What are the legal risks when a foreign trade company uses USDT virtual currency to receive payments and exchange foreign exchange?
Author: Liu Honglin, Founder of Shanghai Mankun Law Firm
Introduction: Recently, a client approached Mankun Law Firm for consultation. Here is the situation: The client is a foreign trade company in Guangzhou. After completing a transaction with an overseas company, they settled the payment in USDT. After receiving the USDT, the company found a domestic service provider to convert the USDT into RMB. However, after the service provider received the USDT, they disappeared. The client exclaimed, "Where is the integrity?" This article will discuss the legal risks faced by foreign trade companies in the process of converting USDT to fiat currency using the above-mentioned case as an example.
01 Foreign Trade Settlement Process
Traditional Method of Returning Foreign Trade Funds
After completing a transaction with overseas counterparts, most domestic foreign trade businesses will remit the received foreign trade funds to China or Hong Kong, followed by conversion to RMB through local or local national banks. Due to the strict management of the foreign exchange market in China and various factors, foreign trade businesses usually seek third parties to handle the currency exchange, depositing foreign currencies such as USD into the third party account, and the third party then transfers the equivalent amount in RMB to the domestic bank account of the foreign trade business. In the foreign trade industry, this transaction is commonly referred to as "offset exchange". (The risks involved in this behavior will not be discussed in this article.)
Based on this, foreign trade companies continuously balance between legality and compliance, and cost control. This has also led to many other ways to avoid China's foreign exchange management in the settlement process.
Returning Foreign Trade Funds in the Form of Virtual Currency
Nowadays, with virtual currencies being recognized and used internationally to a certain extent, many foreign traders convert their local currency into stablecoin USDT (hereinafter referred to as "U"), and then convert USDT into US dollars and transfer them to their Hong Kong dollar accounts. Finally, they use Money Service Operators (MSO; Hong Kong Customs and Excise Department began to implement relevant regulations in 2012, which stipulate that individuals and units engaged in currency exchange and remittance operations need to apply for a Hong Kong MSO license) in Hong Kong to settle the currency into Chinese yuan through proper channels.
However, due to the decentralized, convenient, anonymous, and fast nature of virtual currencies, especially when all the above-mentioned settlement methods require very complex procedures, as mentioned in the preface, some foreign trade companies will directly approach domestic service providers to provide services for converting recognized virtual currencies such as U into Chinese yuan.
We can find in public channels that there are still many service providers offering such services in the market, and even promoting these services.
Illegal remarks on the internet can be seen everywhere
02 Legal Risks
Civil Legal Risks
As mentioned in the case in the preface, foreign trade companies face high risks of performance by service providers. Once foreign trade companies transfer U to the service provider's wallet, they lose control over U. As long as the service provider refuses to transfer or absconds, foreign trade companies will face the situation where the money does not arrive and they don't know where the coins are. In this situation, the possibility of foreign trade companies recovering Chinese yuan or U is relatively low.
According to China's current regulatory policies and judicial attitudes towards virtual currencies, if a civil lawsuit is filed to demand that a service provider return U, the court is likely to dismiss the lawsuit (as discussed in the article "Lending Bitcoin with a Demand for Return, Court: I Don't Care" by Man Kun Law Firm). The reason is that although virtual currency can be seen as a specific virtual commodity, there are currently no relevant laws and regulations in China that explicitly define it as a civil law property. Moreover, it does not have the attributes of a specific type of property and does not have a tangible return in this case. It cannot be quantified using legal tender, and it does not meet the scope of civil litigation accepted by the People's Court as stipulated in Article 119, Clause (4) of the Civil Procedure Law of the People's Republic of China.
Furthermore, what if the lawsuit demands that the service provider continue to fulfill the payment in Chinese yuan?
According to the first clause, Clause (4) of the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" issued by the People's Bank of China in 2019, any legal entity, non-legal entity organization, or natural person investing in virtual currency and related derivatives, if it violates public order and good customs, the relevant civil legal actions are invalid, and the losses caused by this will be borne by the individual. If it is suspected of undermining financial order and endangering financial security, it will be investigated and dealt with by relevant departments in accordance with the law.
From the regulatory attitude in China, although the country has not explicitly banned individual citizens from buying, selling, or speculating in Bitcoin and other virtual currencies, the current regulatory trend indicates that behaviors related to it not only do not receive effective legal protection but also often result in the court deeming the transaction invalid, and the losses are borne by the foreign trade company itself.
Administrative Regulatory Risks
(1) The foreign trade company's funds may be frozen due to suspicion of illicit money
If the service provider successfully transfers the corresponding payment to the foreign trade company's bank account according to the agreement between the two parties. According to Article 2 of the "Provisions on the Application of Sealing and Freezing Measures by Public Security Organs in Handling Criminal Cases", in order to investigate crimes, public security organs shall legally seal and freeze the property involved, and relevant departments, units, and individuals shall cooperate. This method of settlement through service providers can easily lead to the foreign trade company's bank account receiving stolen money. Therefore, the public security organ will freeze the funds in accordance with the above-mentioned provisions. Foreign trade companies still need to regulate their own settlement behavior, otherwise they may inadvertently become "tools" for money laundering by criminals.
(2) Violation of Foreign Exchange Management by Foreign Trade Companies in Virtual Currency Settlement
Virtual currencies, due to their "decentralization" and "support for peer-to-peer transactions" characteristics, to some extent, play the role of cross-border payment equivalents. The flow of virtual currencies does not rely on traditional financial accounts to provide services, and existing foreign exchange management measures are difficult to control.
According to Article 45 of the "Foreign Exchange Management Regulations", if someone engages in unauthorized trading of foreign exchange, disguised trading of foreign exchange, back-to-back trading of foreign exchange, or illegally introducing large-scale trading of foreign exchange, the foreign exchange administration agency shall issue a warning, confiscate illegal gains, and impose a fine of less than 30% of the illegal amount; for serious cases, a fine of more than 30% but less than the equivalent of the illegal amount shall be imposed; and if it constitutes a crime, criminal responsibility shall be pursued in accordance with the law.
In combination with the above-mentioned provisions, if the foreign trade company's settlement behavior is investigated and verified by relevant departments, it may not only face the risk of confiscation of the funds, but also bear the risk of hefty fines.
Criminal Legal Risks
(1) Suspected of Money Laundering, etc.
Continuing from the discussion on "(1) The foreign trade company's payment may be frozen due to suspected stolen money," if the upstream source of the RMB funds received by the foreign trade company belongs to the proceeds and profits of seven crimes such as drug crimes and organized crimes with a mafia nature, according to Article 191 and Article 312 of the Criminal Law of the People's Republic of China, not only the funds in the account may be frozen, but there is also a great possibility of being investigated and dealt with by public security organs for crimes such as "money laundering", "concealing and hiding proceeds of crime or crime gains", "harboring drug criminals", "concealing, transferring, or concealing drugs or drug proceeds" and other charges.
(2) Suspected of Illegal Business Operations
"Regulations on Foreign Exchange Management" require individuals and businesses to conduct all foreign exchange transactions through financial institutions. Although foreign trade companies use virtual currencies as intermediaries, using virtual currencies for settlement still carries great risk of being deemed illegal foreign exchange trading by judicial authorities through the means of "covering illegal purposes in a legal form".
In addition, the Supreme People's Court and the Supreme People's Procuratorate have issued the "Interpretation on Several Issues Concerning the Application of Laws in Handling Criminal Cases of Illegal Engagement in Payment and Settlement Operations and Illegal Foreign Exchange Trading", which states that engaging in disguised foreign exchange trading to disrupt the order of the financial market constitutes the crime of illegal business operation if the circumstances are serious. According to this "Interpretation", if the amount involved in illegal business operation exceeds five million yuan or the illegal proceeds exceed one hundred thousand yuan, it shall be deemed as a "serious" illegal business operation. If the amount involved in illegal business operation exceeds twenty-five million yuan or the illegal proceeds exceed five hundred thousand yuan, it shall be deemed as an "especially serious" illegal business operation.
Usually, compared with foreign trade companies, service providers that engage in settlement of virtual currencies and Chinese yuan are more likely to be charged with this crime. However, if a foreign trade company meets one of the above situations, it may also be deemed as illegal business operation.
03 Summary
In recent years, China's foreign exchange regulation has become increasingly strict, and some "money shops" have been finding loopholes to conduct cross-border fund settlements through private currency exchanges, USDT, and other more concealed methods. This has led to massive capital outflows, posing a great threat to China's financial stability. The use of virtual currencies such as U by foreign trade companies for settlement indeed reduces costs and time to some extent, but it also brings corresponding civil, administrative, and criminal risks. Foreign trade companies usually settle large amounts of payment for goods, and once they encounter unreliable service providers, they are bound to incur significant losses that are difficult to recover. Moreover, because regulatory and judicial authorities tend to substantively identify disguised foreign exchange trading, circumventing formal channels for settlement will also be deemed as a violation of foreign exchange management. Therefore, it is recommended that foreign trade companies, as well as other companies with similar needs, exercise more caution in choosing settlement methods.
Disclaimer:
This article is an original work of Shanghai Mankun Law Firm and represents the personal views of the author, and does not constitute legal advice or legal opinions on specific matters. If you need to reprint the article, please contact the staff of Mankun Law Firm: MankunLawFirm.
