Business Markets Technology
May 16, 2024

USDT at the Center of $2 Billion Illegal Foreign Exchange Scheme Crackdown in China

In Brief

China’s law enforcement disrupted a massive underground banking scam using Tether’s USDT stablecoin for illicit foreign exchange operations.

Law enforcement officials in China have reportedly disrupted a major underground banking scam that involved using Tether’s USDT stablecoin to enable billion-dollar illicit foreign exchange operations. The operation was conducted across many regions. The Chengdu Municipal Public Security Bureau in Sichuan province spearheaded the raid, which has illuminated the possible abuse of cryptocurrencies and the difficulties regulatory organisations confront in keeping an eye on and reining in such activity.

The Underground Banking Scandal

The Chengdu Municipal Public Security Bureau has discovered a huge illegal financial case involving an astonishing 13.8 billion yuan, or almost $1.9 billion, according to local media sources. 193 people were taken into custody throughout 26 provinces, municipalities, and autonomous areas as a result of the operation. Additionally, 149 million yuan in money linked to the illicit operations have been blocked by the authorities.

When the inquiry was started in November 2022, it was discovered that a criminal gang headed by people named Lin, Weng, and Chen mostly worked in the import and export industry. According to the officials, the gang used Tether’s USDT stablecoin as an entry point to provide illicit foreign exchange services to clients wishing to send money overseas.

The Alleged Mode of Operation

The illegal foreign exchange, payment, and settlement businesses that facilitated illegal activities such as the trafficking of drugs and chemicals, the acquisition of properties overseas, and the filing of fictitious tax refund claims were reportedly part of the criminal group’s operations. China’s fiscal monitoring and foreign currency security were seriously threatened by the organisation’s use of USDT, which allowed it to evade national foreign exchange supervision.

The gang participated in a number of illegal operations, such as financial fraud, offences linked to employment, drug management obstruction, smuggling of forbidden commodities, credit card fraud, and export tax return fraud. All with the use of USDT and cooperation with other businesses for money settlements.

Tether’s Response and Regulatory Implications

Following the accusations that USDT was involved in illegal activity, Tether has moved quickly to suppress any criminal activity that makes use of its virtual currency. The CEO of the business, Paolo Ardoino, has repeatedly emphasised Tether’s dedication to thwarting illegal activities and referred to Tether as the stupidest option for doing the illicit activity.

In reaction to discoveries made by the cryptocurrency monitoring and compliance tool MistTrack, which linked Ethereum addresses to phishing activities, Tether has acted decisively and frozen almost $5.2 million USD.

Tether has also added extra safety precautions to stop illegal money activity. The stablecoin issuer has created a tool, especially for monitoring the secondary market, in partnership with Chainalysis, a crypto monitoring and governance platform. This allows Tether to quickly identify and handle any suspicious or unlawful transactions.

The Chinese Cryptocurrency Landscape

While the crackdown on the underground banking scheme involving USDT is significant, it is essential to understand the broader context of the cryptocurrency situation in China. In May 2024, the landscape remains challenging for cryptocurrencies and blockchain-related activities in the country.

China’s position on crypto drastically shifted after it had previously played a big role in the market due to its inexpensive hydropower-generated electricity, which attracted Bitcoin miners looking for low-cost energy for their business. Beijing enacted a complete ban on all cryptocurrency mining activities and transactions inside its borders in late 2021.

Authorities have noted that stablecoins like USDT continue to be used in spite of the ban because they operate as middlemen in illicit foreign exchange transactions using the Chinese yuan. The State Administration of Foreign Exchange (SAFE) and the Supreme People’s Procuratorate (SPP) emphasised criminal proceedings using stablecoins in late 2023, highlighting how virtual currencies supported by fiat currencies had grown in popularity as a way to transact unlawful yuan with foreign currencies.

Regulatory Challenges and Future Outlook

The revelations surrounding the USDT-linked underground banking scheme in China highlight the ongoing challenges faced by regulatory bodies in monitoring and controlling the use of cryptocurrencies and stablecoins for illicit activities. While stablecoins offer the potential for legitimate use cases, their anonymity and ability to circumvent traditional financial systems also make them attractive for criminal enterprises.

As authorities worldwide grapple with the complexities of regulating the cryptocurrency space, it is likely that we will see increased scrutiny and enforcement actions targeting illicit activities involving digital assets. Initiatives such as Tether’s collaboration with Chainalysis and the implementation of monitoring tools may become more commonplace as companies seek to proactively address regulatory concerns and maintain compliance.

However, the decentralised nature of cryptocurrencies and the global reach of the blockchain ecosystem pose significant challenges for regulators. International cooperation and the development of comprehensive regulatory frameworks that balance innovation and consumer protection will be crucial in addressing the potential risks associated with the misuse of digital assets.

In the aftermath of the Sichuan crackdown, it is evident that the Chinese authorities remain vigilant in their efforts to combat illegal financial activities, including those involving cryptocurrencies and stablecoins. As the regulatory landscape continues to evolve, both businesses and individuals operating in the cryptocurrency space must remain diligent in adhering to compliance measures and ensuring the legitimate use of digital assets.

What Should Be Done, Expert’s Opinion

The dismantling of the USDT-linked underground banking scheme in China serves as a reminder of the ongoing battle against illicit financial activities and the potential misuse of cryptocurrencies and stablecoins. While these digital assets hold promise for innovation and disruption in the financial sector, their anonymity and ability to evade traditional monitoring systems also make them susceptible to exploitation by criminal organisations.
The market has been significantly impacted by China’s ban on cryptocurrencies, which has led Chinese investors to use offshore exchanges or decentralised finance platforms. However, the long-term outlook is still unclear, according to Erick Gunawan, Managing Director at BRG and an authority on blockchain and digital currencies. Gunawan suggests that the Chinese government should continue to create its central bank digital currency (CBDC) in order to maintain control over the financial system, rather than relaxing the ban on cryptocurrencies. Given the size and strength of the Chinese market, any shift in China’s stance on cryptocurrencies would have a significant effect on the global ecosystem and might lead to significant market movements.

Disclaimer

In line with the Trust Project guidelines, please note that the information provided on this page is not intended to be and should not be interpreted as legal, tax, investment, financial, or any other form of advice. It is important to only invest what you can afford to lose and to seek independent financial advice if you have any doubts. For further information, we suggest referring to the terms and conditions as well as the help and support pages provided by the issuer or advertiser. MetaversePost is committed to accurate, unbiased reporting, but market conditions are subject to change without notice.

About The Author

Viktoriia is a writer on a variety of technology topics including Web3.0, AI and cryptocurrencies. Her extensive experience allows her to write insightful articles for the wider audience.

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Viktoriia Palchik
Viktoriia Palchik

Viktoriia is a writer on a variety of technology topics including Web3.0, AI and cryptocurrencies. Her extensive experience allows her to write insightful articles for the wider audience.

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