Why are Crypto Assets transactions frequently involved in crimes related to cross-border Exchange Currency?

Why do encrypted transactions frequently hit the "cross-border exchange currency" high-pressure line? What do you need to pay attention to?

Written by: Xu Qian, Partner Lawyer at Shanghai Mankun Law Firm;

Xu Xiaohui, Lawyer at Shanghai Mankun Law Firm

Introduction

Since the birth of Bitcoin, its price has surged multiple times, driving the global encryption currency craze. At its peak, Bitcoin had surpassed 100,000 dollars, and the total market value of encryption currencies even once exceeded the global dollar circulation. Following this, there has been a massive emergence of encryption currency trading platforms, as well as active over-the-counter trading mediated by USDT.

Under China's current policy, some people use crypto assets to privately exchange foreign currencies and RMB to earn exchange rate differences and service fees, which seems to be harmless to technology, but in fact the law is high-pressure. Such operations may involve the offence of illegal business operation under Article 225 of the Penal Code, as well as the offence of money laundering under Article 191 of the Penal Code.

In this article, the Mankun Law Firm team will combine practical experience to help you analyze: why do cryptocurrency transactions frequently hit the "cross-border Exchange Currency" high-pressure line? What do you need to pay attention to?

Is cryptocurrency "property" or "data"? How does the law determine this?

1. Title

The terminology used in domestic and foreign literature related to fields such as Bitcoin and other encryption assets is quite chaotic, with concepts like cryptocurrency, encryption assets, digital currency, digital assets, and virtual currency often being confused with one another. It is precisely because there is no consensus on the attributes of cryptocurrencies, such as whether a cryptocurrency is a currency, an intangible asset, a right of claim, or data symbolizing the rights of the holder. Judicial authorities have varying attitudes towards this, and academia also has no definitive conclusion.

2. The Positioning of Cryptocurrency in Our Country's Law

1. From the perspective of civil law, encryption currency is neither currency nor a valuable security. Civil legislation and judicial practice affirm the virtual property nature of encryption currency (Article 127 of the Civil Code), which should be protected by law.

2. From the perspective of criminal law, cryptocurrency qualifies as "property" as defined in Article 92 of the Criminal Law. Cryptocurrency can be transferred in exchange for money, generating economic benefits, and possesses characteristics such as value, scarcity, and disposability. It meets the constitutive elements of virtual property on the internet and is protected by law, thus also representing a form of property.

Although cryptocurrencies are manifested as a form of digital or computer information system data, we should see the essence of assets or property through the form of data. Bitcoin, Ethereum, and others represent the digitization of assets, where the core is the asset itself and not the data. Just like a ledger, its value does not lie in the paper, but in the content recorded. From the perspective of criminal law, many contents protected by criminal law, such as trade secrets and state secrets, are presented through data. If an actor uses computer network means to steal digital technological information or state secrets stored in others' computers, it may constitute the crime of infringing trade secrets or illegally obtaining state secrets, because the data being infringed represents trade secrets or state secrets.

In simple terms, although encrypted assets are presented in the form of data, they represent tradable and realizable economic interests behind them. Legally, they should be regarded as digital assets with "property attributes."

Why are cryptocurrency transactions frequently classified as "cross-border exchange currency"?

In recent years, more and more cases involving cryptocurrencies have been characterized as "disguised cross-border currency exchange", and those responsible have even been held criminally liable. The reason for this is not that cryptocurrencies themselves are illegal, but that they highly overlap with traditional illegal exchange behaviors in terms of transaction paths, technical characteristics and capital functions. Specifically, it is mainly reflected in the following aspects:

1. The behavior pattern "simulation" has established the Exchange Currency process, falling into the category of illegal business operations.

Traditional illegal Exchange Currency often operates through underground banks, agents for currency exchange, or fictitious trade backgrounds. In the cryptocurrency scenario, traders complete value conversion through the "Renminbi → encryption → foreign currency" or reverse path, thereby achieving the purpose of circumventing official foreign exchange regulations and breaking through currency exchange limits.

Although such transactions do not formally directly touch the banking system, the result is still the illegal exchange of RMB and foreign currencies, which constitutes "other illegal business activities that seriously disrupt the market order" under Article 225 of the Criminal Law. In many cases, cryptocurrency platforms, market makers, and intermediaries have been held accountable and even criminalized as key players in the "exchange chain".

In judicial practice, the behavior of exchanging cryptocurrency often presents the following characteristics:

• Peer-to-peer matching, non-financial license: Matching transactions through community or platform, without obtaining qualifications related to foreign exchange or payment services.
• Decoupling of capital receipts and currency flows: Receiving payments domestically while issuing coins abroad, or vice versa, creates a separation between capital transfer and encryption asset delivery.
• The nature of the service is clear: participants charge fees or exchange rate differences, and it is no longer "personal asset allocation", but rather provides an "Exchange Currency service."

This "currency-as-a-bridge, disguised exchange" approach essentially bypasses the regulatory boundaries set by the state on capital projects through technological means.

2. Technical features promote "concealment" and "high liquidity", breaking through regulatory tracking capabilities.

Anonymity and Mixing Mechanisms Weaken KYC Capabilities

The decentralized mechanism of crypto assets makes most transactions without real names, without reporting, and can even further interrupt the on-chain association between addresses and identities through coin mixing services. This "broken chain + hybrid" mechanism greatly reduces the ability of regulators to identify the flow of funds and the parties involved.

Cross-border transactions have no physical boundary restrictions

Crypto assets can be transferred across borders only through the Internet, without relying on bank accounts or physical channels. A single USDT address can send and receive assets at any node in the world without going through customs, banks, or foreign exchange systems – making it technically unrestricted for global transfers that are much more difficult to regulate than traditional monetary systems.

Breakthrough of the 50,000 USD limit in the "gray channel"

Some investors use the crypto asset channel to convert RMB into USDT, and then exchange it for foreign currencies such as US dollars and Hong Kong dollars, and then remit overseas investments, house purchases, and car purchases. This method seems to be just an asset investment, but in fact, it has exceeded the annual limit of US$50,000 for individuals to purchase foreign exchange, which is a "hidden purchase of foreign exchange".

The role of transaction matching is difficult to define, and platform risks are high

Some platforms provide services such as address provision, fund custody, exchange rate mediation, and dispute resolution for both buyers and sellers when facilitating over-the-counter transactions, which goes beyond the scope of mere information matching and essentially participates in "Exchange Currency." Once a large transaction occurs or profits are made from exchange rate differences, it is likely to be regarded by judicial authorities as an Exchange Currency organizer rather than an ordinary user.

3. The macro-level impact on national financial security and regulatory order

The payment and pricing functions of crypto assets partially replace the role of RMB in cross-border scenarios. As more and more onshore funds leave the country through the "currency standard", the cross-border settlement status of RMB has been challenged, which may affect macroeconomic regulation and control in the long run.

Forming a "shadow financial system" parallel to the banking system

The circulation of stablecoins such as USDT allows some market participants to bypass the banking system and establish a gray financial network based on on-chain assets. Once it intersects with high-risk activities such as overseas gambling, fraud, and tax evasion, it is likely to create systemic risks.

The source of funds is difficult to trace, facilitating illegal activities

Anonymous transactions + mixing mechanism + uncensored channels facilitate money laundering, terrorist financing, and other illegal activities. This is not only a compliance issue but also a financial anti-terrorism and national security issue.

What should individual investors pay attention to in cryptocurrency trading?

1. Avoid participating in "exchange currency" and "exchange rate hedging" and other OTC businesses.

Using cryptocurrencies as a medium to earn profits from exchange rate differences by providing cross-border exchange and payment services is to use the special attributes of cryptocurrencies to circumvent national foreign exchange supervision and realize the conversion of foreign exchange and RMB through the exchange of "foreign exchange, cryptocurrency, and RMB", which is a disguised trading of foreign exchange. Individual investors should be cautious to avoid being held criminally liable for the crime of "illegal business operation".

2. Strictly adhere to the regulatory requirements for personal annual currency exchange limits.

Buying and selling cryptocurrencies, on the surface, appears to be the act of buying or selling cryptocurrencies, but in essence, it involves the conversion of currency value between foreign currencies and RMB, which falls under Exchange Currency. According to the "Implementation Rules for the Personal Foreign Exchange Management Measures," individual currency exchange and domestic individual currency purchases are subject to annual total amount management. The annual total amount is equivalent to 50,000 US dollars per person per year.

3. Avoid using anonymous recharge channels

When trading cryptocurrency, it is essential to choose a platform that has a proper KYC process and ensures transparent transaction records. Funding through P2P over-the-counter trading, mixer services, and privacy coin exchanges via anonymous channels makes it difficult to trace the legitimacy of the source of funds. If suspected of money laundering or funding illegal activities, the platform may freeze the account, leading to a loss of funds. Additionally, anonymous channels are easily exploited by hackers, and the security of user funds cannot be guaranteed.

4. Retain legal proof materials

If studying abroad, you can provide proof materials such as admission notices, tuition payment notices, etc., to verify the legitimacy of the transaction's use of encryption currency. If you are a citizen working domestically, you can keep labor contracts, salary statements, tax payment certificates, etc., to prove that you are not engaged in buying and selling encryption currency as a profession.

Conclusion

Cryptocurrency itself is not the "original sin"; the problem lies in whether the transaction process involves cross-border activities, currency evasion, anonymity, or regulatory avoidance. Once these behaviors are linked to illegal operations, money laundering, or foreign exchange controls, they may cross the red line.

Not understanding the law is not scary; what is scary is rushing into the gray area in a state of "ignorance is fearless." Whether you are an individual investor or a practitioner, you should be clear about the legal boundaries and avoid unnecessary criminal risks before participating in encryption asset trading.