What are 'arbitrage' and 'foreign exchange matched transactions'?
Virtual currency arbitrage refers to the strategy of buying high and selling low based on price differences between different exchanges or trading pairs, focusing on completing the buying and selling of the same subject within a very short period to achieve risk-free or low-risk returns through fast trading. For example, an arbitrage trader discovers frequent arbitrage opportunities between the BTC/USDT trading pairs on OKX and Binance, so they deposit USDT into OKX and BTC into Binance. When an arbitrage opportunity appears, they simultaneously exchange USDT for BTC in OKX and BTC for USDT in Binance to complete the arbitrage.
The above is the simplest description of arbitrage, but in practice, to extract benefits, the transaction chain required by traders is likely to be much more complex, and may involve converting to fiat currency at some point in the chain, leading to potential 'foreign exchange matched transaction' behavior.
(1) Analysis of typical illegal arbitrage models in foreign exchange:
1. Receiving USDT for delivering fiat currency type
Knowing that the USDT and other virtual currencies used by the other party for trading were purchased with foreign currency and still providing RMB for exchange, or knowing that the USDT and other virtual currencies used by the other party for trading were purchased with RMB and believing to provide foreign currency for exchange, constitutes receiving USDT for delivering fiat currency type illegal foreign exchange arbitrage.
2. Matched transaction type
Receiving RMB domestically, transferring foreign currency from an overseas account to the designated account of the currency purchaser, and using the received RMB to purchase USDT and other virtual currencies to exchange for overseas fiat currency; or receiving foreign currency in an overseas account, transferring RMB to the designated account of the currency purchaser, and using the received foreign currency to purchase USDT and other virtual currencies to exchange back to RMB constitutes illegal foreign exchange arbitrage through matched transactions.
3. The core difference between ordinary arbitrage and illegal foreign exchange matched transactions
The most core difference between arbitrage and foreign exchange matched transactions lies in whether both RMB and foreign currency are involved in the transaction chain. Distinguishing between ordinary arbitrage and illegal foreign exchange matched transactions is not difficult; first, confirm whether the transaction subject is a normal trading pair of virtual currencies listed on the exchange. If both sides of the matched transaction involve virtual currencies, it generally will not involve illegal foreign exchange matched transactions. Secondly, if it involves inflows and outflows of funds, it is necessary to determine whether the source of the virtual currency was directly purchased with foreign currency. If the virtual currency, purchased with RMB, also comes from RMB purchases, it generally does not involve illegal foreign exchange matched transactions.
Why does 'matched transactions' constitute illegal business operations?
(Criminal Law) Article 225 states: Violating national regulations, engaging in any of the following illegal business behaviors, disrupting market order, and if the circumstances are serious, shall be sentenced to fixed-term imprisonment of less than five years or criminal detention, and shall be fined more than one time and less than five times the illegal income; if the circumstances are especially serious, shall be sentenced to fixed-term imprisonment of more than five years, and shall be fined more than one time and less than five times the illegal income or confiscated property: ......
(4) Other serious illegal business behaviors that disrupt market order.
At the same time, according to the regulations (Interpretation on the Application of Laws in Criminal Cases Involving Illegal Fund Payment Settlement Business and Illegal Foreign Exchange Trading), violating national regulations by engaging in illegal foreign exchange trading such as reverse buying and selling of foreign exchange or disguised foreign exchange trading, disrupting the financial market order, and if the circumstances are serious, shall be convicted and punished according to the provisions of Article 225, Item 4 of the Criminal Law for illegal business operations.
In judicial practice, foreign exchange matched transactions are usually recognized as 'reverse buying and selling of foreign exchange or disguised foreign exchange trading' behavior.
In the 'receiving USDT for delivering fiat currency type' illegal arbitrage model, the transaction chain is foreign currency - virtual currency - RMB, where virtual currency merely serves as a bridge or medium, and essentially is the exchange between foreign currency and RMB. Subjectively, the actor aims for profit, knowingly receives virtual currencies purchased directly with foreign currencies, and still intends to circumvent foreign exchange control to provide payment for the other party. Objectively, such large-scale operational behavior disrupts the foreign exchange regulatory system, causing a certain degree of damage to financial stability and order, constituting illegal business operations.
In the 'matched transaction type' illegal foreign exchange arbitrage model, the actor provides foreign currency to the currency purchaser and receives local currency while using virtual currency to complete the circulation between foreign currency and local currency. The transaction chain of this model is also foreign currency - virtual currency - RMB, where virtual currency merely serves as a bridge or medium, and essentially also represents the exchange between foreign currency and RMB. Like the 'receiving USDT to deliver fiat currency type' illegal foreign exchange arbitrage, it should also be treated as illegal business operations.
Real case one - Lin's illegal operation case:
Lin originally engaged in ordinary arbitrage in virtual currency exchanges and later met a Nigerian who claimed to be a 'Prince' during a transaction. The 'Prince' claimed that the costs of buying and selling foreign exchange at banks or foreign exchange companies were high, and wanted Lin to exchange the local currency Naira for Chinese Yuan.
The two parties negotiated, and the 'Prince' used the local legal tender Naira to purchase USDT at Binance, then transferred it to Lin's Binance account. Lin sold the received USDT to a domestic currency trader for RMB and then transferred the exchanged RMB to the Chinese bank account provided by the 'Prince'. Lin determined the purchase price by marking down 5% from the day's listing price of Tether, and then sold it to the domestic currency trader at the listing price, earning the price difference.
In just a few months, Lin and others completed more than 650 foreign exchange trading transactions, involving nearly 30 million yuan in foreign exchange conversions.
Lin's behavior seems to involve only two steps of 'receiving USDT' and 'making payments', and Lin personally only uses RMB as the currency for trading USDT. However, subjectively, he helps others engage in illegal currency exchange, bypassing national foreign exchange controls, undermining the country's foreign exchange regulatory system, and disrupting the normal financial market order, which constitutes disguised foreign exchange trading. Ultimately, he was sentenced to five years of imprisonment for illegal business operations and fined.
Real case two - Zhao and others illegal operation case:
In this case, Zhao and others used the cryptocurrency USDT as a medium for matched transactions to buy and sell foreign currency, receiving cash in Dirhams in Dubai, providing RMB to the domestic account of the other party, and buying Tether with Dirhams, while letting the domestic group sell Tether back for RMB. In this way, they not only achieved the circulation of funds but also earned substantial profits through exchange rate differences.
This 'matched transaction type' illegal currency exchange uses virtual currency as a medium to achieve one-way flow between two currencies, objectively increasing the difficulty for police investigation and evidence collection. However, this operation realized the reciprocal relationship between the two currencies within the total accounts of Zhao and others, while circumventing foreign exchange regulation and disrupting normal financial market order, which constitutes disguised illegal currency exchange.
Ultimately, the main members of the case were sentenced to imprisonment for seven to eleven years for illegal business operations and fined between two million to twenty million.
What behaviors in arbitrage may violate criminal law risks
Based on the above analysis, I believe everyone can have their own views on the criminal legal risks involved in arbitrage and 'foreign exchange matched transactions'. In principle, if the arbitrage behavior solely arises from the exchange rate difference between virtual currencies without involving any fiat currency, it does not constitute criminal risks of illegal business operations. However, in practice, there are still some arbitrage behaviors with long and complex transaction chains, where it is unclear at which link fiat currency transactions are conducted for those who have not conducted in-depth research. For example, arbitrage behaviors with the following characteristics carry high criminal risks:
1. Indirect fund closed loop: repeatedly and in large quantities receiving USDT or other virtual currencies of unknown origin directly purchased with foreign currency, providing RMB for exchange, and then selling the virtual currency to exchange for RMB;
2. Abuse of structured tools: Using DeFi protocols, cross-chain bridges, and other tools to split transaction links, concealing the essence of final fund flows to fiat currency exchange;
3. Concealed matched transactions: Both parties superficially conduct coin-to-coin transactions but privately agree to calculate currency profits based on domestic and foreign exchange rate differences.
Therefore, for arbitrage behaviors that one is not familiar with, one should not attempt hasty gains, otherwise, it may put oneself in a risky situation.
Exploring the possibility of technological innovation within a compliance framework
The compliance of virtual currency trading is not 'black or white', but rather requires seeking a dynamic balance between regulatory logic and technical characteristics. For practitioners, it is essential to strictly adhere to the bottom line of 'not touching the fiat currency exchange loop', while also building a verifiable full-process compliance chain through a professional legal team to achieve the coexistence of business safety and innovative value.
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Article author: Rao Weitong, Hu Yiming