Special statement: This article is an original piece by lawyer Shao Shiwei and represents the author's personal opinion, which does not constitute legal consultation or legal advice on specific matters.
Hong Kong, a world-renowned free port and international financial center, has seen its crypto economy flourish even before the introduction of official preferential policies. Among them, virtual asset over-the-counter trading service providers (VAOTC), operating in the forms of offline stores and online groups, along with native and overseas virtual asset trading service providers (VATP), together provide investors with token exchange and capital entry and exit services, forming a unique market landscape.
However, the high level of anonymity and borderless nature of virtual assets under blockchain technology has also opened the door for illegal criminal activities, with a large amount of cryptocurrency related to crime, especially stablecoins, quietly flowing into Hong Kong's crypto ecosystem, bringing funding pollution and legal and compliance risks to operators and ordinary investors.
This article takes the recent experience of mainland college students going to Hong Kong to help others run errands to exchange U as a starting point to explore the damage caused by Southeast Asian fraud industries to Hong Kong's crypto economy.
Author of this article:
Bitrace & Lawyer Shao Shiwei
Incident summary: A college student inadvertently became a 'money laundering tool' for a fraud gang when running errands to buy USDT in Hong Kong.
College student Xiao Wang thought that trading virtual currencies in Hong Kong was legal and not a problem, but recently found that his bank card, WeChat, and Alipay had all been frozen by the mainland police. It turns out that he had been staying in Hong Kong recently and accidentally met someone on the Xianyu platform, who asked him to help buy 'U' and offered him a running errand fee.
The specific process is that the other party transfers RMB to his bank card in mainland China, he exchanges it for Hong Kong dollars at a local fiat currency exchange shop, and then goes to a cryptocurrency exchange in Hong Kong to buy USDT, asking the clerk to transfer the virtual currency to the designated wallet address of the other party. However, shortly after the transaction, the police informed him that he was suspected of fraud. He was confused about how he could be suspected of fraud. So, is there a risk in running errands to buy USDT virtual currency in Hong Kong?
It turns out that the money the other party transferred to him each time came from different victims.
In essence, this is a typical 'carding back to U' money laundering method closely related to organized crime networks in Southeast Asia.
On-chain analysis: How to identify the money laundering chain of Hong Kong OTC through on-chain data?
Lawyer Shao Shiwei and the Bitrace team (a cryptocurrency security service platform) teamed up to conduct an in-depth investigation. Through funding analysis of the designated receiving address TTb8Fk, the Bitrace team found that the college student purchased 2,396 USDT from a designated exchange shop, and this fund subsequently flowed into the guarantee platform merchant address TKN5Vg, which has long been associated with two Southeast Asian guarantee companies, HuioneGuarantee and NewcoinGuarantee.
(Bitrace on-chain tracking of Hong Kong VAOTC transaction paths, hereinafter the same)
These two guarantee platforms have long provided services to organized crime industries in Southeast Asia, including illegal online gambling, black and gray markets, money laundering, and fraud, and in this incident, they played a role in helping handle upstream fraudulent funds.
This indicates that this is a malignant incident where a Southeast Asian fraud group used a cryptocurrency exchange in Hong Kong for money laundering.
Its model is a common 'carding back to U (Crypto-based money laundering)' technique, meaning that money launderers collect fiat proceeds from fraud victims and quickly exchange them for USDT in the OTC market, then transfer them back to the blockchain address of the fraudsters and earn commissions from it. As purchasing USDT requires a considerable amount of bank cards and real-name information, money launderers will recruit a large number of part-time workers in advance to form a 'money laundering fleet (Crypto Laundering Syndicate)', and these part-time workers are referred to as 'carders' or 'runners'.
In this incident, mainland college students unknowingly became money laundering runners, assisting Hong Kong virtual asset over-the-counter service providers (namely: VAOTC, commonly referred to as cryptocurrency exchange shops) in completing the conversion of funds for money launderers. The USDT obtained first entered the fleet address, and after deducting the commission (which has been calculated to be 33%), the funds were then transferred to the guarantee merchant and finally settled through the guarantee platform.
'Money laundering fleet' revelation: Hong Kong VAOTC is being exploited by Southeast Asian fraud gangs for USDT fund laundering.
Behind these cases, a mature black and gray industrial assembly line has formed, where fraud gangs are remotely commanded from Southeast Asia, using 'carding' transfers and 'runners' to exchange U, disguising illegal funds as compliant transactions.
By further expanding the rebate address TGeZzC of the money laundering fleet, we found that this money laundering incident is not an isolated case, but rather the tip of the iceberg of a highly industrialized large money laundering gang.
Tracing the funding source of the rebate address, we can find 7 other primary addresses for returning U (left three), these addresses are at the same level as TTb8Fk, all receiving varying amounts of USDT from Hong Kong exchange shops (left one and left two, HKVAOTC), of which 33% is transferred to the rebate address (marked in red), and 67% is transferred to secondary return U addresses (right two), and then dumped through the guarantee platform, the entire process has very clear division of labor characteristics.
Analysis shows that this batch of addresses became active as early as 2024, and the initial source of funds was unrelated to Hong Kong, but rather a large number of high-risk addresses from Southeast Asia's black and gray markets, further indicating that the case is closely related to an organized crime network in Southeast Asia.
In less than three months, this single money laundering fleet has illegally laundered more than 310,000 US dollars in Hong Kong using the same method. Considering that there are still other addresses in this case that have not been expanded or other gang addresses that have not been detected, the actual scale of these industrialized money laundering activities illegally using HKVAOTC may be even larger.
Hong Kong VAOTC exchange shops: a gray area before the introduction of compliance policies.
Lawyer Shao Shiwei from Shanghai Mankun Law Firm pointed out that the Hong Kong virtual asset over-the-counter trading (VAOTC) industry is still in a stage of inadequate regulation, and many platforms have become important channels for laundering fraudulent funds due to a lack of effective compliance mechanisms. Looking globally, countries have not yet fully unified their regulatory frameworks for cryptocurrencies and OTC trading services, but major virtual asset trading markets such as Hong Kong, the EU, and the United States have begun to promote the licensing system for virtual asset service providers and the construction of anti-money laundering (AML) regulatory systems.
Taking Hong Kong as an example, the Financial Services and the Treasury Bureau (FSTB) released a legislative consultation document regarding virtual asset over-the-counter (OTC) services in February 2024. The document proposed an important recommendation to introduce a licensing system for OTC merchants through the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). According to this proposal, the Hong Kong side plans to establish a licensing management system for OTC merchants through the AMLO, with the core purpose of ensuring that these companies can meet compliance requirements such as anti-money laundering (AML) and customer identity verification (KYC).
This means that all companies engaging in virtual asset over-the-counter trading services, including OTC merchants, must apply for the corresponding license from Hong Kong Customs (CCE) and strictly adhere to relevant legal provisions. However, as of now, the legislation is still in the consultation stage, and specific implementation details and effective dates are yet to be officially announced by the government.
How should VAOTC merchants respond to Hong Kong's virtual currency compliance regulation?
As Hong Kong is about to introduce regulatory policies for virtual asset over-the-counter (OTC) trading, OTC service providers are facing unprecedented compliance pressure. Currently, virtual asset over-the-counter trading services (VAOTC) have become a key link in the cryptocurrency market, providing users with efficient capital entry and exit channels, but their high level of anonymity also makes them vulnerable to becoming downstream links for money laundering and telecom fraud.
In this context, VAOTC operators urgently need to systematically sort out customer due diligence (KYC) processes and funding source review mechanisms (AML) to comprehensively investigate potential illegal funding risks in their business. If compliance obligations are not fulfilled, once verified to assist in processing illegal funds, they are likely to face criminal liabilities.
To actively respond to the upcoming OTC licensing system, industry participants must not only actively familiarize themselves with the compliance requirements that will be implemented by the Hong Kong Customs (CCE) and the Financial Services and the Treasury Bureau (FSTB), but also establish a sound internal risk control system to ensure that all transaction activities comply with anti-money laundering and counter-terrorism financing standards.
In addition, OTC platforms should strengthen communication with regulatory agencies and industry self-regulatory organizations, promptly grasp policy dynamics, and enhance transaction monitoring through technical means to identify suspicious behavior in a timely manner. At the same time, the platform should strictly refuse to associate with any funds suspected of being related to black and gray markets, cutting off the possibility of laundering illegal funds through OTC channels. This not only helps maintain the company's good reputation but also reflects the company's important commitment to social responsibility.
Overall, the upcoming OTC compliance policy in Hong Kong is an important opportunity for the virtual asset over-the-counter trading industry to achieve standardized development. Operators in the industry should seize this opportunity, proactively adapt to changes in the regulatory environment, continuously improve their compliance levels, and thus enhance their competitiveness. Only in this way can they stand firm in the prosperous market of the crypto economy in Hong Kong and achieve long-term stable development.