Introduction
Since the birth of Bitcoin, its price has soared multiple times, driving a global cryptocurrency craze. At its peak, Bitcoin surpassed $100,000, and the total market value of cryptocurrencies even exceeded the global dollar circulation at one point. This was followed by a surge of cryptocurrency trading platforms and active over-the-counter trading using USDT as a medium.
Under the current policies in China, some individuals utilize cryptocurrency assets for private exchanges between foreign currencies and RMB, profiting from exchange rate differences and service fees, seemingly harmless from a technical standpoint but legally under high pressure. Such operations may involve illegal business operations under Article 225 of the Criminal Law and money laundering under Article 191.
In this article, the Mankiw lawyer team will leverage practical experience to help you analyze why crypto transactions frequently hit the 'cross-border foreign exchange' hotspot. What should you be aware of?
Is cryptocurrency 'property' or 'data'? How does the law determine this?
I. Titles
The terminology used in domestic and international literature regarding cryptocurrencies such as Bitcoin is quite mixed. Concepts like cryptocurrency, crypto assets, digital currency, digital assets, and virtual currency are often confused. The lack of consensus on the attributes of cryptocurrency—whether it is a currency, intangible asset, claim right, or data representing the rights of the holder—leads to varying attitudes among judicial authorities and no definitive conclusion in academia.
II. The positioning of cryptocurrency under Chinese law
1. From a civil law perspective, cryptocurrency is neither currency nor a valuable security. Civil legislation and judicial practice affirm the virtual property attributes of cryptocurrency (Article 127 of the Civil Code), which should be legally protected.
2. From a criminal law perspective, cryptocurrency meets the definition of 'property' under Article 92 of the Criminal Law. Cryptocurrency can be transferred for consideration in money, generates economic benefits, possesses value, scarcity, and disposability, and thus meets the constitutive requirements of virtual online property, which is protected by law, and therefore is a form of property.
Although cryptocurrencies manifest as data in digital or computer information systems, we should see their essence as assets or property through their data form. Bitcoin and Ethereum are the digitalization of assets; their core is assets rather than data. Similar to a ledger, its value lies not in the paper but in its recorded content. From a criminal law perspective, many contents protected by criminal law, such as commercial secrets and state secrets, are presented through data. If a perpetrator steals digital technology information or state secrets stored in someone else's computer using computer networks, it may constitute the crime of infringing commercial secrets or illegally obtaining state secrets because the data infringed represents commercial or state secrets.
In simple terms, although crypto assets are presented in data form, what they represent behind the scenes are tradable and liquid economic interests, which should legally be regarded as digital assets with 'property attributes.'
Why are cryptocurrency transactions frequently classified as 'cross-border foreign exchange'?
In recent years, an increasing number of cryptocurrency-related cases have been classified as 'disguised cross-border foreign exchange' behaviors, with related responsible individuals even being held criminally liable. The reason lies not in the illegality of cryptocurrency itself but in its high degree of overlap with traditional illegal foreign exchange behaviors in terms of transaction paths, technical characteristics, and funding functions. Specifically, this is primarily reflected in the following aspects:
I. Behavioral patterns 'simulate' the foreign exchange process, falling into the category of illegal business operations
Traditional illegal foreign exchange often operates through underground banks, agency foreign exchange purchases, fictitious trade backgrounds, etc. In the cryptocurrency scenario, traders complete value conversion through the path of 'RMB → cryptocurrency → foreign currency' or the reverse, thereby circumventing official foreign exchange regulations and breaking through purchase limit restrictions.
Although such transactions do not directly touch the banking system in form, their results still constitute illegal exchanges of RMB for foreign currency, forming 'other serious illegal business operations that disrupt market order' as defined in Article 225 of the Criminal Law. In many cases, cryptocurrency platforms, market makers, and intermediaries have been held accountable as key figures in the 'foreign exchange chain,' and some have even been criminally prosecuted.
In judicial practice, foreign exchange behaviors involving cryptocurrency often exhibit the following characteristics:
Peer-to-peer matching, non-financial licenses: transactions are matched through communities or platforms without obtaining qualifications related to foreign exchange or payment services.
Decoupling of fund payments and currency flows: receiving payments domestically while issuing currency overseas, or reverse operations, leading to a separation of fund transfers and cryptocurrency delivery.
The service nature is obvious: participants charge fees or exchange rate differences, which is no longer 'personal asset allocation' but rather provides 'foreign exchange services.'
This path of 'using cryptocurrency as a bridge for disguised exchange' essentially circumvents the regulatory boundary on capital projects using technical means.
II. Technical features foster 'concealment' and 'high liquidity,' breaking through regulatory tracking capabilities
Anonymity and mixing mechanisms weaken KYC capabilities
The decentralized mechanism of crypto assets allows most transactions to be conducted without real-name registration or reporting, and can even further sever the on-chain connection between addresses and identities through mixing services. This 'disconnection + mixing' mechanism significantly reduces the ability of regulatory agencies to identify the flow of funds and participants.
Cross-border transactions have no physical boundary restrictions
Cryptocurrency assets can circulate across borders using only the internet, without relying on bank accounts or physical channels. A USDT address can receive and send assets at any global node without going through customs, banks, or foreign exchange systems—this technically provides unlimited global transfer capabilities, making regulatory oversight far more challenging than that of the traditional currency system.
The 'gray channel' exceeding the $50,000 limit
Some investors use cryptocurrency channels to exchange RMB for USDT and then for foreign currencies such as USD or HKD, further remitting funds for overseas investment, home buying, or vehicle purchases. This method appears to be merely asset investment but has actually surpassed the individual annual foreign exchange purchase limit of $50,000, falling under 'covert foreign exchange purchases.'
The role of transaction matching is hard to define, with high platform risks
Some platforms provide services such as address, fund custody, exchange rate intermediary, and dispute mediation for both buyers and sellers during off-exchange trading, which has exceeded the scope of mere information matching, effectively participating in 'currency exchange.' Once substantial transactions or profits from exchange rate differences occur, they may be regarded by judicial authorities as currency exchange organizers rather than ordinary users.
III. Macroeconomic factors affecting national financial security and regulatory order
The payment and pricing functions of crypto assets partly replace the role of RMB in cross-border scenarios. As more domestic funds flow out through 'currency-based' methods, the cross-border settlement position of RMB is challenged, which may long-term impact macroeconomic regulation.
Forming an 'underground financial system' parallel to the banking system
The circulation of stablecoins like USDT allows some market participants to bypass the banking system and establish gray financial networks based on on-chain assets. Once intertwined with high-risk activities such as overseas gambling, fraud, and tax evasion, systemic risks are likely to arise.
The direction of funds is difficult to review, facilitating illegal activities
Anonymous transactions + mixing mechanisms + unregulated channels facilitate money laundering, terrorist financing, and other illegal activities. This is not only a compliance issue but also a matter of financial anti-terrorism and national security.
What should individual investors pay attention to in cryptocurrency trading?
I. Avoid participating in 'proxy foreign exchange purchases' and 'currency hedging' OTC businesses
Using cryptocurrency as a medium, earning profits through cross-border exchange and payment services by leveraging exchange rate differences, is a method of circumventing national foreign exchange regulation through the unique properties of cryptocurrency. The conversion from 'foreign exchange to cryptocurrency to RMB' achieves the value conversion of foreign exchange and RMB, which constitutes disguised foreign exchange trading. Individual investors should be cautious to avoid being prosecuted for 'illegal business operations.'
II. Strictly adhere to the regulatory requirements for personal annual foreign exchange purchase limits
Buying and selling cryptocurrency seems to involve merely buying or selling cryptocurrency, but in essence, it constitutes a currency value conversion between foreign currencies and RMB, classified as foreign exchange purchase and settlement. According to the Implementation Rules for the Personal Foreign Exchange Management Measures, individual settlement and domestic personal foreign exchange purchases are subject to annual aggregate management. The annual aggregate limit is $50,000 equivalent per person.
III. Avoid using anonymous funding channels
When trading cryptocurrencies, choose platforms with formal KYC processes and ensure the transparency of transaction records. It is difficult to track the legality of fund sources when funding via P2P off-exchange trading, mixing services, or privacy coin exchanges. If suspected of money laundering or financing illegal activities, the platform may freeze accounts, resulting in financial loss. Furthermore, anonymous channels are easily exploited by hackers, compromising user fund security.
IV. Retain legal proof materials
If studying abroad, proof materials such as admission notices and tuition payment notices can be provided to verify the legitimacy of cryptocurrency transactions. If a citizen is working domestically, they can retain labor contracts, salary statements, tax payment certificates, etc., to prove they are not engaged in the business of buying and selling cryptocurrency.
Conclusion
Cryptocurrency itself is not the 'original sin'; the problem lies in whether the transactions cross borders, circumvent regulations, are anonymous, or evade supervision. Once these behaviors are linked to illegal business operations, money laundering, or foreign exchange controls, they might cross the red line.
Not understanding the law is not frightening; what is frightening is charging into the gray area in a state of 'ignorance is fearless.' Whether an individual investor or a practitioner, one should be clear about legal boundaries and avoid unnecessary criminal risks before participating in cryptocurrency asset trading.
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Author of this article: Lawyer Xu Qian