China has imprisoned two men for using the Tether stablecoin (USDT) to circumvent foreign exchange controls. They received five year sentences after processing RMB 30 million ($4.1m) in transactions.
One of the traders met a Nigerian online who complained about the foreign exchange costs of converting naira to renminbi. So Lin, the Chinese trader, came up with a plan for the Nigerian, ‘Prince’, to buy Tether on a local crypto exchange and transfer it to Lin. He then sold the Tether to domestic currency dealers, deposited the renminbi into a local bank and transferred it to an account belonging to Prince. After making 300 yuan on the first transaction, Lin went into business with a friend, Yan.
Within months their bank accounts were restricted because of large fund inflows of RMB 21 million ($2.9 m) so they co-opted a third person Xie to provide a bank card to receive funds. They continued at a slower pace until their arrest in June 2022. The authorities collected evidence including WeChat chat records, bank transactions and records from overseas crypto trading platforms, which resulted in the three pleading guilty. Lin and Yan were imprisoned for five years, with Xie receiving a 1.5 year suspended sentence.
Stepping back, the timing of this coincides with the Nigerian government taking action against Binance Nigeria and other cryptocurrency exchanges. The prosecution of the Chinese traders started on February 26 and presumably involved some interaction with Nigerian authorities. Nigeria started taking steps against crypto exchanges in the first week of March. The timing could be a coincidence because Nigeria blamed the crypto exchanges for the plunging value of the Naria from late January to early March this year.
Making an example of the offenders?
Meanwhile, the Chinese state appears to be using the case as a lesson to others, because multiple news outlets, including Sina, described why it is an offense. A major issue for China is that it circumvents foreign currency controls. Specifically, they want to control Chinese money flowing out, which wasn’t the case here. The authorities also want to keep tabs on inward investment and manage the exchange rate. Secondly, they’re concerned that circumvention leads to inaccurate economic data. What’s not mentioned is that legitimate cross border trading without FX tracking would make tax evasion easier. Plus, there are the usual worries about money laundering by criminals.
In 2022, the International Monetary Fund (IMF) published a paper exploring the cryptocurrency challenges to capital controls.
