China calls for tougher crackdown on use of crypto for illegal forex trading

Prosecutors and forex regulators told to strengthen supervision, with cases involving Tether stablecoin highlighted
Coordination to be improved to ‘effectively prevent and resolve financial risks and maintain national financial security’

Crime in China

Hayley Wong

Published: 7:00pm, 28 Dec 2023

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Chinese authorities have called for a tougher crackdown on the use of cryptocurrencies as a tool for illegal foreign exchange trading in the latest effort to fend off financial risks.

Prosecutors and forex regulators were told to strengthen supervision over foreign exchange, and cases where the Tether stablecoin was used as an intermediary to trade yuan with other currencies were highlighted, the Supreme People’s Procuratorate and State Administration of Foreign Exchange said in a statement on Wednesday.

Tether – which is also known as USDT – is pegged to the US dollar, making the virtual currency less volatile than others.

The SPP and SAFE said their local branches should improve coordination to “punish fraudulent foreign exchange purchases, illegal foreign exchange transactions and other foreign exchange-related illegal and criminal activities lawfully and handle every case efficiently to effectively prevent and resolve financial risks and maintain national financial security”.

The statement said converting yuan to cryptocurrency – and thereby converting it to foreign currencies – or the other way round was illegal in China. Those not directly involved in such transactions but who knowingly provide technical support, including building and maintaining a website, would be seen as “accomplices”.

A “heavy-handed crackdown” on illegal cross-border financial activities would continue, the forex regulator said.

The prosecutor’s office highlighted eight “typical cases of illegal foreign exchange crime” – two of which used the Tether stablecoin as an intermediary – and called for tighter regulation.

It said that in a 2019 case, a crypto trader received more than 22 million UAE dirhams (about US$6 million) in cash from a Chinese gambling syndicate in Dubai and transferred the corresponding yuan into their account in China. The trader – who was jailed for seven years and fined 2.3 million yuan (US$322,000) – was found to have used UAE dirhams to buy Tether stablecoin that they resold in mainland China for yuan, making gains of over 2 per cent.

Another case involved the conversion of more than 220 million yuan worth of foreign currency using Tether between 2018 and 2021. The statement said the developer and maintainer of several Chinese payment websites used in those transactions had been sentenced to five years’ jail and fined 200,000 yuan but did not give further details of the case.

The use and exchange of foreign currency is subject to strict rules in mainland China, while trading and mining cryptocurrency is officially banned.

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Is cryptocurrency too risky for China?

But mainland China remains a significant market for cryptocurrencies and is the largest in East Asia in terms of transaction turnover.

Underground traders use virtual coins to exchange currencies and avoid regulation. They make money on the difference in value between buying cryptocurrencies with foreign currencies and reselling the virtual assets in yuan. Payments in foreign currencies and yuan are often made in parallel to both overseas and Chinese accounts to avoid a direct, local transaction.

This week, police in the eastern city of Qingdao, in Shandong province, said they had busted a 15.8 billion yuan money laundering case that involved illegal forex trading using cryptocurrencies, and warned against the crime.

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