What are the legal risks when a foreign trade company uses USDT for payment?

Original author: Lawyer Zhou Fengxuan - senior lawyer at Shanghai Mankiw Law Firm

Some time ago, a client came to Mankiw for consultation. The basic facts of the case are: The client is a foreign trade company in Guangzhou. After completing the transaction with an overseas company, the client’s original intention was of course to settle the payment through Yangguan. However, the overseas company could not. Unable to pay, he proposed a feasible solution "to settle the payment in USDT". After careful consideration to avoid long nights and dreams, the customer agreed and quickly received the USDT paid by the overseas company, and then found a domestic "service provider" "Liquidate (convert USDT to RMB). The result of finding Lawyer Mankiw can be imagined. After the "service provider" received the U, he was unable to contact and found no such person.

Many people may, upon first hearing the content of this consultation, think that “things related to virtual currencies are doomed to be misfortunes.” In view of the fact that different countries have different regulatory policies for virtual currencies, using USDT to settle payments has become one of the payment options for some foreign trade companies. However, there are many pitfalls in the traditional payment methods in the foreign trade industry ( risk), is it really appropriate to choose USDT as a payment method?

01 Common problems in payment collection for cross-border foreign trade merchants

It is very easy for small, medium and micro foreign trade companies to encounter cross-border payment failures. Some companies are even deceived and eventually withdraw from the market. Therefore, in foreign trade transactions, payment collection is a matter of great concern to both buyers and sellers. In small, medium and micro foreign trade companies, comprehensive costs are rising, operating risks and pressures are at high levels, and to varying degrees, there are phenomena of "fearing to take orders when there are orders" and "increasing revenue without increasing profits". This is because foreign trade companies will encounter many problems when collecting money, including but not limited to: ① long account opening process, slow collection time, and high withdrawal fees; ② too few supported currencies, and existing channels do not support small coins ③The RMB withdrawal limit is limited; ④Cash cannot be withdrawn at the real-time exchange rate; ⑤It is impossible to pay suppliers directly; ⑥It is difficult to collect payments in high-risk areas; ⑦You may even encounter troubles such as card freezing and fund freezing. For domestic foreign trade merchants, repayment of funds in cross-border settlement must be a very important link, and the difficulty of repayment is also a practical problem faced by them. In order to avoid the problems that arise in reality, many foreign trade merchants now give up going through legal contracts. Instead of collecting payments through regular methods and channels, funds are mostly recovered through “underground banks”.

02 The operation model of cross-border "underground banks"

Normally, cross-border payment refers to international claims and debts arising from international trade, international investment and other aspects between two or more countries or regions, with the help of certain settlement tools and payment systems to achieve cross-border and cross-border payments of funds. Regional transfer behavior. In actual economic activities, many domestic underground banks are used as a settlement method for cross-border trade.

"Underground bank" is not a definite and standardized legal concept. It mainly refers to "a special illegal financial organization that is free from the financial regulatory system and uses or partially uses the settlement network of financial institutions to engage in illegal foreign exchange transactions and cross-border (border) transactions." ) Illegal financial services such as fund transfer, fund storage, and lending.” Its essence is an underground bank, which operates financial services such as exchange, lending, payment and settlement without state approval, and provides funding channels for corruption, gambling, smuggling, tax fraud, tax evasion, etc. It is also a form of money laundering crime (relevant regulations : The "Anti-Money Laundering Report" issued by the People's Bank of China in 2005, and the "Measures for the Suppression of Illegal Financial Institutions and Illegal Financial Business Activities" promulgated and implemented by the State Council on January 8, 2011).

Although labeled as "illegal", the existence and prosperity of "underground banks" have always been an open secret. At present, there are three main types of operation models of domestic “underground banks”: cross-border “knock-on” model, “payment and settlement” model, and other illegal business models.

1. Cross-border “counter-attack” model

That is to say, an exchange method is adopted in which RMB is delivered domestically and foreign currency is delivered overseas, and the funds are not cross-border in form (referred to as the "cross-border exchange model") to achieve substantial exchange and cross-border transfer of funds. This is also the main mode of operation of underground banks at present. It is mainly used to transfer domestic illegal income and other funds abroad through underground banks and to evade foreign exchange through underground banks in cross-border trade.

2. "Payment and settlement type" model

That is, using false and deceptive means to fabricate or construct legal transaction forms, conceal their illegal purposes, and realize the "payment and settlement" model of illegal cross-border transfer of funds. For example, the import and export of props and commodities can be used to realize cross-border funds, and public-to-private transactions can be transferred from public to private through shell companies and fake trade.

3. Other illegal business models

The operation modes of underground bank gangs are often diversified, and they are also called comprehensive underground banks. Methods such as scalpers exchanging currency, illegally modifying and moving POS machines overseas, swiping bank cards overseas to withdraw cash, illegal splitting of foreign exchange purchases and payments, and cash smuggling are also common. In order to avoid crackdowns, in recent years, the use of virtual currencies, fourth illegal cross-border transfer of funds on party payment platforms.

In short, no matter which of the above-mentioned models is used, the profit methods of "underground banks" can be roughly summarized as follows: earning price differences by buying low and selling foreign currencies high, and extracting a certain percentage of handling fees from "customers" based on the amount of exchange transactions and fund lending. commissions, defrauding government incentives, export tax rebates and other cross-border arbitrage and other illegal gains through transactions.

03 The risk of choosing to receive USDT when settling cross-border trade

When domestic and foreign trade merchants choose a settlement method, why they choose USDT to receive payment is probably due to the existing problems mentioned above. Choosing USDT just avoids some difficulties in collecting payment, but what they get in their hands is virtual currency after all, and For non-real gold and silver, after collection, should you choose to hold, invest, or liquidate it? This is a practical issue that domestic merchants need to consider after collection. In view of my country’s current regulatory policy on virtual currency is so strict, whether it is collection, holding, or investment Either way, it's a high-risk situation.

1. Risk of receiving USDT

If an overseas buyer converts his foreign currency into USDT through an "underground bank" or exchange (over-the-counter OTC), the domestic merchant will provide him with a wallet address to receive USDT, and the overseas merchant will pay USDT according to the requirements of the domestic merchant. This seems to pass USDT collection is very fast and avoids currency, foreign exchange, tax and other restrictions. However, if we analyze it more deeply, we will find that since overseas merchants exchange their own funds into USDT through "underground banks" or exchanges (over-the-counter OTC), it is difficult for domestic merchants to identify whether the source of the funds is legal. Risks will follow.

Assuming that the funds of overseas merchants are illegal funds, in the process of handling previous cases, we can preliminarily predict that the reason why overseas merchants want to convert their own funds into virtual currencies is simply to use "underground banks" or exchanges (OTC) originally illegal funds are laundered. Domestic merchants, as a link in receiving USDT (or other virtual currencies), are very likely to be implicated in the investigation of the case. In the end, the foreign trade funds of this order cannot be recovered. If it is small, if it rises to the point where it is recognized as a criminal offense, the gain outweighs the loss.

2. Risks of holding USDT

After domestic merchants collect USDT, if there is no criminal risk mentioned above, can they be safe? In fact, this is not the case. The value of virtual currency in China may not be reflected, but some countries have confirmed that virtual currency is legal property. If a domestic merchant does not immediately convert it into RMB after receiving USDT, but plans to wait and see the situation in the international market before making any plans. If the USDT in hand happens to appreciate, then why not?

However, the theft of virtual currency (whether it is Bitcoin or USDT) is nothing new in the currency circle. I believe that in order to have a glimmer of hope of recovery, domestic merchants will choose to try criminal reporting. However, due to the impact of current domestic laws and regulatory policies, Based on the cases we have done in the past and the judgment documents of public criminal cases, whether virtual currency has property attributes is the key to whether it can be recognized as a criminal crime. At present, some courts determine the property attributes of virtual currencies, which will generally be The crime of theft is filed for investigation; however, judging from practical experience, regardless of whether a criminal case is filed or not, it is relatively difficult to recover the stolen virtual currency (USDT) in full.

3. Risks of investing in virtual currencies

Of course, holding USDT is not the ultimate goal of domestic merchants. In the end, if they want to gain through USDT, they may use the USDT collected for investment. In real economic activities, most of the time, when entrusting others to invest in virtual currencies for themselves, they will not sign a written contract, which is what Mr. Zhou often calls streaking investment. Whenever the "investment fails" (it may be that the project is really bad) (or the project party did nothing at all), the court generally determines the establishment of the entrusted investment contract based on the chat records, transfer records and other materials between the two parties. However, the establishment of the entrustment contract does not mean that it is valid. There are a large number of court judgments that consider the contract to be established. If it violates financial regulatory policies, the virtual currency itself is an illegal subject matter, or the contract violates public order and good customs, the contract will be deemed invalid; of course, there are also a small number of typical cases that recognize the validity of contracts entrusted to invest in virtual currencies.

Entrusted investment in virtual currencies is deemed to be an invalid contract, and the legal consequences are also different. Some courts require both parties to bear part of the responsibility; some courts believe that according to the "Announcement on Preventing Token Issuance Financing Risks" the client's investment behavior should bear its own risks; some courts believe that related debts based on virtual currency It is illegal and therefore the law does not protect the client's property.

Therefore, if domestic merchants engaged in cross-border trade receive USDT and consider using it for investment, they must be aware of the possible consequences of being deemed invalid in the entrusted investment contract and bear the risk themselves, and make investment decisions with caution.

4. Risks of liquidating USDT

Whether it is traditional payment methods or collecting USDT, the main purpose of domestic merchants is to collect money and realize the turnover of capital flow. Just like the customer who consulted at the beginning, that is to say, the ultimate purpose is to exchange USDT for RMB, but according to my country's existing regulatory policies, the possibility of legally converting it into RMB through domestic institutions is very slim, so if you want to realize it, you can only choose: exchanges, over-the-counter OTC (or underground banks). No matter which service provider you choose, it has broken through the legal compliance process for cross-border RMB entry. The process of collecting payments through USDT can be briefly summarized as follows: overseas merchants exchange foreign currency into USDT → domestic merchants provide wallets to overseas merchants Address → Overseas merchants transfer USDT to the wallet address provided by domestic merchants → Domestic merchants exchange it into RMB through exchanges, over-the-counter OTC (or underground banks), which perfectly breaks through the national foreign exchange and tax management system, and also overcomes the problem of slow timeliness . However, risks abound. If there are illegal funds in the RMB exchanged from USDT, the bank card or funds may be frozen, and the public security organs require cooperation with the investigation, and the unfreezing is far away; there is also the possibility of being suspected of money laundering, concealing criminal proceeds, etc. Criminal cases spread. Even if the RMB converted from USDT are legal funds, breaking the legal and compliant entry process of RMB may constitute illegal foreign exchange trading, tax evasion, etc. Once relevant units investigate, they may also be subject to criminal or administrative penalties.

Of course, even if the relevant national units or departments do not pursue the case, the process of cashing out USDT is not necessarily guaranteed. Just like the customer who consulted us at the beginning, the situation where the service provider lost contact and ran away after receiving USDT is not an exception. Because my country's current regulatory attitude is to strictly prohibit speculation in virtual currencies, it can be imagined that it is still relatively difficult to recover the USDT that has been paid. In this way, I thought I could avoid foreign exchange, taxes, high handling fees, slow timeliness and other problems, but in the end I may get nothing.

04 Mankiw Lawyer Summary

Having said this, I believe domestic merchants already have their own ideas on whether to choose USDT (or other virtual currencies) for settlement. As a law firm engaged in the web3.0 industry, we have actually been paying attention to the legalization of virtual currencies in China. It can only be said that it is still a stage of strict regulatory control. It is recommended that domestic merchants choose cross-border settlement methods on the premise of legal compliance. Finally, let me summarize the topics discussed today:

**1. The main reasons why it is difficult for domestic foreign trade merchants to collect payments are: ** Long account opening process, slow collection time, and high withdrawal fees; too few supported currencies, and existing channels do not support small currencies; and the RMB withdrawal limit is limited ; Unable to withdraw cash at the real-time exchange rate; unable to pay suppliers directly; difficult to collect payments in high-risk areas; and may even encounter troubles such as card freezing and fund freezing.

**2. There are three main operating models of cross-border (border) payment underground banks: ** Cross-border "knock-on" model, "payment and settlement type" model, and other illegal business models, no matter which one it is, it is possible Subject to criminal penalties or administrative penalties.

**3. The main risks of receiving USDT when settling cross-border trade are: ** (1) The risk of receiving USDT: the funds cannot be recovered, and may even become part of a criminal crime; (2) The risk of holding USDT: price fluctuations It may lead to devaluation, or it may not be recovered after being stolen; (3) Risk of investing in USDT: There is a possibility that the entrusted investment contract is invalid and you bear the risk at your own risk; (4) Risk of liquidating USDT: The exchange or over-the-counter OTC runs away Causing capital losses, violating foreign exchange, taxation and other national management regulations, and subject to criminal or administrative penalties.

Special statement:

This article is an original article by Shanghai Mankiw Law Firm. It only represents the personal views of the author of this article and does not constitute legal consultation or legal opinions on specific matters. If you need to reprint the article, please contact Mankun Law Firm staff: MankunLawFirm