Web3 lawyer interpretation: What impact does the new regulations of the State Administration of Foreign Exchange have on the crypto world?

Around December 26, the State Administration of forex issued two new regulatory documents, the ‘Interim Measures for the Management of forex Risk Trading Reports of Banks’ and the ‘Interim Provisions on the Due Diligence Exemption of forex Business of Banks’, which have attracted wide attention. With the rapid development of the Virtual Money market, how will they drive Compliance transformation in bank forex business under the increasingly strict supervision, and what impact will they have on traders that are worth following?

The significance of the release of two new documents: new regulation in the context of big data interconnection and comprehensive informatization

The release of the ‘Interim Measures for the Management of Risk Trading Reports on forex Business by Banks’ and the ‘Interim Provisions on Due Diligence Exemption for forex Business by Banks’ aims to improve the regulatory system for forex business by banks, enhance market transparency, and maintain order in the forex market. Against the backdrop of increasingly enhanced data circulation, these two documents not only help strengthen the monitoring and management of risk trading in forex, but also provide banks with a more clear Compliance framework, thereby promoting the healthy and stable development of the financial environment and ensuring a more standardized and orderly forex market.

• In terms of risk prevention and control in forex trading: With the increasing frequency of cross-border trade and investment activities, illegal activities in forex are also gradually increasing, such as false trade, illegal cross-border financial activities involving Virtual Money, which seriously disrupt the order of the forex market. The introduction of the ‘Bank’s Risk Trading Report Management Measures for forex (Trial)’ requires banks to monitor and report potential forex risk trading activities, which is like installing a ‘monitor’ for the forex market, capable of timely detecting and curbing illegal activities, safeguarding the facilitation of cross-border trade and investment, and better coordinating development and security.
• In regulating bank forex business: In the past, banks faced problems such as unclear responsibility and undefined due diligence standards in forex business. The “Provisions on Due Diligence Exemption for Bank Forex Business (Trial)” provides clear guidance, clarifying the situations and conditions for due diligence exemption, making it clear to banks how to diligently fulfill their duties when handling forex business, and also ensuring that banks are not unreasonably penalized after fulfilling their responsibilities. This helps banks accurately grasp the responsibility of forex business review and ensures the normal operation of forex business for banks.

What impact does seemingly regulatory bank have on traders of Virtual Money?

Under the increasingly strict regulatory measures, Virtual Money is being cracked down on.

• Full chain under control: The forex administration’s crackdown on Virtual Money trading starts with the full control of the entire chain. The full chain refers to the entire process of Virtual Money from purchase to trading, and then to withdrawal. When the forex administration can fully grasp the flow of funds and the parties involved in the trading chain, any abnormal or illegal behavior could become a target of the crackdown. For example, in cross-border Virtual Money trading, if the source, destination, and authenticity of the funds involved in the transaction can be fully traced and regulated, any attempt to evade forex management regulations will face higher risks.
• Banks discover and report relevant information: Virtual Money transactions often involve capital flows, especially cross-border capital flows. As intermediaries in fund circulation, banks bear the responsibility of monitoring large transactions and abnormal activities. When banks identify suspicious transactions, especially those involving Virtual Money flows, they are required to promptly report to the State Administration of Foreign Exchange (SAFE) in accordance with relevant regulations and provide risk warnings to customers. This step is crucial in combating Virtual Money transactions, as it serves as a vital channel for SAFE to obtain information.
• SAFE believes it meets the conditions for cracking down: SAFE has the right to decide whether to crack down on certain Virtual Money transactions based on its judgment. However, SAFE’s cracking down criteria are not fully disclosed, and there is still a certain level of ambiguity. Typically, SAFE will consider multiple factors, including but not limited to the amount of the transaction, the legitimacy of the source of funds, whether the transaction involves illegal purposes (such as evasion of foreign exchange control, money laundering, etc.). Although there is a lack of clear criteria, against the backdrop of increasingly transparent regulatory information, SAFE can more effectively crack down on violations.

Second, what is the deep logic behind the State Administration of Foreign Exchange issuing regulatory documents and disclaimers at the same time?

With the advancement of informatization construction, the State Administration of Foreign Exchange has strengthened its monitoring methods for Virtual Money and other cross-border fund flows. The application of big data technology enables the State Administration of Foreign Exchange to more accurately identify and monitor suspicious activities in Virtual Money transactions. This not only improves the efficiency of regulation, but also significantly reduces the existence of regulatory blind spots.

However, in order to avoid excessive impact on banking business due to regulatory changes, the SAFE has also specially issued a disclaimer to ensure that banks can transition smoothly when adjusting regulatory measures, thereby avoiding adverse effects on the stability of the financial market.

Definition of the Nature of Different Trading Behaviors Under New Regulations

Compliance:

• For ordinary consumers, here we still need to reassure everyone that the purchase and trading of Virtual Money, as long as the source of funds is legal, basically will not involve serious legal risks. In addition, if consumers’ transactions comply with the individual annual forex convenience quota regulations, basically there will not be serious legal risks.
• For enterprises or institutions, as long as the source of funds is legal, the cross-border fund flow is real, and it complies with the relevant regulations of forex management, the State Administration of Foreign Exchange (SAFE) generally does not intervene.

High-risk behavior:

• Involvement in Criminal Activities: If Virtual Money transactions are used for money laundering, terrorist financing, capital flight and other criminal activities, the State Administration of Foreign Exchange (SAFE) has the right to impose penalties in accordance with the law. In this regard, Virtual Money itself is not illegal, but its purpose and transaction background may make it a tool for criminal activities.
• Illegal activities such as fleeing and fraudulent purchase of forex: When Virtual Money transactions involve crimes of fleeing foreign exchange control or fraudulent purchase of forex, or illegal buying and selling of forex, the State Administration of Foreign Exchange has sufficient legal basis to crack down on them. For example, hiding the source of funds through a Virtual Money platform, illegally purchasing forex through underground banks, once discovered, individuals or entities involved will face severe penalties.
• Regulatory issues within the bank: When implementing forex management, the bank must timely detect and report suspicious transactions based on the early warning system. The bank’s internal management system, information reporting mechanism, and whether it actively cooperates with regulatory authorities will directly affect the intensity of SAFE’s crackdown on Virtual Money transactions.

Fourth, forex regulatory penalties

Zhang Mouqun, Wu Mourui and others illegally operated and deceived in the case of fraudulent export tax rebates and opening special VAT invoices (source: Notice on typical cases of punishment of illegal forex-related crimes issued by the Supreme People’s Procuratorate and the State forex Administration)

Keywords: Crime of illegal business operations, Crime of defrauding export tax refunds, Crime of issuing special value-added tax invoices for false transactions, Comprehensive chain crackdown

Basic Facts: Zhang Mouqun and others, by controlling Bao Mou Company, colluded with Le Mou Company’s Gu Moujie to inflate commodity prices, deceiving and obtaining 36.63 million RMB in export tax rebates. The goods were fictitiously exported and treated as waste. At the same time, Wu Mourui and Ma Moujian used Shun Mou Company for illegal RMB to USD exchanges, cross-border fund transfers involving over 180 million RMB, with illegal gains exceeding 180,000 RMB. In addition, Zhang Mouqun instructed Wang Mou to issue 522 fake VAT invoices, totaling 56.25 million RMB, deceiving 3.18 million RMB in taxes.

Case Handling: In September 2021, the Wujin District People’s Court of Changzhou City sentenced Zhang Mouqun to 14 years in prison and fined him RMB 28 million; Zheng Mouhua to 12 years in prison and fined him 8 million; Wu Mourui to 5 years and 6 months in prison and fined him 350,000; Gong Mousen was sentenced to 11 years in prison for the crime of issuing false VAT invoices. In February 2022, the Intermediate People’s Court of Changzhou City rejected the appeal and upheld the original judgment.

The case emphasizes investigating the flow of funds and the amount of illegal forex transactions, accurately determining the amount of illegal business through evidence such as bank statements and chat records. At the same time, promote the comprehensive crackdown on illegal forex activities throughout the chain, strengthen cross-border fund monitoring, and prevent the proliferation of black and gray industries.

V. Coordination and Consensus Among Departments

Although the forex administration has made some progress in regulating Virtual Money transactions, due to the coordination of functions across multiple departments, the implementation and enforcement of relevant policies still require time. How various departments can reach consensus, especially in terms of regulatory standards and enforcement measures, still requires a gradual process. With the continuous development of financial regulatory technology, the regulation of Virtual Money transactions will become more stringent and refined in the future.

Chapter Six, Summary of Cryptocurrency Salad

Although Virtual Money trading brings many innovations and conveniences, it also comes with certain legal risks. The forex Administration, with the support of information technology construction and big data monitoring, is strengthening the control of Virtual Money trading. For ordinary consumers, as long as they comply with relevant regulations and ensure the legality of the source of funds, their trading activities generally will not face legal risks. However, for enterprises and institutions, especially those involved in cross-border transactions and fund transfers, Compliance needs to be paid special attention.

For any illegal activities, the State Administration of Foreign Exchange will impose penalties in accordance with the law to ensure the stability and order of the financial market. In the future, with the gradual formation of consensus among all parties, the regulation of Virtual Money will become more transparent and efficient.

Special statement: Only represents the personal views of the author of this article and does not constitute legal advice or legal opinion on specific matters.