A while ago, a client came to Mankiw for consultation. The basic facts of the case were: as a foreign trade company in Guangzhou, after completing a transaction with an overseas company, the client's original intention was of course to settle the payment through the Yangguan method. However, the overseas company could not pay, so the client proposed a feasible plan to "settle the payment with USDT". After careful consideration, in order to avoid more trouble, the client agreed and soon received the USDT paid by the overseas company, and then found a domestic "service provider" to cash it out (convert USDT into RMB). The result of finding Mankiw lawyers can be imagined. After receiving the U, the "service provider" could not be contacted and could not find the person.
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Many people may think that "anything related to virtual currency is doomed to fail" when they first hear the content of this consultation. Given that virtual currency has different regulatory policies in different countries, using USDT to settle payments has become one of the payment options for some foreign trade companies. However, the traditional payment methods in the foreign trade industry have many pitfalls (risks). Is it really appropriate to choose USDT as a payment method?
01 Common problems faced by cross-border foreign trade merchants in collecting payments
Cross-border payment collection for small and medium-sized foreign trade enterprises is very easy to step on thunder. Some enterprises are even deceived and eventually withdraw from the market. Therefore, in foreign trade transactions, payment collection is a problem that both buyers and sellers are very concerned about. In small and medium-sized foreign trade companies, there is an increase in comprehensive costs, high operating risks and pressures, and there are different degrees of "dare not accept orders" and "increase in revenue but not increase in profits". This is because foreign trade enterprises will encounter many problems when collecting funds, including but not limited to: ① Long account opening process, slow collection time, and high withdrawal fees; ② Too few supported currencies, and existing channels do not support small currencies; ③ Limited RMB withdrawal quota; ④ Unable to withdraw at real-time exchange rate; ⑤ Unable to pay suppliers directly; ⑥ Difficulty in collecting payments in high-risk areas; ⑦ Even encounter card freezing, fund freezing and other troubles. For domestic foreign trade merchants, fund collection in cross-border settlement must be a very important link, and difficulty in collecting funds is also a practical problem. In order to avoid the problems in reality, many foreign trade merchants now give up collecting funds through legal and compliant methods and channels, and more of them use "underground banks" to recover funds.
02 Operational model of cross-border "underground banks"
Normally, cross-border payment refers to the international debts and credits between two or more countries or regions due to international trade, international investment and other aspects, which are realized by using certain settlement tools and payment systems to transfer funds across countries and regions. In real economic activities, many domestic underground banks are used as a settlement method for cross-border trade.
"Underground money houses" is not a definite and standardized legal concept. It mainly refers to "a special type of illegal financial organization that is outside the financial regulatory system and uses or partially uses the settlement network of financial institutions to engage in illegal foreign exchange trading, cross-border fund transfers, fund storage, lending and other illegal financial businesses." Its essence is an underground bank that operates financial businesses such as foreign exchange, lending and payment settlement without state approval, providing funding channels for corruption, gambling, smuggling, tax fraud, tax evasion, etc. It is also a form of money laundering crime (relevant regulations: the "Anti-Money Laundering Report" issued by the People's Bank of China in 2005, and the "Measures for the Prohibition of Illegal Financial Institutions and Illegal Financial Business Activities" promulgated and implemented by the State Council on January 8, 2011).
Although it is labeled as "illegal", the existence and prosperity of "underground banks" has always been an open secret. At present, there are three main types of operating modes of "underground banks" in China: cross-border "counter-trading" mode, "payment settlement" mode, and other illegal business modes.
1. Cross-border "counter-trading" model
That is, the RMB is delivered domestically and the foreign currency is delivered overseas, and the funds do not cross the border in form of exchange (referred to as the "cross-border exchange model"), so as to achieve the actual exchange and cross-border transfer of funds. This is also the main operating method of underground banks at present, which is mainly used to transfer funds such as illegal income from domestic sources to overseas through underground banks and to evade foreign exchange through underground banks in cross-border trade.
2. “Payment settlement” model
That is, using false and deceptive means to fabricate or construct legal transaction forms to cover up illegal purposes and realize the "payment settlement" model of illegal cross-border transfer of funds. For example, using props to import and export goods to realize cross-border funds and using shell companies and fake trade to transfer public to private.
3. Other illegal business models
The operation modes of underground money houses are often diversified, and they are also called comprehensive underground money houses. For example, scalpers exchange foreign currency, illegally modify and move POS machines abroad to swipe cards, swipe bank cards abroad to withdraw cash, illegally split purchase and payment of foreign exchange, and cash smuggling are also relatively common. In order to evade crackdowns, in recent years, there have also been cases of illegal cross-border transfer of funds using virtual currencies and fourth-party payment platforms.
In short, no matter which of the above models is used, the profit-making methods of "underground banks" can be roughly summarized as follows: earning the difference by buying foreign currencies low and selling them high, charging "customers" a certain percentage of handling fees or commissions based on the amount of foreign exchange transactions and fund borrowing, and defrauding government rewards, export tax rebates, cross-border arbitrage and other illegal income through transactions.
03 Risks of choosing to receive USDT when settling cross-border trade
Why do domestic and foreign trade merchants choose USDT to receive payments when choosing a settlement method? It is most likely based on the aforementioned difficulties that already existed. Choosing USDT just happens to avoid some difficulties in collecting payments. However, what you get is virtual currency after all, not real money. After receiving it, whether to hold, invest, or cash it out is a practical issue that domestic merchants need to consider after receiving it. In view of the fact that my country’s current regulatory policies on virtual currencies are so strict, whether it is collecting, holding, investing or cashing out, the current situation is high-risk.
1. Risks of receiving USDT
If overseas buyers exchange their foreign currencies into USDT through "underground banks" or exchanges (OTC), domestic merchants provide them with wallet addresses for receiving USDT, and overseas merchants pay USDT according to the requirements of domestic merchants, it seems that the timeliness of receiving payments through USDT is very fast, avoiding restrictions on currencies, foreign exchange, taxes, etc. However, if we analyze it more deeply, we will find that since overseas merchants exchange their own funds into USDT through "underground banks" or exchanges (OTC), it is difficult for domestic merchants to identify whether the source of funds is legal, and risks follow.
Assuming that the funds of overseas merchants are illegal funds, in the process of handling previous cases, we can preliminarily predict that the reason why overseas merchants want to convert their own funds into virtual currency is nothing more than wanting to launder the originally illegal funds through "underground banks" or exchanges (OTC). Domestic merchants, as a link in receiving USDT (or other virtual currencies), are very likely to be implicated in the process of solving the case. In the end, it is a small matter that the foreign trade funds of this order cannot be recovered, but it is not worth the loss if it is identified as a criminal offense.
2. Risks of holding USDT
After receiving USDT, if there is no criminal risk mentioned above, can domestic merchants just put their money in the bag? Actually, not really. The value of virtual currency in China may not be reflected, but some countries have confirmed that virtual currency is legal property. If domestic merchants do not convert USDT into RMB immediately after receiving it, and plan to wait and see the international market before making plans, and the USDT in their hands happens to appreciate, why not?
However, the theft of virtual currency (whether Bitcoin or USDT) is nothing new in the currency circle. I believe that for a glimmer of hope to recover it, domestic merchants will choose to try to report it to the police. However, affected by the current domestic laws and regulatory policies, combined with our previous cases and the judgment documents of the public criminal cases, whether virtual currency has property attributes is the key to whether it can be identified as a criminal offense. At present, some courts have recognized the property attributes of virtual currency, and generally they will file a case for investigation as theft; however, from practical experience, whether a criminal case is filed or not, it is difficult to recover the stolen virtual currency (USDT) in full.
3. Risks of investing in virtual currencies
Of course, holding USDT is not the ultimate goal of domestic merchants. In the end, they still want to gain something through USDT, so they may use the collected USDT for investment. In real economic activities, most of the time, when entrusting others to invest in virtual currency on their behalf, no written contract will be signed, which is what Lawyer Zhou often calls naked investment. Whenever there is an "investment failure" (it may be that the project is really stale, or the project party has not done anything at all), the court generally determines that the entrusted investment contract is established based on the chat records, transfer records and other materials between the two parties. However, the establishment of an entrusted contract does not mean that it is valid. There are a large number of court judgments that hold that the contract violates financial regulatory policies, virtual currency itself is an illegal subject matter, or the contract violates public order and good morals, and thus determines that the contract is invalid; of course, there are also a small number of typical cases that recognize that the contract for entrusting investment in virtual currency is valid.
The legal consequences of entrusting virtual currency investment to be deemed an invalid contract are also different. Some courts require both parties to bear part of the responsibility; some courts believe that according to the "Notice on Preventing Risks of Token Issuance and Financing", the client's investment behavior should be at his own risk; and some courts believe that the debts related to virtual currency are illegal, and therefore the law does not protect the client's property.
Therefore, if domestic merchants engaged in cross-border trade collect USDT and consider using it for investment, they should be aware of the possible consequences of the entrusted investment contract being deemed invalid and the risk being borne by the merchants themselves, and make investment decisions with caution.
4. Risks of cashing out USDT
Whether it is the traditional payment method or collecting USDT, the main purpose of domestic merchants is to collect payments and realize the turnover of capital flow. Just like the customers who come to consult mentioned at the beginning, that is to say, the ultimate goal is to exchange USDT into RMB. However, according to my country's existing regulatory policies, the possibility of legally exchanging it into RMB through domestic institutions is very small, so if you want to cash out, you can only choose: exchanges, over-the-counter OTC (or underground banks). No matter which service provider is chosen, it has broken through the legal and compliant process of cross-border RMB entry. The process of collecting payments through USDT can be roughly summarized as follows: overseas merchants exchange foreign currency into USDT → domestic merchants provide wallet addresses to overseas merchants → overseas merchants transfer USDT to the wallet addresses provided by domestic merchants → domestic merchants exchange it into RMB through exchanges, over-the-counter OTC (or underground banks), which perfectly breaks through the national foreign exchange and tax management system and overcomes the problem of slow timeliness. However, there are also many risks. If the RMB exchanged from USDT contains illegal funds, the bank card or funds may be frozen, and the public security organs may require cooperation in the investigation, but the unfreezing is far away; there may also be criminal cases such as suspected money laundering and concealing criminal proceeds. Even if the RMB exchanged from USDT is legal funds, breaking the legal and compliant entry process of RMB may constitute illegal foreign exchange trading, tax evasion, etc. Once the relevant units want to investigate, they may also be subject to criminal or administrative penalties.
Of course, even if the relevant national units or departments do not pursue it, the process of cashing out USDT is not necessarily a sure thing. Just like the client who consulted us at the beginning, the service provider lost contact and ran away after receiving USDT is not an isolated case. It is precisely because my country’s current regulatory attitude is to strictly prohibit speculation in virtual currencies. It is conceivable that it is still difficult to recover the USDT that has been paid. In this way, you may end up with nothing in the end, even if you thought you could avoid foreign exchange, taxes, high handling fees, slow timeliness and other problems.
04 Lawyer Mankiw’s Summary
At this point, I believe that domestic merchants have their own ideas about whether to choose USDT (or other virtual currencies) for settlement. As a law firm engaged in the web3.0 industry, we have actually been paying attention to the process of legalization of virtual currencies in China. We can only say that it is still a stage of strict regulatory measures. It is recommended that domestic merchants choose cross-border settlement methods under the premise of legality and compliance. Finally, let’s make a summary of today’s topic:
1. The main reasons why domestic foreign trade merchants have difficulty in collecting payments are: long account opening process, slow collection time, high withdrawal fees; too few currencies are supported, and existing channels do not support small currencies; RMB withdrawal limits are limited; withdrawals cannot be made at real-time exchange rates; suppliers cannot be paid directly; it is difficult to collect payments in high-risk areas; and there may even be troubles such as frozen cards and frozen funds.
2. There are three main operating modes of underground banks that engage in cross-border redemption: cross-border "counter-knocking" mode, "payment settlement" mode, and other illegal business modes. No matter which one, they may be subject to criminal or administrative penalties.
3. The main risks of receiving USDT during cross-border trade settlement are: (1) Risks of receiving USDT: funds cannot be recovered, and may even become part of a criminal offense; (2) Risks of holding USDT: large price fluctuations lead to depreciation, or it cannot be recovered after being stolen; (3) Risks of investing in USDT: there is a possibility that the entrusted investment contract may be deemed invalid and the risk is borne by the investor; (4) Risks of cashing out USDT: the exchange or OTC may run away, resulting in capital losses, violating national regulations on foreign exchange, taxation, etc., and being subject to criminal or administrative penalties. #DeFiChallenge
