In Depth: How Cryptocurrency Gets Used to Move Billions of Yuan in and out of China

[para. 1] In July 2023, a significant crackdown on illicit financial activities in East China's Shandong province led to the arrest of Li Bi, an accountant at a small textile company. Police discovered she possessed 10 bank cards linked to over 17 billion yuan ($2.3 billion) in transactions, exposing her as a major player in a virtual currency trading operation designed to transfer money overseas using cryptocurrencies like Tether and Ethereum.

[para. 2] Li's operation assisted individuals such as Chinese students studying abroad and purchasing agents to circumvent China's stringent foreign exchange restrictions, which cap annual personal currency exchanges at $50,000. The use of cryptocurrencies lowered entry barriers for underground currency exchanges by eliminating the need for substantial reserves of domestic and foreign currencies.

[para. 3] The digital and decentralized nature of cryptocurrencies, alongside varying regulatory frameworks across nations, further complicate oversight and enforcement efforts. As a result, authorities in Qingdao were initially challenged when uncovering connections to other underground banks in 17 different regions, like Shanghai and Guangdong, suspected of engaging in money laundering.

[para. 4][para. 5] This represents a significant shift from the traditional currency trading model via underground networks. Yang Yi, a police case officer, emphasized the profound transformation. In China, where cryptocurrency transactions were banned in 2021, Li was eventually convicted of operating an illegal business and sentenced to seven months in prison.

[para. 7] The investigation initiated by Qingdao police followed tips from the Ministry of Public Security in late 2022 about suspicious bank transactions. Several hundred Chinese bank accounts displayed abnormal transaction volumes and amounts, tied to South Korean online banking IP addresses, even though the account holders had never traveled abroad.

[para. 8] The investigation revealed that a substantial portion of the money senders were Chinese students in South Korea or frequent interstate travelers, such as shopping agents. These agents purchase goods overseas that are either unavailable in China or subject to heavy import taxes.

[para. 10] Identifying the orchestrators behind the vast number of accounts and unusual transaction patterns was laborious due to the complexity and scope. The investigation was novel territory for the Qingdao police, necessitating on-the-spot learning to collect digital evidence effectively.

[para. 13] A critical aspect of the operation was Li's collaboration with individuals like Dou Zhuang, a 27-year-old former student in South Korea, who ran an underground banking account. Initially moving his own money with cryptocurrencies, Dou later expanded his networking by offering cross-border money transfer services online, attracting clientele due to cheaper fees compared to traditional banks and quicker transactions.

[para. 15] Dou would capitalize on price discrepancies between domestic and South Korean cryptocurrency exchanges, accepting Tether, trading it for Ethereum in China, then selling it at a higher value in Korea and converting it to the won. This quick process allowed clients to gain .7 to 1 more Korean won per Chinese yuan, with the exchange of 50,000 yuan yielding roughly 200 yuan more in Korean won.

[para. 16] Li facilitated these exchanges by converting client funds, acquired through intermediaries like Dou, into cryptocurrencies. Her profits emerged from small price differences in buying and selling digital coins, earning up to 8 million yuan through these trades.

[para. 21] The movement of money through virtual currencies remains complex and difficult to regulate. In November 2023, China's Supreme People's Procuratorate acknowledged virtual currency exchanges as a major money laundering method, underscoring the growing challenge authorities face in distinguishing virtual currency crimes from traditional cash-related offenses.

[para. 23] The inherent anonymity, stability, and ease of conversion offered by some cryptocurrencies have made them increasingly favored by criminals across the spectrum, further complicating global efforts to combat financial crime.