What are the legal risks when a foreign trade company uses USDT virtual currency to collect payments and exchange foreign exchange?

Preface Recently, a customer came to Mankiw for consultation. The story goes like this: The customer is a foreign trade company in Guangzhou. After completing the transaction with an overseas company, the payment was settled in USDT. After receiving the USDT, the company found a domestic service provider. , convert USDT to RMB. As a result, the service provider disappeared after receiving the U, and the customer called out, "Where is the integrity?" This article combines the above cases to discuss the legal risks faced by foreign trade companies in the entire USDT-for-fiat process under such circumstances.

01 Foreign trade payment settlement process

Traditional way to transfer foreign trade funds back

After most domestic merchants in the foreign trade industry complete transactions with their overseas counterparts, as long as they receive normal foreign trade payments, the foreign trade merchants will remit to China or Hong Kong, China through the local region/local bank, and then settle the remittance into RMB.

Due to my country's strict management of the foreign exchange trading market and various factors, foreign trade merchants usually find a third party to exchange currency, transfer foreign currencies such as US dollars to the third-party account, and then the third party transfers the equivalent amount of RMB to the foreign trade merchant's domestic bank account. In the foreign trade industry, this transaction has an industry term called "foreign exchange." (The risks of this behavior will not be discussed in this article)

On this basis, various foreign trade companies are constantly balancing between legal compliance and cost control, and many other foreign exchange settlement methods have been derived to circumvent my country's foreign exchange management.

Foreign trade funds are transferred back in the form of virtual currency

Nowadays, as virtual currencies are recognized and used in a certain area internationally, many foreign traders exchange their local currencies for the stable currency USDT (hereinafter referred to as "U") locally, and then convert Usdt into US dollars and transfer them to their Hong Kong US dollar accounts. Finally, in Hong Kong, through money service operators (MSO; Hong Kong Customs began to implement relevant regulations in 2012, which stipulates that all individuals and units engaged in currency exchange and remittance operations need to apply for a Hong Kong MSO license from Hong Kong Customs) through formal channels Settle into RMB.

However, due to the characteristics of virtual currency decentralization, convenient circulation, anonymization, and fast arrival, especially the above-mentioned foreign exchange settlement methods need to go through very complicated procedures. Therefore, just like the situation mentioned in the preface, some foreign trade companies will directly find domestic service providers and ask them to provide services such as U and other highly recognized virtual currencies into RMB.

We can check through public channels that there are still many service providers on the market that provide such services, and even promote such services.

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Illegal speech can be found everywhere on the Internet

02 Legal risk

Civil legal risk

As mentioned in the preface of the case, foreign trade companies face a great risk of service provider performance. Once the foreign trade company transfers U to the service provider's wallet, it loses control over U. So as long as the service provider refuses to transfer the money or absconds, the foreign trade company will face a situation where the money does not arrive and the currency does not know where it is. In this case, foreign trade companies are less likely to recover RMB or U.

According to China's current regulatory policy and judicial attitude towards virtual currency, if the service provider is required to return U by filing a civil lawsuit, the court will most likely rule to reject the lawsuit (this is what we read in the Mankiw Law Firm article "Bitcoin lending requires return, the court : I don’t care about this matter” discussed), the reason is: although virtual currency can be regarded as a specific virtual commodity, there are no relevant laws and regulations in China to clarify that it is a thing in civil law, and it does not have a category. In this case, there is no realistic returnability, nor can it be quantified using legal tender, and the people's courts that do not comply with the provisions of Article 119 (4) of the "Civil Procedure Law of the People's Republic of China" accept civil cases. scope of litigation.

In addition, what if the lawsuit requires the service provider to continue to pay RMB?

According to Article 1 (4) of the Notice on Further Preventing and Dealing with Speculation Risks in Virtual Currency Transactions issued by the People’s Bank of China and other departments in 2019, any legal person, unincorporated organization and natural person investing in virtual currency and related derivatives , if it violates public order and good customs, the relevant civil legal actions will be invalid, and the resulting losses shall be borne by the parties themselves; those suspected of disrupting financial order and endangering financial security will be investigated and dealt with by relevant departments in accordance with the law.

We can see the regulatory attitude of our country. Although the state currently does not explicitly prohibit individual citizens from buying, selling, trading and speculating on virtual currencies such as Bitcoin, the current regulatory trends show that not only do related behaviors not receive effective legal protection, therefore, If the service provider is sued and asked to continue to pay RMB, the court often finds that the transaction is invalid, and the foreign trade company shall bear the above-mentioned losses by itself.

Administrative supervision risk

(1) The payment for goods of foreign trade companies may be frozen due to suspicion of stolen money

If the service provider successfully transfers the corresponding payment to the foreign trade company's bank account in accordance with the agreement between the two parties. According to Article 2 of the "Relevant Provisions on the Application of Seizure and Freezing Measures in the Handling of Criminal Cases by Public Security Organs", based on the needs of investigating crimes, the public security organs shall seize and freeze the property involved in the case in accordance with the law, and relevant departments, units and individuals shall assist and cooperate. This method of settling foreign exchange through service providers can easily lead to the foreign trade company's bank account receiving stolen money. Therefore, the public security will freeze the money in accordance with the above regulations. Foreign trade companies still need to regulate their foreign exchange settlement behavior, otherwise they may accidentally become "tools" for criminals to launder money.

(2) Foreign trade companies’ virtual currency settlement violates foreign exchange management

Due to its "decentralization" and "support for peer-to-peer transactions" characteristics, virtual currency plays the role of cross-border payment equivalent to a certain extent. The flow between virtual currencies does not rely on traditional financial accounts to provide services, and it is difficult to control them with existing foreign exchange management measures.

According to Article 45 of the "Regulations on Foreign Exchange Administration", whoever buys and sells foreign exchange privately, in a disguised form, buys and sells foreign exchange, or illegally introduces and sells foreign exchange for a relatively large amount shall be given a warning by the foreign exchange administration agency, the illegal gains shall be confiscated, and a penalty of less than 30% of the illegal amount shall be imposed. If the circumstances are serious, a fine of not less than 30% of the illegal amount but not more than the equivalent amount shall be imposed; if a crime is constituted, criminal liability shall be pursued in accordance with the law.

Combined with the above regulations, if the foreign exchange settlement behavior of foreign trade companies is investigated and verified by relevant departments, they may face the risk of not only confiscating the money, but also bearing huge fines.

Criminal legal risks

(1) or suspected of money laundering, etc.

Continuing the discussion in conjunction with the above "(1) The payment for goods of a foreign trade company may be frozen due to suspicion of stolen money", if the upstream source of the RMB payment received by the foreign trade company belongs to the income and proceeds of seven crimes including drug crimes, organized crimes of a triad nature, etc., according to Articles 191 and 312 of the "Criminal Law of the People's Republic of China" stipulate that not only the money on the account will be frozen, but also there is a high possibility of being suspected of "money laundering" or "covering up". Crimes such as "concealing criminal proceeds and proceeds of crime", "harboring drug criminals", "harboring, transferring and concealing drugs and drug stolen goods" were investigated and dealt with by the public security organs.

(2) or suspected of illegal business operations

The "Foreign Exchange Administration Regulations" require that all foreign exchange settlement and sales business for individuals and enterprises must be handled through financial institutions. Although foreign trade companies use virtual currency as a medium, according to "legal forms to cover up illegal purposes", in the end, this kind of foreign exchange settlement using virtual currency still has a great risk of being judged as an illegal foreign exchange transaction by the judiciary.

In addition, the Supreme People's Court and the Supreme People's Procuratorate's "Interpretation on Several Issues Concerning the Application of Laws in Handling Criminal Cases of Illegal Fund Payment and Settlement Business and Illegal Foreign Exchange Trading" stipulates that any disguised trading of foreign exchange that disrupts the order of the financial market and the circumstances are serious shall constitute the crime of illegal business operations. According to the "Interpretation", if the amount of illegal business operations is more than 5 million yuan, or the amount of illegal income is more than 100,000 yuan, the illegal business behavior should be deemed to be "serious." If the illegal business amount is more than 25 million yuan, or the illegal income amount is more than 500,000 yuan, the illegal business behavior should be deemed to be "particularly serious."

Under normal circumstances, compared with foreign trade companies, service providers who undertake virtual currency and RMB settlement are more likely to be found guilty of this crime. However, if a foreign trade company meets one of the above conditions, it will also be found guilty of illegal business operations.

03 Summary

In recent years, my country's foreign exchange regulatory standards have become increasingly strict, and some "banks" have also been constantly adapting to conduct cross-border redemptions of funds through private exchanges, Usdt and other more covert methods, resulting in huge capital outflows and causing problems for China's financial stability. caused great harm. Foreign trade companies use virtual currencies such as U for foreign exchange settlement, which indeed saves a lot of cost and time to a certain extent, but at the same time brings corresponding civil, administrative supervision, and criminal risks. Foreign trade companies usually settle large amounts of payment. Once they encounter an unreliable service provider, they will inevitably cause large losses and it will be difficult to recover them. Even more so, because regulatory and judicial authorities are more inclined to "substantively" identify disguised foreign exchange transactions, behaviors that bypass formal foreign exchange settlement channels will also be substantively identified as violations of foreign exchange management. Therefore, it is recommended that foreign trade companies and other companies with similar needs should be more careful in choosing foreign exchange settlement methods.