMB with foreign currency or vice versa—thus essentially completing foreign exchange conversions. Given the massive transaction volumes and particularly serious circumstances, their actions constituted illegal business operations. In Guo’s case, Fan Moubin repeatedly and unilaterally assisted the principal offender in exchanging foreign currency and RMB using USDT as a medium, while also maintaining close ties including investment relationships and helping resolve frozen bank account issues—leading the court to认定 him as an accomplice.
From this, we can identify two key characteristics of illegal foreign exchange trading occurring within the virtual currency market:
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Profit Motive. Gaining profit through trading activities is inherent to commercial conduct. Profits may come directly from foreign exchange trades or indirectly through associated activities. Whether benefiting oneself, others, or enabling others to benefit oneself, the crucial factor lies in whether the individual subjectively intended to gain profit through unauthorized foreign exchange trading.
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Unauthorized Foreign Exchange Transactions. Any foreign exchange trading conducted outside authorized banks or the China Foreign Exchange Trade System and its branches constitutes unauthorized trading, primarily falling into two categories: unauthorized buying/selling and disguised trading.
Currently, the latter scenario is common in the cryptocurrency market, with the most typical method known as "mirroring" or "matching trades." In such cases, perpetrators exploit the unique properties of virtual currencies to circumvent national foreign exchange controls. They collect RMB domestically from clients or receive foreign currency abroad, then deposit equivalent foreign currency into the client’s designated overseas account or RMB into a domestic account—achieving one-way capital flow across borders. Although there appears to be no direct RMB-foreign currency exchange between parties, the economic effect is equivalent to actual foreign exchange trading.
Therefore, even though the mechanism involves only virtual currency as an intermediary, objectively facilitating RMB-foreign currency exchange as part of a commercial operation may still constitute the crime of illegal foreign exchange trading. Even though virtual currencies lack legal tender status, their role as a functional intermediary cannot conceal the underlying illegality of unauthorized foreign exchange trading.
Recommendations from ManQin Lawyers
Given the understanding of illegal foreign exchange trading, we must adopt a cautious and prudent approach to minimize exposure to such criminal risks. ManQin lawyers offer the following recommendations:
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Avoid Profit-Oriented Activities. Individuals or foreign trade enterprises engaging in cryptocurrency transactions should avoid any commercial or profit-seeking behavior. It is essential to clarify whether the purpose of the transaction is personal use. "Personal use" here means fulfilling one’s own needs rather than resale or other commercial purposes—that is, not aiming to profit from exchange rate fluctuations in cryptocurrency trading;
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Avoid Direct or Indirect Conversion. In cryptocurrency transactions, avoid any conduct that substantively results in RMB-foreign currency exchange. If the transaction objectively involves only one-way movement between cryptocurrency and RMB, or between cryptocurrency and foreign currency, without facilitating cross-currency settlement, it generally will not constitute illegal business operations;
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Avoid Assisting Criminal Acts. This includes introducing individuals with currency exchange needs, providing financial support, offering collection accounts, or assisting in cryptocurrency trading processes. For example, in Case A above, Zhan Mouxiang and Liang Mouzuan were found guilty of aiding information network criminal activities for providing virtual currency trading accounts and RMB bank accounts. Additionally, actors should implement proper AML (Anti-Money Laundering) and KYC (Know Your Customer) procedures to avoid involvement in crimes beyond illegal business operations.
Conclusion
In the digital age, cryptocurrencies are gradually penetrating every corner of the global economy. With increasing integration of global markets and easier capital flows, changing regulatory policies and shared market sentiments make interactions between virtual currencies and foreign exchange increasingly sensitive. Under this backdrop, investors and participants should remain highly vigilant regarding virtual currency exchange services, ensuring that attempts to earn minor profits do not escalate into criminal offenses.
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