Web3 Lawyer: China's new foreign exchange administration document: cryptocurrency trading becomes the focus of foreign exchange regulation?

On December 27, 2024, China's State Administration of Foreign Exchange issued the "Bank Foreign Exchange Risk Transaction Report Management Measures (Trial)" (hereinafter referred to as the "Measures"), which clearly listed illegal cross-border financial activities of virtual currencies as foreign exchange risk trading behaviors, and required banks to conduct risk monitoring and reporting on domestic/foreign institutions and individual customers involved in such activities.

Faced with the release of the "Measures", many people's first reaction may be: "Are virtual currency transactions completely regulated?" The good news is that this is not the case; but the bad news is that the intensity of supervision has indeed increased.

So what does the Measures say? What signals does it convey? In this article, Attorney Mankiw will provide an in-depth interpretation.

This regulatory document is not aimed at virtual currency transactions

If you read the whole document, you will find that the core of the document is to require banks to pay attention to the transaction background and the use of funds when identifying abnormal cross-border capital flows . Once suspected risky transactions are found, banks must monitor, analyze and submit risky transaction reports in a timely manner. In other words, the focus is on the judgment of "risky transactions" rather than non-specific assets or instruments.

The document points out that all activities involving false trade, false investment and financing, underground banks, cross-border gambling, fraudulent export tax rebates, and illegal cross-border financial activities using virtual currencies are classified as foreign exchange risk transactions. This reminds Attorney Mankiw of the "Explanation on Several Issues Concerning the Application of Laws in Handling Criminal Cases of Money Laundering" previously issued by the two high courts. The document also contains a similar description that transferring criminal proceeds through virtual currencies is money laundering. Therefore, whether it is the "Measures" or the documents of the two high courts, the regulatory focus is not on specific tools, but on using these tools to achieve illegal purposes.

However, virtual currencies, especially stablecoins such as USDT and USDC, are often used in cross-border transactions because of their natural borderless and convertible nature with most legal currencies. However, these characteristics are exploited by "smart people" who use virtual currencies as intermediaries to conceal cross-border capital flows or earn exchange rate differences between legal currencies.

This is why this document specifically points out the illegal cross-border financial activities of virtual currencies. my country has always maintained a high-pressure regulatory stance on the use of foreign exchange arbitrage, and the emergence of virtual currencies has further strengthened this regulatory need.

Therefore, for institutional or individual players, staying away from illegal cross-border financial activities involving virtual currencies is the key. From past cases and regulatory practices, illegal cross-border financial activities involving virtual currencies usually include the following categories:

Cross-border money laundering and fund transfer using virtual currencies, taking advantage of the anonymity and global liquidity of virtual currencies to transfer illegal proceeds across borders and evade anti-money laundering tracking. For example, domestic funds are converted into virtual currencies through stablecoins such as USDT, and then sold on overseas exchanges for cash.

Virtual currency underground banks use virtual currency to transfer funds in domestic and overseas markets, using virtual currency as a "bridge" to conduct cross-border exchange and illegal arbitrage. Such activities often conceal the source of funds, evade foreign exchange supervision and tax control, and seriously undermine financial order.

Cross-border gambling and illegal gambling payments : Overseas gambling platforms use virtual currencies to receive and pay money, thus bypassing the cross-border payment review of the banking system. For example, users use USDT to top up their gambling website accounts, and then transfer the gambling funds or profits back to China through virtual currencies for cash.

Disguise trade and false investment flows , transfer funds with virtual currency, and conceal the true purpose of funds. For example, fabricate cross-border trade contracts, pay "advance payments" with virtual currency, and then repatriate funds on the grounds of trade failure or investment losses, forming a path for fund laundering.

·Use virtual currency for arbitrage and tax evasion , through the price difference between domestic and foreign virtual currency markets, cross-border transactions to achieve exchange rate arbitrage, while evading capital controls and foreign exchange declarations. It is especially common to buy USDT at a low price in China and then sell it at a high price through overseas exchanges to earn the difference.

It can be found that these behaviors are no different from traditional illegal cross-border financial activities. In the final analysis, these behaviors have common characteristics such as bypassing foreign exchange arbitrage , concealing the flow of funds, and evading capital controls . The only difference is that virtual currency is used instead of traditional legal currency.

After clarifying the key points of the Measures, you may have another question: I have never done any of the above behaviors, so why does the bank still consider that my account has foreign exchange risk transactions? This must be the puzzlement of many players whose cards have been frozen.

Potential foreign exchange risk characteristics of virtual currency transactions

According to the Measures, when banks identify foreign exchange risk transactions, the focus is not on the transaction tools, but on the background, path and pattern of capital flow. Therefore, even if it involves virtual currency transactions, banks will not "one size fits all" identify them as risky transactions, but will focus on analyzing whether the transaction behavior has abnormal characteristics.

Virtual currency transactions naturally have the attributes of cross-border and high liquidity, and some users often use this feature for short-term arbitrage or capital flow. However, this trading habit is likely to show the typical characteristics of foreign exchange risk transactions:

1. High-frequency trading and capital flow

In virtual currency transactions, complex fund flows are the norm, especially for swing traders, where frequent top-ups and withdrawals are commonplace. However, in the bank’s risk control system, such funds are easily labeled as “abnormal”—high-frequency transactions, complex fund paths, multiple accounts, or direct connections to overseas exchanges. If large remittances, split accounts, and a lack of reasonable business background explanations are added, it is likely to be identified by the bank as foreign exchange risk transactions.

2. The source of funds does not match the purpose

In virtual currency investment, users often receive or pay through different channels, such as transfers between friends or transfers by OTC dealers. However, the flow of funds through such "informal" channels lacks standardized business background support in the banking system, and the authenticity of the transaction is easily questioned. For example, if funds in an account are transferred in and out many times in a short period of time, but no clear transaction contract or payment voucher can be provided, it may be regarded by the bank as a manifestation of false trade or underground money operation.

3. The funding path is complex and hidden

Virtual currency transactions often go through multiple wallet addresses and trading platforms, and eventually flow to overseas accounts or overseas exchanges. This complex transaction path makes it difficult to track the flow of funds. If it happens to flow through a mixer, the flow of funds will be even more secretive. For example, a user first buys USDT through an OTC transaction, then sends it to multiple on-chain addresses through a decentralized wallet, and finally withdraws it from an overseas exchange. This model that bypasses multiple links is easily suspected of circumventing foreign exchange control risks.

4. Frequent exchange of virtual currency and legal currency

Arbitrage opportunities in the virtual currency market have prompted some users to frequently convert legal tender into virtual currency, and then repeatedly buy and sell through different exchanges to earn the price difference. Lawyer Mankiw often mentioned the use of USDT arbitrage, which was eventually convicted of illegal foreign exchange trading operations. This type of capital flow is often characterized by frequent deposits and withdrawals in a short period of time, and the flow of funds to multiple accounts or platforms, which can easily be regarded as abnormal foreign exchange transactions by banks, thus triggering further review.

If you think that you can be worry-free by following the above characteristics, you are totally wrong. The most difficult thing to guard against is buying black U or black money, which inexplicably becomes a part of money laundering. At the same time, it is difficult to verify the real counterparty and source of funds in virtual currency transactions, and it is indeed easy to receive related stolen money in actual transactions. In addition, once involved, it is difficult for users to effectively explain to the relevant departments, which often leads to triggering the red line of foreign exchange risk transactions.

Can mainland users still participate in virtual currency transactions?

The door to virtual currency transactions has not been closed, but the compliance threshold has been greatly raised.

Although individuals holding virtual currencies and conducting related transactions are not considered illegal at the legal level, with the release of the "Management Measures for Bank Foreign Exchange Risk Transaction Reports (Trial)", illegal cross-border financial activities involving virtual currencies will face more stringent screening.

At the same time, in the virtual currency market, the characteristics of cross-border transactions, high-frequency buying and selling, and complex capital flows naturally overlap with the risk control logic of foreign exchange supervision. In addition, this document requires banks to strictly monitor and report on behaviors such as complex transaction patterns, unclear capital flows, or cross-border arbitrage. Therefore, when participating in virtual currency transactions, mainland users need to be particularly vigilant about transaction paths and fund uses. Otherwise, even if the virtual transaction itself has no illegal intent, it may be included in the bank's review list because the behavior pattern is similar to illegal cross-border activities.

As I said, investing is risky and trading should be done with caution.