Chinese Police Bust $1.9 Billion Underground Banking Scheme Using Tether to Facilitate Illegal Activities

Chinese authorities have dismantled a $1.9 billion underground banking network that used Tether (USDT) to bypass foreign exchange controls and facilitate illicit activities. The network, which operated since January 2021, was involved in financial fraud, drug trafficking, and other illegal activities. The crackdown resulted in the arrest of 193 suspects across 26 provinces and the seizure of assets worth 149 million yuan (about $20 million). Despite a nationwide crypto ban, Chinese investors remain active in the crypto market, particularly in stablecoins like USDT.

Chinese Police Dismantle $1.9 Billion Underground Banking Network Facilitating Illicit Activities Using Tether

In a significant crackdown on illicit financial activities, Chinese authorities have dismantled a vast underground banking network valued at $1.9 billion that utilized the stablecoin Tether (USDT) to circumvent foreign exchange controls and facilitate a range of illegal operations. The operation, which spanned across 26 provinces and involved the arrest of 193 suspects, underscores the ongoing challenge of combatting crypto-related crime and the resilience of Chinese investors in accessing cryptocurrencies despite a nationwide ban.

Unveiling the Underground Banking Network

The illicit banking system, which became operational in January 2021, was primarily engaged in the smuggling of pharmaceuticals, cosmetics, and investment assets, according to police reports. The network's activities extended to financial fraud, job-related crimes, drug management obstruction, smuggling of restricted goods, credit card fraud, and tax evasion.

Investigations revealed that the criminal network, originating from an import and export business, exploited USDT to facilitate illegal fund transfers abroad. They collaborated with other firms to engage in fraudulent activities, including tax refund scams.

Tether's Role in Bypassing Foreign Exchange Controls

Critically, the network's use of USDT, a stablecoin pegged to the US dollar, enabled them to bypass national foreign exchange controls, posing significant risks to the country's financial and foreign exchange security. This circumvention of regulations highlights the potential for cryptocurrencies to be used for illicit purposes and has raised concerns among Chinese authorities.

Crackdown and Nationwide Raids

Following the uncovering of the case involving obstruction of drug management in November 2022, a task force was formed under directives from the Ministry of Public Security and the Public Security Department. By June 1, 2023, the task force executed raids in major cities across China, including Shanghai, Changsha, Nanjing, Shenzhen, Fuzhou, and Jinhua.

The raids resulted in the arrest of a group led by individuals surnamed Lin, Weng, and Chen, along with 25 other suspects. Police confiscated a significant amount of evidence, including bank cards and payment devices used in the illicit activities.

Additional Arrests and Nationwide Crackdown

In August 2023, the Ministry of Public Security initiated a nationwide crackdown, leading to the arrest of an additional 168 suspects across 26 provinces. This comprehensive operation demonstrates the Chinese government's determination to clamp down on crypto-related crimes and maintain control over its financial system.

Chinese Investors' Enduring Interest in Cryptocurrencies

Despite China's strict ban on all crypto-related activities, Chinese traders continue to find innovative ways to access and utilize cryptocurrencies, particularly stablecoins, to circumvent these restrictions. According to a report by Kyros Ventures, Chinese investors are among the world's largest holders of stablecoins, with one-third of Chinese investors holding these assets.

This enduring interest in cryptocurrencies reflects the global trend of increasing adoption and the need for regulators to find effective ways to mitigate potential risks associated with their use.

Impact of China's Regulatory Landscape

China's ban on Bitcoin mining in 2021 and the subsequent prohibition of centralized exchanges have had a significant impact on the country's cryptocurrency industry. However, Chinese traders have adapted to these restrictions by shifting to decentralized exchanges (DEXes) and utilizing virtual private networks (VPNs) to access foreign trading platforms.

The surge in the use of decentralized finance (DeFi) protocols and the resilience of Chinese investors in finding ways to access cryptocurrencies pose challenges for regulators seeking to control the flow of capital and maintain financial stability.

Conclusion

The dismantling of the $1.9 billion underground banking network in China serves as a potent reminder of the ongoing challenges in combating crypto-related crime and the need for effective regulation. The case highlights the potential for cryptocurrencies to be exploited for illicit purposes, particularly when used to bypass foreign exchange controls.

As regulators around the world grapple with the evolving landscape of cryptocurrencies, the Chinese government's approach to clamping down on crypto-related crimes offers valuable insights into the complexities of addressing this issue.