Encirclement and suppression of Cryptocurrency: tens of billions of unsupervised funds leaving the country for half a year

The virtual currency has gradually become a trend of encirclement and suppression, but there are still major challenges in monitoring and intervening in such new payment instruments that bypass the traditional financial system.

On the eve of “Eleventh”, the People’s Bank of China and multiple departments issued the “Notice on Further Preventing and Disposing of the Risks of Virtual Currency Trading Speculation” to severely crack down on virtual currency trading speculation. It is regarded by the market as another milestone in the domestic thunderous purge of the virtual currency industry chain.

Regulatory rectification of virtual currencies has a long history. Since 2017, relevant statements and measures have been continuously introduced. At the recent 10th Payment and Settlement Forum, Wen Xinxiang, Director of the Payment and Settlement Department of the People’s Bank of China, clearly stated for the first time the three main challenges brought by virtual currency to the payment system—breaking away from the closed operation of the payment system, diverting banks and payments The payment business of the institution was used for illegal actions.

The above-mentioned “three sins” can give a glimpse into some of the motivations for the supervision and rectification of virtual currency speculation and trading. How does virtual currency bypass the traditional financial system and erode cross-border payment business? How does it participate in illegal operations through a hidden funding path? It should be noted that the current supervision mainly focuses on the link between “virtual currency” and the traditional financial system, and adopts measures such as “stop payment”, but how to monitor, intervene, prevent, and punish also requires legal basis and innovative application of technical means .

Unregulated capital outflows are surging

Chen Moubo fled Australia in 2018 after being investigated by the police for illegal fund-raising by opening an Internet financial platform and issuing virtual coins on a digital currency trading platform. Since then, he instructed his wife Chen Mouzhi, who was still in China, to sell the vehicles purchased with illegal fund-raising funds and transfer hundreds of thousands of yuan of stolen money overseas for his use.

In the first half of this year, the Supreme People’s Procuratorate and the People’s Bank of China jointly disclosed a number of typical money laundering cases. However, in the above-mentioned case uncovered by the Shanghai Pudong Public Security Department, the police initially did not know how Chen Mouzhi transferred large sums of funds to his fugitive husband. From the bank transaction records, Chen Mouzhi only sent several hundred thousand yuan to two strangers, and there was no direct capital exchange with her husband, and the money laundering capital chain was interrupted.

Since then, the People’s Bank of China has instructed the anti-money laundering departments of commercial banks to investigate suspicious transactions, and transferred relevant evidence to the public security organs by penetrating the capital chain, analyzing and judging suspicious points. After interrogation, Chen explained that it was transferred to two Bitcoin miners, who then provided the Bitcoin secret key to his husband and transferred the stolen money overseas. According to the transaction characteristics of the crime of money laundering using virtual currency, the public security organs collected and used evidence, including bitcoin addresses, keys, contact information between the perpetrator and bitcoin holders, and capital flow data, etc., and finally realized their conviction.

The above-mentioned typical cases reflect to a certain extent the motivation of zero tolerance for virtual currency trading hype in domestic supervision. Zhang Hao, deputy director of the Internet Law Department of Jingheng Law Firm, said in an interview with a reporter from China Business News: Virtual currency has three illegal application scenarios. The first is cross-border payment, which provides payment and settlement channels for illegal activities such as cross-border settlement and cross-border gambling; the second is running money laundering, which is more difficult to track than traditional running scores; the third is tax evasion, virtual currency transaction records It is difficult for tax authorities to inspect.

In fact, before the “924” supervision was upgraded again, since 2017, under continuous supervision and purge, many virtual currency exchanges that were active in China have moved abroad and moved their servers to Gibraltar and other supervisions. Countries and regions that are more relaxed. However, this alone cannot completely prevent the operation of the virtual currency market and the outflow of unregulated funds.

The “Digital Currency Anti-Money Laundering and DeFi Industry Security Report (First Half of 2021)” released by the blockchain security service company Hangzhou Paidun Xinan Technology Co., Ltd. (hereinafter referred to as “Paidun Technology”) shows that in the first half of 2021, the virtual The amount of money flowing out of domestic exchanges (the users are mainly located in the four exchanges in Mainland China and Hong Kong) to foreign exchanges unregulated out of the country reached US$28.3 billion, which is 1.6 times the total outflow of funds in 2020 . From May to June 2021, due to the strengthening of domestic policies on mining and trading, the amount of outflows of unregulated virtual currency fell by nearly 40%.

What needs to be noticed is that the current way of hyping virtual currency has been quietly shifting. Wang Linggang, a senior lawyer and anti-money laundering expert at Shanghai Fangda Law Firm, has worked in anti-money laundering positions in a number of international banks. He told reporters: With the upgrading of supervision in recent years, the current mainstream virtual currency transactions conducted by domestic individuals and institutions are relatively common. One type of method is over-the-counter transactions between investors, which is similar to offline face-to-face “one-handed payment and one-hand delivery”; the other is offshore transactions conducted on overseas fund accounts and on overseas trading platforms.

With the tightening of supervision again this time, a number of large digital currency exchanges have made a decision to shut down services in the Mainland. While this is cracking down on virtual currency transactions, it remains to be seen whether it can further curb the export of unregulated funds.

Secret and complicated transaction link

This round of regulatory upgrades, on the one hand, stems from the deviation of low-carbon targets from high-energy-consuming industries such as mining. On the other hand, with the surging capital outflow, virtual currency is frequently used in illegal transactions such as money laundering, fraud, and gambling, and its capital path is more secretive and difficult to supervise.

The reporter noticed that Wen Xinxiang disclosed on the aforementioned forum a case involving the use of virtual currency to transfer gambling funds in Henan in the first half of this year. The case involved a total of 5.1 billion yuan. The central bank found during on-site investigations that the transfer funds link has the characteristics of “money separation” and “money before money”-through multiple participants and multiple capital flows, a rather complex capital link has been designed. “Among them, there are gangs that specialize in the role of central counterparty (CCP), connecting gambling platforms and currency circles; there are criminal gangs and currency circles that provide a mechanism for dealing with RMB and virtual currency, and form a’large-retail’ internally. Double-layer structure. The features of virtual currency’s coin countermeasure mechanism, transaction trust mechanism, and double-layer structure of currency circle.” Wen Xinxiang said.

Although the above-mentioned cases have not been disclosed in detail by the relevant departments, the routines of transferring gambling funds or implementing fraud through “run points” are not unfamiliar. With the help of virtual currency channels, the transfer of funds is more complicated and high-speed. During a technical analysis of a “killing pig disk” case that used virtual currency fraud, Paidun Technology found that after tricking the victim to recharge the virtual currency to a fake platform or address, the funds were generated from the collection address into the fraudster’s wallet. After many transfers and confusions, the deposit address of the fraud platform interacted with 243 exchange addresses, and the victim’s virtual currency was quickly processed by money laundering gangs or flowed into overseas decentralized exchanges.

In an interview with reporters, the relevant person in charge of Paidun Technology said: In recent years, the structure of illegal transactions of virtual currencies has become increasingly complex, which is characterized by lengthening the entire transaction chain and increasing the complexity of the entire money laundering link. The difficulty in investigating and obtaining evidence for this type of case lies in the following: first, criminal gangs use multiple false identities to open exchange accounts, making KYC authentication information invalid, and it is difficult to lock real suspects; Some users who have no subjective intention to launder money and OTC (over-the-counter transactions) are involved in the network; third, the core links in the middle are often controlled by overseas crimes, creating difficulties for the closed-loop entire chain of illegal transactions.

A practitioner in a virtual currency exchange revealed: Especially sometimes assets flow into a newly opened address, and this address has almost no transaction data, it is extremely difficult to determine the nature of the account or the holder, and the steps of money laundering are in milliseconds. It runs at a high speed, and it is very difficult to respond and track down.

Challenges to the traditional “discontinued payment”

The reason why virtual currency transactions are difficult to monitor and intervene is that they are separated from the existing regulatory system. Banks and payment institutions only rely on internal transaction systems to monitor suspicious funds and accounts, and cannot solve the problem of cross-bank, cross-platform or even cross-border transaction tracking.

According to interviews with reporters, currently, Alipay and WeChat Pay treat most of these types as blacklisted management, establish inspection systems for key websites and accounts, and block them as soon as they are discovered; by strengthening risk monitoring in the payment transaction link, deploying risk algorithm models, Strengthen the monitoring of abnormal transactions, remind the suspected payer of risks, and restrict the rights of the payee.

Basically, domestic financial institutions can only restrain from the dimension of suspicious transactions. Wang Linggang told reporters: The anti-money laundering transaction monitoring system of domestic banking institutions is not specifically set up for virtual currency transaction monitoring. At present, all financial institutions pay full attention to the money laundering risks related to virtual currency transactions. However, due to the numerous money laundering methods, the scale of money laundering through virtual currency transactions can be described as a drop in the entire money laundering activity.

“More technology investment will inevitably bring higher compliance costs. Because the scale of money laundering in virtual currency transactions is still small, it seems that the amount is relatively large in individual cases. Financial institutions usually do not invest more resources in virtual currency money laundering monitoring. “He said.

More anti-fraud and anti-money laundering measures obviously require digital currency exchanges to “take up heavy responsibilities.” In combination with the existing 100 million address tags, Paidun Technology tracked and monitored a variety of high-risk addresses, including fund disk addresses, dark web addresses, and gambling addresses, and found that there were frequent interactions between these black production addresses and exchange addresses behavior.

According to the reporter’s understanding, mainstream exchanges usually have strict KYC certification, and more anti-fraud and anti-money laundering measures have also begun to appear. Some exchanges have previously disclosed that they have set up a risk isolation period policy, and risk users need to withdraw cash on T+1 days. In addition, the on-chain asset tracking system based on the dynamic open source intelligence big data analysis of currency-related people has been used in the tracking of virtual currency fraud and money laundering in the past two years.

The reporter noticed that institutions including Paidun Technology, Huobi, Ouke Cloud Chain and other institutions have successively launched similar systems to track the flow of funds on the chain-the on-chain monitoring function generally involves “address monitoring” and “transaction monitoring” “, by monitoring the dynamics of certain addresses and monitoring the funds involved in a certain transaction to achieve dynamic tracking.

However, if these funds eventually go to non-mainstream exchanges, the above tracking mechanism may also be ineffective. With the development of the DeFi (decentralized finance) ecology, more complicated models of money laundering with virtual currencies have emerged.

In Wang Linggang’s view, this model does not require KYC certification and no specific operators can be found. Even international regulatory research and measures on this are far from enough.

The relevant person in charge of Paidun Technology revealed to reporters that in addition to the commonly used centralized currency mixing services and the emergence of decentralized currency mixing servers that use protocols to automate currency mixing, multiple layers of protection are added to the virtual currency held by criminals. membrane. The new changes after this regulatory upgrade still need to be investigated.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/encirclement-and-suppression-of-cryptocurrency-tens-of-billions-of-unsupervised-funds-leaving-the-country-for-half-a-year/
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