On August 19, 2024, China's Supreme People's Court and Supreme People's Procuratorate jointly released the Interpretation on Several Issues Concerning the Application of Law in Handling Criminal Cases of Money Laundering (hereinafter referred to as the "Interpretation"). This landmark legal update officially includes virtual asset trading as a potential method under the catch-all provision of money laundering offenses.
Effective August 20, 2024, the Interpretation marks a significant shift in how digital asset activities are viewed within China’s legal framework. While not targeting the crypto community directly, its implications are profound—especially for traders, OTC participants, and anyone involved in cross-border or high-volume transactions.
Let’s break down what this means, who is at risk, and most importantly, how you can protect yourself in this evolving regulatory landscape.
Does This Mean Crypto Trading Is Now Illegal?
No. Simply buying, selling, or holding cryptocurrencies does not constitute a crime under the new rules.
The Interpretation focuses squarely on money laundering and concealment of criminal proceeds, not legitimate crypto investment. Its primary aim is to combat the use of virtual assets to disguise funds derived from specific “upstream crimes” listed under Article 191 of China’s Criminal Law:
- Drug-related crimes
- Organized crime (e.g., triads)
- Terrorist activities
- Smuggling
- Corruption and bribery
- Crimes disrupting financial management order
- Financial fraud
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Only when virtual asset transactions are used to launder proceeds from these seven categories of crime can they be prosecuted as money laundering. General trading activity—such as investing in BTC, ETH, or USDT using legal income—is unaffected by this ruling.
However, the inclusion of “virtual asset trading” in the interpretation reflects growing concern over how easily digital currencies can be exploited for illicit purposes due to their borderless, pseudonymous nature.
According to a research report by Zhongke Chain Security, in 2021 alone, over 298.5 billion RMB was linked to cryptocurrency-related money laundering, gambling, and pyramid schemes. USDT, BTC, and ETH were the most commonly used assets. These figures continue to rise.
In real-world enforcement, legal teams have observed crypto being misused in various ways beyond traditional crime:
- Hiding marital assets during divorce proceedings
- Evading foreign exchange controls by transferring wealth overseas
- Bypassing official channels to repatriate overseas business income and evade taxes
- Concealing assets from courts as a judgment debtor
A well-known case is that of Qian Zhimin, the mastermind behind the Tianjin Blue Sky Ge Rui Ponzi scheme. Before fleeing abroad in 2017, she converted hundreds of millions in illicit funds into Bitcoin and stored them on a single hard drive—highlighting just how efficient crypto can be as a tool for asset concealment.
Who Is Most at Risk Under the New Rules?
Two groups face heightened scrutiny:
- OTC Traders and Market Makers (‘Coin Merchants’)
- Frequent or High-Volume Peer-to-Peer Traders
The core issue? Receiving tainted funds unknowingly.
In China, criminal liability for money laundering or concealment of criminal proceeds hinges on whether the individual “knew or should have known” the funds were illegal.
Unfortunately, many in the OTC space have experienced frozen bank accounts after receiving payments linked to telecom fraud or underground banking operations. There's even a saying in the community: “If your card hasn’t been frozen, you haven’t truly traded crypto.”
The Interpretation clarifies in Article 3 how “knowledge” is assessed:
Courts must consider multiple factors including: transaction patterns, fund sources, account behavior anomalies, communication records, professional background, and relationships with suspects.
Real Case Example: The A Student Case (2023)
“A,” a regular USDT seller, was criminally detained on suspicion of concealing criminal proceeds. He claimed he only traded his own legally acquired crypto.
Yet investigators found:
- Funds received came from known telecom fraud accounts
- Chat logs suggested awareness of suspicious activity
- Incoming amounts far exceeded his reported trading profits
- No explanation for surplus funds or where they went
- Delayed movement of funds (“funds sedimentation”)
Based on these objective indicators, authorities concluded A “should have known” the money was dirty—even without explicit admission.
Another similar case in Ordos (2023) saw a man convicted after previously having his cards frozen due to involvement with an illegal payment network. When he later sold USDT and received scam funds, the court ruled he “should have known” based on prior experience—even though no direct link between the two incidents was proven.
Critics argue such rulings risk violating the principle of innocent until proven guilty, especially when guilt is inferred indirectly.
How Can Crypto Users Protect Themselves?
With rising enforcement and increasing flows of illicit funds through OTC channels, proactive self-protection is essential.
Here are key steps based on legal best practices:
✅ 1. Document Your Fund Sources
Keep clear records proving your initial capital comes from legal sources:
- Pay stubs or tax returns
- Sale contracts for property or stocks
- Business revenue statements
This creates a verifiable trail if questioned by authorities.
✅ 2. Archive All Transaction Records
Many exchanges only retain data for 90 days. Always:
- Take monthly screenshots of trades
- Record videos of transaction histories
- Export and securely store logs
Ensure continuity—avoid unexplained gaps or sudden large inflows.
✅ 3. Maintain a Clear and Logical Fund Flow
Never allow unexplained surpluses. If your crypto profits exceed your documented income significantly, be ready to justify it with historical data.
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✅ 4. Limit OTC Exposure
Reduce frequency of peer-to-peer trades. When necessary:
- Use trusted platforms with KYC/AML safeguards
- Consider drafting simple agreements confirming both parties’ funds are clean
- Retain communication records (e.g., chat logs)
Avoid cash-out methods like bank counter withdrawals immediately after receiving funds—this raises red flags.
Frequently Asked Questions (FAQ)
Q: Does this mean all crypto trading is now illegal in China?
A: No. The regulation targets illicit use of crypto for money laundering—not personal investment or trading with legitimate funds.
Q: Can I be charged even if I didn’t know the money was illegal?
A: Yes—if evidence shows you “should have known.” Factors like transaction patterns, prior incidents (e.g., frozen cards), and fund behavior matter.
Q: Is OTC trading completely banned?
A: Not explicitly banned, but high-risk. Frequent OTC activity increases exposure to tainted funds and legal scrutiny.
Q: What if my account gets frozen?
A: Cooperate with investigations, provide documentation promptly, and consult a qualified lawyer immediately.
Q: Are stablecoins like USDT treated differently?
A: Legally, no distinction is made between types of virtual assets—BTC, ETH, USDT are all equally subject to scrutiny if used in suspicious transactions.
Q: Can I still hold crypto anonymously?
A: Technically yes—but doing so may increase suspicion during investigations. Transparency helps demonstrate legitimacy.
Final Thoughts: Stay Informed, Stay Protected
The inclusion of virtual asset trading in China’s anti-money laundering framework signals tighter oversight—not a blanket ban. However, it raises the stakes for anyone active in decentralized or informal trading ecosystems.
Your best defense? Documentation. Transparency. Caution.
Treat every transaction as potentially reviewable. Build a paper trail today so you’re not scrambling tomorrow.
And remember: if legal issues arise, don’t hesitate to seek professional help. Full disclosure with your lawyer is crucial for building a strong defense.