Entering the hidden corners of USDT: drug trafficking, online gambling, money laundering
Title: "Behind the Scenes of the Grey Market Investigation of USDT: Drug Trafficking, Online Gambling, Money Laundering"
Source: TechFlow Deep Tide
Recently, the anti-fraud propaganda film "All-In" set in northern Myanmar has been released, which also brought attention to the cryptocurrency mentioned in the film, as well as the connection between crypto and the dark industry. This is not a new phenomenon. USDT money laundering has been a key target for law enforcement agencies for many years. This article takes you back to TechFlow's in-depth investigation article from 2020, delving into the hidden corners of USDT.
Cryptocurrencies like USDT are becoming a "green channel" for collecting drug proceeds.
"Compared to WeChat Pay and Alipay transfers, the flow of cryptocurrencies cannot be fully traced. Both buyers and sellers are safe," wrote a person involved in drug activities on their self-built blog.
Cryptocurrency is a great experiment in financial history. Its invention dates back to 2009, with a paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System" written by an account named "Satoshi Nakamoto". It was born with the mission of decentralization and hard currency, but also planted a time bomb – due to its anonymity, it has gradually become a favorite of criminals, with USDT (Tether) being the most popular.
USDT is not limited to the buying and selling of drugs. It is also used in black industries such as online gambling, money laundering, and capital flight.
TechFlow conducted interviews and research on the dark industry chain of cryptocurrencies, attempting to expose the hidden corners of USDT.
Buying Marijuana with USDT
"Compared to WeChat Pay and Alipay transfers, the flow of cryptocurrencies cannot be fully traced. Both buyers and sellers are safe," wrote Zhou Xiao (pseudonym) on his self-built blog.
Zhou Xiao claimed that because of Bitcoin, people who buy "green leaves" from him don't have to worry. Buying Bitcoin on exchanges requires real-name authentication, but it only proves that you have bought Bitcoin (invested in Bitcoin). As for where the Bitcoin goes and why, "unless you voluntarily reveal it, no one will know," he explained.
"You can say that you have been following the rising trend of Bitcoin this year and have invested in some Bitcoin for fun. Then you transferred it to your other Bitcoin wallet. I wrote the password for the other wallet on a piece of paper, but it got lost. I've been looking for it these days," he added.
Zhou Xiao operates an online drug trading platform, mainly assisting domestic players in purchasing marijuana, LSD, and other new types of drugs.
There are many people like Zhou Xiao who buy and sell drugs using cryptocurrencies and "earn a living at the risk of their lives."
According to Justice Network, a couple in Changchun City used a Bitcoin address to collect and transfer drug proceeds.
Wife Liu entrusted her Bitcoin account to husband Ma. Ma used the account to collect drug money and transferred the funds to Liu's bank card, totaling over 100,000 yuan.
After reviewing the case, the prosecutor concluded that Liu, knowing that Ma was selling drugs, still provided the Bitcoin account to Ma for collecting drug money and transferring the funds, which constitutes the elements of money laundering.
On January 20th this year, the court accepted the prosecution's sentencing recommendation. Ma was convicted of drug trafficking and sentenced to three years and two months in prison, while Liu was convicted of money laundering and sentenced to six months in prison.
The reason Zhou Xiaowei escaped legal punishment is that his Bitcoin address is difficult to trace. He claims that his Bitcoin address is generated offline through elliptic encryption algorithm, generating addresses and corresponding keys at will without any restrictions.
Zhou Xiaowei has chosen three types of cryptocurrencies for transfers: Bitcoin, USDT, and his own issued E-RMB.
He initially chose Bitcoin, but later, due to the bear market and the decline in BTC price, the seller requested a stable value transaction, so he used the stablecoin USDT for transfers.
USDT is a cryptocurrency launched by Tether, which is pegged to the US dollar. 1 USDT = 1 USD, which means that for every issued USDT token, there is a USD fund guarantee in its bank account.
Recently, he also plans to launch electronic RMB (E-RMB). He introduced that this currency has significantly improved security, privacy, and stability, always anchored to the price of 1:1 with the RMB, and is limited to old users.
More and more people like Zhou Xiaowei, who are proficient in cryptocurrencies and flexibly use them, are emerging in the gray industry. They operate on the edge of the law, earning money under the concealment of cryptocurrencies.
The Grey World of Cryptocurrencies
"I have 900,000 USDT in my account." Ai Ba (pseudonym) operates an offline casino in Mong La, Myanmar. He told the author that he needs to convert cash into foreign exchange or USDT every day.
According to data from Chainalysis report, from July 2019 to June 2020, over $50 billion in cryptocurrencies were transferred from East Asian addresses to overseas addresses, with over $18 billion being USDT.
Cryptocurrencies are primarily used in the gray industry for three purposes: drug trafficking, online gambling, and capital flight. This is a secretive gray industry chain with a mix of good and bad elements.
Using cross-border remittances as an example, a Zhihu user introduced their cross-border remittance operation in 2016: they buy Bitcoin on domestic exchanges, transfer it to Bitfinex, and before withdrawing, the platform requires personal information verification, including filling in ID card, passport, and address proof as prompted. After the withdrawal, the platform charges a 0.1% transaction fee, with a minimum of $20. This completes the entire Bitcoin cross-border remittance process.
An insider informed TechFlow that the above procedure is feasible, as they have personally tried sending funds from China to an exchange in the United States, exchanging it into US dollars, and transferring it to a US account. However, this is just an exceptional case.
If the above procedure is limited to personal exploration, individuals need to bear the risks. However, with the popularity and development of digital currencies, an industry chain for cross-border remittances using cryptocurrencies has emerged.
"We deal with US dollars and Australian dollars," said Ji Nan (pseudonym). They provide services to convert USDT into legal currency (remittance) and only require the customer to inform them of the recipient bank, whether it is a private or public account, which bank it is registered with, and in which region it is registered. The funds will arrive within one working day. If the customer is an individual account, it is treated as a loan or debt, and if it is a corporate account, it is treated as labor remuneration.
Ji Nan explained that compared to traditional bank wire transfers, which can take weeks and have transaction fees as high as 5%, USDT transfers have lower transaction fees (close to 0) and are instantly credited.
"The minimum amount is 5000 USDT, and there is no maximum limit. If the transaction exceeds 1 million USDT, just inform me in advance," Ji Nan said. The common purposes for customer transfers are usually for US stock trading, buying property, or immigration.
Compared to the "simple" procedures used for cross-border remittances as mentioned above, specialized criminal groups involved in cryptocurrency laundering are more secretive and extensive.
The term "laundering" originated from the performance testing of computers or mobile phones, but it has a new meaning in the payment field.
In the past, online gambling platforms would purchase a large number of bank cards to receive funds. However, this method incurred high costs, as the cost of acquiring a bank card could be hundreds or thousands of dollars. Once the bank card is blocked, the money becomes inaccessible.
Since 2018, the "laundering" model has emerged. Many laundering platforms have appeared on the market, significantly reducing the cost of money laundering through crowdsourcing. These laundering platforms claim that "as long as you have a QR code, you can make money while lying at home."
In the laundering model, laundering players pay a deposit (e.g., 10,000 yuan) to the laundering platform and upload their WeChat and Alipay QR codes for receiving payments. Recharging players send money to laundering players through the payment platform. Once the deposit of 10,000 yuan is reached, the laundering process ends. The laundering platform gives a certain percentage of the received commission to the laundering players and transfers the 10,000 yuan deposit to the gambling platform.
"It's like Didi Chuxing for transporting funds. Didi transports people, while we transport money," explained a person involved in the laundering process. Throughout the entire process, the gambling platform does not participate in the flow of funds; instead, the laundering players become the money laundering tools.
USDT laundering is a new model of money laundering using digital currencies. Traditional laundering involves the Chinese yuan, while USDT laundering involves USDT.
The above benchmarking person said that the biggest advantage of USDT benchmarking is decentralized trading. "All transactions are conducted between customers and our drivers (acceptors), with no fund pool in between, effectively preventing funds from being frozen on a large scale. And with USDT as a barrier in between, the entire process is traceless and cannot be tracked. Our trading volume is large enough and well diversified."
"We provide deposit and withdrawal services for gambling platforms." A benchmarking person on QQ said that they trade with the cryptocurrency USDT to "earn commissions with the principal, settle each transaction separately, and directly transfer 15,000 to 20,000 yuan of commissions to your bank account."
According to DeepTechFlow, these benchmarking groups attract users on platforms such as QQ groups, Baidu Tieba, and Xianyu, and then communicate transaction details on communication software such as WeChat, Telegram, and Signal. They purchase cryptocurrencies on exchanges and transfer them to benchmarking platforms, with the most commonly used cryptocurrency being USDT.
"Some do benchmarking and cash out in RMB. But those are very rare. Over 90% of them are scam investment plans or scammers." Aiba said that even in face-to-face transactions, sudden disappearances can occur.
Justice may be slow, but it won't be absent. A crackdown on cryptocurrency money laundering is coming.
Crackdown Is Coming
"It can't be as rampant as before." Aiba said that recently, the situation has become tight, and he no longer accepts USDT business. Instead, he uses cash for exchange, at a ratio of 100:105.
On September 24th, at the 9th China Payment and Clearing Forum held in Beijing, Liao Jinrong, director of the International Cooperation Bureau of the Ministry of Public Security, pointed out that over 1 trillion yuan of gambling-related funds flow out of China each year, specifically mentioning that cryptocurrencies are being used to transfer gambling funds.
"In recent cases, it has been found that some gambling groups use virtual currencies to collect and transfer gambling funds, and even engage in online gambling activities in some areas of Myanmar under the guise of virtual currency investment. These new types of digital currency channels cannot be frozen, and their anonymity makes it difficult to trace their origins, posing a great challenge to our crackdown and governance work."
Since the beginning of this year, a nationwide "anti-money laundering" and "card blocking" campaign has been underway.
On October 10th, the Inter-Ministerial Joint Conference on Counteracting and Governing New Types of Telecommunications Network Illegal Activities deployed a nationwide "card blocking" campaign to vigorously crack down on the illegal operation and sale of phone cards and bank cards.
Cryptocurrencies are undoubtedly a key area of crackdown. Some cryptocurrency OTC traders have also been affected, with frozen accounts and investigations.
According to the Criminal Law's standards for filing money laundering cases, those who provide "funds accounts" for money laundering activities will be prosecuted and face a maximum imprisonment of "no less than five years but no more than ten years, and a fine of no less than five percent but no more than twenty percent of the amount involved in money laundering".
On June 8th of this year, the Huizhou police dismantled a criminal gang that operated a fourth-party payment platform using USDT digital currency. A total of 76 suspects were arrested, 4 studios involved in online payment were investigated, and 2 online gambling gangs were destroyed.
This case is the first national case in which USDT digital currency was used to provide online payment services for illegal criminal activities. According to preliminary verification, the platform has been in operation for nearly 15 months, providing fund settlement services for 120 overseas gambling websites and 70 investment fraud platforms, with a total amount involved of 120 million yuan.
TechFlow has found that USDT, due to its stable value and anonymity, is increasingly favored by criminals. All the aforementioned activities such as drug trafficking, online gambling, and cross-border transfers invariably use USDT.
USDT: The Chief Culprit?
Contrary to popular belief, the most popular cryptocurrency among the Chinese is not Bitcoin but USDT.
According to a Chainalysis report, in June of this year, USDT surpassed Bitcoin and became the most popular cryptocurrency in East Asia. China accounts for the highest proportion. The report states that "Tether has become the de facto fiat substitute for Chinese cryptocurrency users and is the main means of transition to Bitcoin and other standard cryptocurrencies."
The total market capitalization of USDT currently exceeds 19.1 billion US dollars, but in 2017, it was only about 100 million in scale. In just 3 years, the market value of USDT has achieved a 1,910-fold growth.
Where are these rapidly increased USDT being used?
As early as July 2019, Coindesk reported a case in which USDT was used for cross-border trade in Russia, where "20% of the sales volume is Bitcoin, 80% is USDT." A Russian OTC trader stated that "Chinese companies purchase USDT in quantities ranging from 10 to 30 million US dollars per day."
In fact, USDT has become the most "out-of-the-box" cryptocurrency, closely associated with the gray market. Crime incidents related to USDT are increasing. Data from China's Prosecution Network shows that there have been 85 cases of USDT-related criminal activities this year, compared to only 5 cases before 2020.
This trend has been noticed by regulatory authorities worldwide, and legislation is approaching.
In September, the European Union officially proposed a regulatory framework for crypto-assets and stablecoins, explicitly stating that all crypto-assets not covered by existing financial laws in the European Union will be regulated.
Recently, the UK Treasury issued a statement stating that it is drafting regulations for private stablecoins and is also studying the possibility of central bank digital currencies as cash substitutes.
Back to China, on October 23, 2020, the revised draft of the "People's Bank of China Law" was announced, which stipulates in Article 22: "No unit or individual shall produce or sell token tickets and digital tokens to replace the circulation of renminbi in the market."
As mentioned above, USDT has already replaced the status of RMB fiat currency in areas such as cross-border transfers and money laundering, and is actually a fiat currency substitute for Chinese cryptocurrency users.
Will USDT collapse? When will it collapse? This is a question hanging over the heads of every cryptocurrency user.
In the eyes of some geeks, technology is innocent, but it is only used by ill-intentioned people. However, the increasing number of cryptocurrency criminal cases reminds us that technology cannot completely absolve itself of responsibility for human nature's evil.
"The Genie is out of the Bottle." Bitcoin wallet company Xapo's CEO Ted Rogers described the BCH fork as a civil war in this way. This proverb originated from the story of Aladdin's lamp in "One Thousand and One Nights," meaning that once a genie is released from a bottle, it will have irreversibly negative effects on the world. Today, this statement can still be applied to cryptocurrencies such as USDT.
"Bitcoin is inherently missioned with deleveraging and hard currency, while USDT is the source of high leverage in exchanges. It is a good thing if more people use a currency in theory, but if its use is limited to black market activities and speculation, should we reflect on the original intention of cryptocurrencies?" commented Pan Chao, the head of MakerDAO China.
(Respecting the opinions of the interviewees, Zhou Xiao, Aiba, and Ji Nan are all pseudonyms)
