India targets ‘offshore’ exchanges; China takes aim at Tether conversions

India and China are taking additional steps to rein in ‘crypto’ excesses, moves that could imperil some major industry players’ access to 3/8ths of the globe’s population.

On December 28, India’s Financial Intelligence Unit (FIU) issued ‘compliance show cause’ orders to nine digital asset exchanges—Binance, Bitfinex, Bitstamp, Bittrex, Gate.io, Huobi
(now HTX), Kraken, Kucoin and Russia-based MEXC Global—that the government says are “operating illegally without complying with the provisions of the Prevention of Money Laundering (PML) Act.” The exchanges have been given two weeks to submit evidence that further action shouldn’t be taken against them.

The FIU says the exchanges fail to comply with the PML despite their obligations being “activity-based and is not contingent on physical presence in India.” To date, 31 Virtual Digital Asset Service Providers (VDASPs) have registered with the FIU but “a substantial part of Indian users” continue to make use of unregistered exchanges. The director of the FIU has written to the Ministry of Electronics and Information Technology to “block the URLs” of the nine exchanges cited in the announcement.

India is a highly valued market given its nearly 1.5 billion population, but tough new tax rules encourage many residents to patronize exchanges registered outside the country. While some of the nine exchanges targeted by the FIU are more likely than others to take steps to acknowledge this shot fired across their bows, most observers will be keenly watching to see how Binance reacts.

It’s been over a month since Binance reached its $4.3 billion settlement with U.S. authorities for doing basically what the FIU is accusing it of—ignoring regulatory guardrails and legal obligations. Part of the settlement involved the setting up of a compliance monitor to ensure there’d be no repeating such shenanigans.

Crucially, this compliance knows no geographic boundaries, so the U.S.—which strategically prizes India as a key regional ally—would almost certainly inform Indian authorities should Binance continue to cater to Indian clients without India’s permission. Binance’s compliance record in the Indian market wasn’t great to start with, so this will be a good indicator for determining just how serious Binance’s new management is about turning over a new leaf.

Ironically, the FIU’s action may have been triggered by a request from the Bharat Web3 Association, a group comprising many VDASPs registered with the Indian government. The Association includes WazirX, the exchange that Binance acquired and then attempted to distance itself from when Indian authorities started investigating money laundering allegations.

The Association reportedly sent a letter to India’s Finance Ministry in mid-December proposing that the ‘offshore’ exchanges that have so far failed to register as VDASPs be allowed to establish local subsidiaries. These subsidiaries would be required to collect the 1% tax deducted at the source that registered VDASPs must remit to the government. The Association believes this would help establish “a level playing field” for registered exchanges.

But the Association is also seeking to allow Indian customers a 30-day window in which to withdraw their assets from these offshore exchanges (and presumably deposit on registered exchanges). Local exchanges appear keen to reclaim some of the billions in trading volume that have migrated to offshore exchanges in the wake of the government’s tax changes.

China isn’t playing anymore

Just over India’s eastern border, Chinese authorities are turning their enforcement spotlight to the Tether (USDT) stablecoin, and its role in helping individuals and entities avoid China’s strict capital controls. The Supreme People’s Procuratorate and State Administration of Foreign Exchange issued a joint statement reminding prosecutors and forex regulators that converting yuan (RMB) to digital currency and vice versa was illegal.

The statement offered multiple examples of the type of criminality that local officials must guard against. These included individuals and entities that provided forex payment services in China and the United Arab Emirates (UAE), converting UAE dirham to USDT and then selling the USDT to Chinese gangs for RMB. Many of these Chinese gangs are/were involved in activities such as online gambling, ‘pig butchering’ fraud scams, and other crimes.

The gangs were often rumbled after Chinese authorities examined individuals’ mobile phone data, including chat conversations detailing confirmations of successful transfers. Last week’s statement urged local officials to “[m]ake full use of procuratorial technology to assist case handling mechanisms and strengthen the review of electronic data … the information in the electronic data transferred by the public security organs should be further restored, extracted, and retrieved.”

Chinese media recently reported on a similar case involving a ‘huge underground bank’ with a network spanning 17 provinces and municipalities with a volume totaling RMB15.8 billion (US$2.2 billion), much of it conducted via USDT and Litecoin (LTC).

The authorities reminded the public that “virtual currency does not have the same legal status as legal currency; conducting business activities related to virtual currency is illegal financial activity. At the same time, in our country, foreign exchange transactions must be conducted in places designated by the state. Otherwise, it is illegal to buy and sell foreign exchange. If the circumstances are serious, criminal liability will also be pursued.”

This liability extends not only to the actual perpetrators of frauds, gambling, and other crimes but also to those “accomplices” who merely provide technical support, including building and maintaining websites through which transactions are moved.

The joint statement offered details on the seven-year sentence imposed a few years ago on Zhao Dong, a former giant in China-based over-the-counter (OTC) digital currency trading. Zhao, the founder of Singapore-based OTC trading desk RenrenBit, was detained in 2020 and pleaded guilty in 2021. Zhao was also a Bitfinex shareholder who helped create the RMB-pegged version of USDT in 2019, and USDT features prominently in the story of Zhao’s downfall.

Zhao’s fate offers a peak at what other Tether-affiliated or even Tether-linked individuals might face should they be foolish enough to set foot on Chinese soil. But China also has extradition treaties with some surprising partners in Europe, South America, Africa, Asia, and the Middle East, and a high-ranking figure in the Tether ecosystem could prove a plump prize with which to curry Chinese favor.

Did you know China’s conviction rate hit an all-time high of 99.975% in 2022? Just sayin’…

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple, Ethereum,
FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.

New to blockchain? Check out CoinGeek’s Blockchain for Beginners section, the ultimate resource guide to learn more about blockchain technology.