A detailed explanation of the Compliance risks of U Card's domestic operation and use

Based on blockchain technology, the value of Virtual Money is gradually becoming apparent and continuously developing with the maturity of information technology. Unlike BTC, which has a large space for value fluctuation, U Coin (USDT) is pegged to the US dollar and is a stablecoin with low volatility, making it a medium for transactions in the crypto world. Due to the legal issues associated with cashing out U Coin, the U Card has emerged. Similarly, due to the restrictions on Virtual Money in the country, the domestic operation and use of the U Card are also accompanied by some legal compliance issues.

1. Operation Mechanism of U-Card

（一）The concept and nature of Ucoin

USDT, also known as USDT, is a kind of virtual money launched by Tether, which has functions such as trading, storage, and consumption payment. U-coin is a stablecoin that is pegged to the fiat currency US dollar to achieve value stability; U coins are equivalent to the same amount of U dollars, and Tide provides 1:1 pre-deposited U dollar fund guarantee for U coins, and users can exchange U coins and U dollars at any time. It is established to provide a virtual money currency with relatively stable value, accelerate currency circulation and enhance transaction trust. Compared with BTC (BTC), U currency has higher value stability, but compared with fiat currencies such as RMB, U currency does not have the important feature of legal compensation, so according to the provisions of China’s Announcement on Preventing Tokenissuance Financing Risks (hereinafter referred to as the “Announcement”) dated September 4, 2017 and the Notice on Further Preventing and Dealing with the Risk of Speculation in Virtual Money Transactions (hereinafter referred to as the “Notice”) dated September 24, 2021, Virtual money such as U coins is still a virtual commodity in China, and should not be used as currency in the market.

（二）U card introduction and usage process

U Card has both physical and virtual cards, and their functions are basically the same. They are bank cards that support U Coin deposit, consumption, or cash withdrawal in addition to basic functions. The biggest feature is that it can facilitate and quickly transfer and convert cross-border funds through U Coin. Common U Cards include Unioncash Card, UnionPay U Card, dupay, etc. Physical cards such as Unioncash Card introduced by Paytend are international credit cards with a wider acceptance range and higher acceptance, which are more suitable for overseas travel or consumption; UnionPay U Card has a relatively wider acceptance range in China. Virtual cards such as dupay are mostly used for e-commerce or international payments, which are more convenient and flexible, but cannot be used for cash withdrawal at ATMs.

The usage process of U card can be summarized as follows: users hold U coins and U cards, deposit U coins from WalletAddress into U card Address, and then can directly use U cards for consumption or cash withdrawal. WalletAddress is a random combination of numbers and letters generated by encryption Wallet providers after the user is created, with uniqueness. Users can freely provide it to the outside world for Cryptocurrency transactions including U coins. When U coins are deposited, they will be settled by the U card operator into foreign currency, and the operator will conduct international clearing and settlement with domestic banks. Therefore, users can directly use U cards in China, and the objects of consumption or withdrawal are still RMB, the legal currency.

2. Criminal Legal Risks of U Card Domestic Agents or Operators

(1) Legal Issues of UCoin Transactions

As can be seen from the above, when conducting U card deposits, the Virtual Money deposited into the card is U coins, but the currency that finally lands in the Settlement process of consumption and payment is not Virtual Money, but still legal currency. Taking the Mastercard U card as an example, during its service period, users can purchase U coins with RMB domestically, deposit them into the Mastercard U card, and withdraw the corresponding foreign currency from foreign ATMs. Similarly, users can deposit U coins purchased with foreign currency into the Mastercard U card and withdraw RMB from domestic ATMs. This behavior of depositing and withdrawing currency is vividly referred to as deposit and withdrawal. Although there is a KYC in the withdrawal and deposit process, which requires users to provide identity verification information as a threshold, this threshold is relatively basic and simple. In fact, the withdrawal and deposit can still complete the exchange between RMB and foreign currency outside the forex management system of China.

Although there is no legislation specifically for Virtual Money, including U coins, etc., the attitude of relevant policies has always been clear, that is, it denies its legal tender status and does not allow it to be exchanged with legal tender. For example, Article 3 of the 2017 Announcement emphasizes that platforms shall not engage in mutual exchange business between fiat currencies and virtual money, and shall not buy, sell or provide services such as pricing and information intermediary. 2 On this basis, by circumventing the national forex management system and providing an objective and private exchange channel between RMB and foreign currencies, the relevant platforms may also actually get involved in illegal Exchange Currency. According to Article 225 of the Criminal Law of the People’s Republic of China on the crime of illegal business operation, illegal Exchange Currency belongs to “illegally engaging in fund payment settlement business” in item (3). Regardless of whether it is a U card domestic agent or an operating company, if it implements U currency transactions and seriously disrupts the market order on the objective basis of providing U card issuance and deposit support, it may commit the crime of illegal business operation. 3. Relevant cases have appeared in the “Typical Cases of Punishing Violations and Crimes Involving Forex” (hereinafter referred to as the “Typical Cases”) jointly issued by the Supreme People’s Procuratorate and the State Forex Administration, such as the “Zhao et al. Illegal Business Case”, whose “typical significance” emphasizes that the defendant “used Virtual Money as a medium to realize the exchange of RMB and Forex, which constitutes the crime of illegal business operation.” ”4

(2) U-coin transactions involve other legal issues

According to Article (3) of the first article of the “Notice” in 2021, the domestic employees of the U card platform, qualified domestic agents or operating companies may be held accountable in accordance with the law. Apart from administrative liabilities arising from violations of the national forex management system and criminal liabilities for illegal operations, the domestic agents or operating companies of the U card may also be implicated in aiding and abetting cybercrimes. As the existing U cards are all issued overseas, the domestic agents and operating companies of the U card will inevitably provide internet technology support, advertising promotion, and other services for U coins, U cards, and related transactions due to business needs. According to Article 287-2 of China’s Criminal Law, if there are acts of using cybercrimes in the transaction process, and it is proven or presumed that they knowingly assisted others in using the internet to commit crimes, the domestic agents and operating companies of the U card may be implicated in aiding and abetting cybercrimes.

In addition, UCoin is a relatively emerging existence, and most people do not understand it and cannot see the essence through the phenomenon. On the one hand, some people take advantage of the public’s unfamiliarity with UCoin to carry out network pyramid schemes, fraud, and other activities in the name of UCard agents or operators. On the other hand, UCoin is a property-like US dollar token, and its trading circulation belongs to financial activities. Under the premise that the country does not recognize its legal currency status and prohibits related business activities, the behavior of providing UCard and its channel agents or operators is illegal and may be suspected of undermining financial management order.

3. Analysis of U-card user behavior

Assuming that the funds involved in the exchange and the source of U coins are legal, the non-operational routine use of U cards by users usually does not constitute a crime of illegal business. However, according to the operating mechanism of U card, in the trading mode of “RMB-U coin-foreign currency” or “foreign currency-U coin-RMB”, because it avoids the foreign exchange management of China, it may be subject to administrative penalties by the foreign exchange management authorities according to Article 45 of the Regulations on foreign exchange management.

Because U coins have features such as Anonymity and confidentiality, the U coins stored in the U card or the funds used to purchase U coins may come from upstream criminal activities. If the exchange involves illegal funds or the source of U coins is illegal, based on the objective behavior of users using the U card, including but not limited to providing account, converting, transferring assets, and providing payment Settlement assistance, under the subjective conditions of clear and should know, U card users may constitute money laundering, concealing and concealing proceeds of crime, crime of benefiting from proceeds of crime (hereinafter referred to as concealing crimes), or assisting in information network crime (hereinafter referred to as assisting crimes).

For example, in the case of Liu’s smuggling and trafficking, Liu used U coins to carry out settlements in drug transactions, concealed and transferred funds, constituting the crime of Money Laundering. 6. However, in practice, except for special circumstances such as money laundering, there are few circumstances in which knowledge can be directly determined and determined, and it is usually necessary to make a presumption of the defendant’s subjective state in accordance with judicial interpretations and other relevant provisions. According to the 2009 Supreme People’s Court’s judicial interpretation of money laundering and other crimes,7 the determination of the defendant’s knowledge shall be judged based on his cognition, the type and amount of the proceeds, and the method of handling the proceeds. For those who trade in an abnormal way, price, or manner without justifiable reasons, unless there is evidence to the contrary to prove that they did not know, it is usually presumed that they knew it. In the case of Wan Lisheng, Yu Zhenyu, et al., covering up and concealing criminal proceeds, the four defendants used the money they remitted online to purchase U coins, transfer funds and make profits in a hotel room, an abnormal transaction location, and the court held that they “assisted in the transfer knowing that they were criminal proceeds, and the circumstances were serious”, and ruled that the four defendants constituted the crime of concealment. 8Similarly, in practice, charging or indirectly charging high-priced “handling fees”, using anonymous or encrypted chat tools to communicate transactions, and other circumstances sufficient to prove that the U card user has subjective knowledge, may constitute the crime of money laundering or the crime of concealment, respectively, depending on the type of predicate crime.

In the second typical case of ‘Guo Mouzhao and others illegally operating and assisting in cybercrime activities’, the defendant Zhan Mouxiang provided an ID card for Fan Mouwen and others to register a Virtual Money trading account for the involved transactions. Although he did not have specific knowledge of the illegal business activities of Fan Mouwen and others, the generalized knowledge of the criminal activities he helped was clear, thus constituting the crime of assisting in the crime. According to the judicial interpretation of the crime of assisting in the crime issued by the Supreme People’s Court and the Supreme People’s Procuratorate in 2019, if a 10U card user uses the U card for transactions and directly or indirectly provides assistance to upstream network criminals, even if he or she does not have specific knowledge of the criminal behavior of others, it may still constitute the crime of assisting in the crime.

4. Conclusion

In China, the policies regarding the activities related to Virtual Money have experienced a development from restriction to comprehensive prohibition. For the emerging entity U card, although the risk prevention and control and governance system for domestic agents or operating companies and U card users are not yet mature, the legal Compliance risk cannot be ignored.