Recently, a high-profile case involving the use of virtual currency for foreign exchange transactions has garnered significant public attention. On July 16 (UTC), the Shanghai Pudong New District People’s Court disclosed details of a major illegal foreign exchange case involving digital assets that was adjudicated in March—totaling an astonishing RMB 6.5 billion. In this case, participants used Tether (USDT) as an intermediary, assisting individuals in converting RMB to foreign currency.

Why have Chinese judicial authorities intensified crackdowns on cases involving the illegal use of virtual currencies for currency exchange and foreign exchange trading over the past two years? The answer is straightforward: China maintains strict capital controls, limiting each citizen to an annual $50,000 foreign exchange quota. If you want to exchange more, it’s possible, but you must go to the bank, wait in line, complete an extensive array of forms, and provide documentation on the purpose of the funds.

The emergence of virtual currencies has allowed individuals to circumvent China’s capital controls, creating opportunities for illegal arbitrage. As a result, judicial authorities have concentrated their enforcement efforts on foreign exchange transactions and illicit currency conversion facilitated by virtual currencies. As a Web3 attorney, I will analyze the criminal liability framework and defense strategies for illegal business operations involving virtual currencies under mainland Chinese law, aiming to provide practical insights for Web3 professionals and fellow legal practitioners.

1. Case Overview: Pudong Court’s Major Currency Exchange Case

According to CCTV.com citing the China Times, at the end of 2023, Ms. Chen from Shanghai needed to transfer funds overseas to her daughter. Due to the $50,000 annual foreign exchange cap, she contacted a company referring to itself as a “currency exchange company.” After Ms. Chen wired RMB to Company A’s account, her daughter quickly received the equivalent amount in foreign currency abroad. Of course, the currency exchange company collected a percentage-based service fee.

Case disclosures indicate that as of the investigation, Yang, Xu, and others leveraged domestic shell companies to provide cross-border fund transfers for a broad client base using stablecoins such as USDT as an intermediary, generating illegal profits. The total value of these transactions reached RMB 6.5 billion. The operation worked as follows: the domestic entity received RMB from clients, but instead of moving it overseas through banks or underground money changers, Yang and Xu converted the funds into USDT and other digital currencies. Once the exchange company received the domestic client’s funds, it instructed overseas associates to remit foreign currency at prevailing rates from their own reserves to the overseas recipients. This approach, commonly used in jurisdictions where crypto-to-fiat services are permitted, allows mature virtual currency-enabled cross-border settlement between RMB and local currencies.

2. Criminal Threshold for Illegal Business Operations Involving Foreign Exchange

1. Statutory Provisions

Article 225 of the PRC Criminal Law defines the crime of illegal business operations—a successor to the older “speculation and profiteering” offense. Legal professionals know it as a “catch-all” charge in economic crime. The law addresses four categories of conduct: (1) unlicensed operation or sale of monopoly or restricted goods; (2) trading import/export permits or certificates of origin; (3) unauthorized securities, futures, insurance, or fund payment and settlement services; and (4) “other illegal business operations that seriously disrupt market order.”

2. Judicial Interpretation

The first three categories are clear-cut, but the fourth—“other illegal business operations that seriously disrupt market order”—has been a source of ambiguity, fostering inconsistent judicial outcomes and overbroad application to new business models. In 2011, the Supreme People’s Court issued the “Notice on the Accurate Understanding and Application of ‘State Provisions’ in the Criminal Law” (Fa Fa [2011] No. 155), clarifying that courts must strictly interpret the fourth category:

First, “state provisions” refer to laws and resolutions enacted by the National People’s Congress and its Standing Committee, as well as administrative rules, measures, decisions, and orders issued by the State Council.

Second, if a specific judicial interpretation is absent for “other illegal business operations that seriously disrupt market order,” courts at all levels must seek guidance from the Supreme People’s Court.

3. Specific Criminal Thresholds

According to the “Interpretation on Issues Concerning the Application of Law in the Handling of Criminal Cases of Illegal Fund Payment and Settlement Business and Illegal Foreign Exchange Trading” by the Supreme People’s Court and Supreme People’s Procuratorate, “serious circumstances” (punishable by up to five years in prison or detention) are established when: (1) the illegal operation amount exceeds RMB 5 million; or (2) illegal profits exceed RMB 100,000.

For “especially serious circumstances” (punishable by more than five years in prison), the thresholds are: (1) illegal operation amount exceeding RMB 25 million; or (2) illegal profits exceeding RMB 500,000.

Here, “illegal operation amount” refers to the total value of unauthorized foreign exchange, illicit currency conversion, or foreign exchange settlement, while “illegal profit” denotes the actual proceeds gained by the offender.

3. Why Does Buying and Selling USDT for Currency Exchange Constitute Illegal Business Operations?

Focusing on this article’s main topic and beyond the Yang/Xu operation, a common scenario leading to conviction for illegal business operations is the use of USDT to facilitate illicit foreign exchange—effectively, unlicensed currency trading. As described, the process breaks into two steps:

• First, the client remits RMB to a domestic shell entity in exchange for USDT;
• Second, an overseas group converts the USDT to U.S. dollars and deposits those dollars into the client’s overseas account.

While these steps may seem distinct, together they accomplish the conversion of RMB into U.S. dollars. This method, known as “peer-to-peer currency exchange,” involves domestic RMB inflow and simultaneous overseas USD outflow—completely bypassing official channels, required notifications, and compliance reviews. This circumvents national foreign exchange oversight and anti-money laundering controls, amounting to disguised foreign currency exchange. When statutory thresholds are crossed, it constitutes illegal business operations.

There is another scenario often encountered in practice: a domestic entity sells USDT to a client and receives RMB—without participating in, or knowledge of, the client’s subsequent USDT-to-foreign currency conversion. In this situation, assuming no evidence of facilitation or collusion, we argue that the domestic entity does not satisfy the elements of illegal business operations. Detailed reasoning follows below.

4. Legal Defense Recommendations

As a Web3 criminal defense lawyer, I offer the following concise defense strategies for cases involving alleged illegal business operations tied to virtual currencies, based on practical experience in the crypto sector.

First, in an environment where confessions play an outsized role, defense counsel must thoroughly review the client’s statements for any admission of “business” or “profit-seeking” intent. If the domestic team denies any unlawful currency trading purpose, and no corroborative objective evidence exists, so-called “evidence” collected through phone calls with overseas exchange groups (i.e., parties converting USDT into foreign currency) should not be admissible as criminal evidence.

Second, evaluating objective evidence requires technical expertise. For example, attorneys must scrutinize whether blockchain transfer records, centralized exchange account Know Your Customer (KYC) info, transaction timestamps, fund flows, and transaction volumes align. If a foreign crypto exchange provides Chinese investigators with an account’s registration details (name, ID, phone, email, etc.), how can the authenticity and relevancy of that information be independently verified? Could the account have been fraudulently registered? Defense counsel must be well-versed in varying KYC standards across exchanges and their host countries.

Finally, attorneys must exercise caution with forensic and audit reports from third-party agencies. Some authorities may treat these reports as definitive criminal evidence by default. With the client’s and family’s consent, defense counsel may retain subject-matter experts to appear in court to contest or rebut such reports and opinions.

Moreover, attorneys deeply familiar with China’s virtual asset regulatory regime and common pitfalls in forensic and evidentiary review can vigorously challenge the prosecution. Experience shows that new types of virtual currency-related cases often offer strong opportunities for successful defense, especially surrounding evidence and expert analysis.

Disclaimer:

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