Virtual Money arbitrage - Beware of legal risks related to forex wash trading.

What are "Arbitrage" and "forex hedging"?

Arbitrage in virtual currency involves using the price differences between different exchanges or trading pairs to implement a strategy of buying high and selling low. The core idea is to complete the buying and selling of the same asset in a very short period of time, achieving risk-free or low-risk returns through rapid trading. For example, an arbitrage trader discovers that there are often arbitrage opportunities between the BTC/USDT trading pair on OKX and Binance. They deposit USDT in OKX while depositing BTC in Binance. When an arbitrage opportunity arises, they exchange u for BTC in OKX and then exchange BTC for u in Binance, completing the arbitrage.

The above is the simplest description of arbitrage, but in practice, in order to trap profits, the trading chain required by traders is likely to be much more complicated than above, and it is very possible that a certain link in the chain will convert to fiat currency, which could lead to possible "forex hedging" behavior.

(1) Analysis of Typical Forex-type Illegal Arbitrage Models:

1. Receive u and deliver fiat currency type

Knowing that the other party's USDT and other virtual currencies used for trading are purchased in foreign currencies and still providing them with RMB for exchange, or knowing that the other party's USDT and other virtual currencies used for trading are purchased in RMB, and considering that they provide foreign currencies for exchange, it constitutes illegal foreign exchange arbitrage in the form of receiving and delivering fiat currencies.

2. Wash Trading Type

Collecting RMB domestically, transferring foreign currency from an overseas account to the designated account of the currency buyer, and using the collected RMB to purchase USDT and other virtual currencies to exchange for foreign fiat currency; or collecting foreign currency in an overseas account, transferring RMB to the designated account of the currency buyer, and using the collected foreign currency to purchase USDT and other virtual currencies to exchange back to RMB constitutes an illegal forex arbitrage transaction of a matched trade type.

3. The core difference between ordinary搬砖Arbitrage and illegal forex market making.

The core difference between brick arbitrage and foreign exchange swapping is whether both RMB and foreign currencies are involved in the transaction chain. It is not difficult to distinguish between ordinary brick-moving arbitrage and illegal foreign exchange pairing, first confirm whether the transaction target is a virtual currency trading pair that is normally launched on the exchange, and if the transaction target of the two-way transaction is virtual currency, it will generally not be suspected of illegal foreign exchange pairing; Secondly, if it involves deposits and withdrawals, it is necessary to determine whether the source of the virtual currency is a foreign currency direct purchase, and if the virtual currency purchased with RMB is also purchased from RMB, it generally does not involve illegal foreign exchange transactions.

Why does "wash trading" constitute the crime of illegal operation?

Article 225 of the Criminal Law stipulates: Violating national regulations and engaging in any of the following illegal business activities that disrupt market order, if the circumstances are serious, shall be sentenced to imprisonment for a term of up to five years or detention, and may be fined an amount more than one time but less than five times the illegal gains; if the circumstances are particularly serious, shall be sentenced to imprisonment for a term of more than five years, and fined an amount more than one time but less than five times the illegal gains or confiscation of property: ......

(4) Other illegal business activities that seriously disrupt market order.

At the same time, in accordance with the provisions of the "Interpretation on Several Issues Concerning the Application of Law in Handling Criminal Cases of Illegally Engaging in Fund Payment and Settlement Business and Illegal Foreign Exchange Trading", if a person violates state regulations by carrying out illegal foreign exchange trading such as buying and selling foreign exchange or buying and selling foreign exchange in disguise, thereby disrupting the order of the financial market, and the circumstances are serious, he shall be convicted and punished as the crime of illegal business operation in accordance with the provisions of Article 225, Item 4 of the Criminal Law.

In judicial practice, forex wash trading is usually recognized as the act of "buying and selling forex or engaging in disguised forex trading."

In the "Receiving U Delivering Fiat Currency" forex illegal Arbitrage model, the trading chain is foreign currency - virtual currency - Renminbi, where virtual currency only serves as a bridge and medium; essentially, it is an exchange between foreign currency and Renminbi. Subjectively, the actor aims for profit and is aware that the virtual currency received is directly purchased with foreign currency, yet intentionally seeks to bypass foreign exchange controls to provide payment for the other party. Objectively, this scale of operational behavior undermines the forex regulatory system, causing a certain degree of damage to financial stability and financial order, constituting the crime of illegal operation.

In the "cross-trading type" forex illegal arbitrage model, the actor provides foreign currency to the buyer and receives local currency, while using virtual currency to complete the circulation between foreign currency and local currency. The trading chain of this model is also foreign currency - virtual currency - RMB, where virtual currency serves only as a bridge and medium, essentially facilitating the exchange between foreign currency and RMB. Similar to the "receiving U and delivering fiat currency type" forex illegal arbitrage, it should also be treated as a crime of illegal operation.

Real Case One - Lin's Illegal Operation Case:

Lin was originally engaged in ordinary arbitrage at a virtual currency exchange, and later met a Nigerian who called himself "Prince" during a transaction. "Prince" claimed that the fees for buying and selling forex at banks or forex companies are high, and wanted Lin to help exchange the local currency, Naira, into RMB.

Both parties negotiated, and the "prince" bought USDT on the Binance exchange using the local legal currency Naira, then transferred it to Lin's account on the Binance exchange. Lin sold the received USDT to a domestic currency dealer to exchange it for RMB, and then transferred the obtained RMB to a bank account in China provided by the "prince". Lin determined the purchase price based on the listing price of Tether on that day, discounted by 5%, and then sold it to the domestic currency dealer at the listing price, earning the price difference.

In just a few months, Lin and others completed over 650 forex trading transactions, involving the exchange of nearly 30 million yuan.

Lin's behavior seems to be only a two-step operation of "receiving you" and "paying", and Lin is only using a currency of RMB as a currency for buying and selling you, but he subjectively helps others to carry out illegal foreign exchange exchanges, bypassing the state's foreign exchange control, undermining the state's foreign exchange supervision system, and disrupting the normal order of the financial market, and his behavior is a disguised purchase and sale of foreign exchange. In the end, he was sentenced to five years in prison and fined for the crime of illegal business operation.

Real Case Two - Zhao and Others Illegal Business Case:

In this case, Zhao and others used cryptocurrency USDT as a medium for arbitrage buying and selling foreign currency. They received cash in dirhams in Dubai and paid RMB to the domestic accounts provided by the counterpart, while buying Tether with dirhams, and simultaneously letting the domestic gang sell Tether to exchange for RMB. In this way, they not only achieved the circulation of funds but also earned substantial profits through the exchange rate difference.

This type of "matched trading" illegal forex exchange uses virtual currency as a medium to achieve a one-way flow between two currencies, objectively increasing the difficulty of police investigation and evidence collection. However, this operation resulted in a corresponding increase and decrease in the amounts of the two currencies within the total accounts of Zhao and others, while circumventing forex regulation and disrupting the normal order of the financial market, which constitutes a disguised form of illegal forex exchange.

Ultimately, the main members of the case were sentenced to imprisonment for a fixed term of seven to eleven years for the crime of illegal operation, and were fined between two million to twenty million yuan.

Which behaviors of arbitrage trading may violate criminal law risks

In principle, if the act of moving bricks arbitrage purely comes from the exchange rate difference between virtual currencies and does not involve any fiat currency, it does not constitute the criminal risk of illegal business operations, but there are still some brick-moving arbitrage behaviors in practice, and the transaction chain is long and complex. For example, there is a high criminal risk in the arbitrage of moving bricks under the following circumstances:

1. Indirect capital closed loop: repeatedly and in large amounts collecting USDT or other virtual currencies of unclear origin directly purchased with foreign currencies, providing RMB for redemption, and then selling the virtual currencies to exchange for RMB;

2. Abuse of structured tools: using DeFi protocols, cross-chain bridges, and other tools to split transaction links, concealing the essence of the final fund flow to fiat currency exchange.

3. Concealed matched trading: The two parties conduct cryptocurrency trading on the surface, but privately agree to calculate cryptocurrency gains based on the domestic and foreign exchange rate differences.

Therefore, for arbitrage activities that one does not understand, one should not make hasty attempts for quick gains, otherwise, one may put oneself at risk.

Exploring the Possibilities of Technological Innovation Within a Compliance Framework

The compliance of virtual currency transactions is not a "black or white" issue, but rather requires a dynamic balance between regulatory logic and technical characteristics. For practitioners, it is essential to strictly adhere to the bottom line of "not touching the fiat currency exchange closed loop," while also building a verifiable full-process compliance chain through a professional legal team, in order to achieve coexistence of business safety and innovative value.