Entering the hidden corners of USDT: drug trafficking, online gambling, and money laundering

Recently, the "anti-fraud propaganda film" "All or Nothing" set in northern Myanmar was released, which also made the Kotai currency mentioned in the film popular, and at the same time focused people's attention on the connection between Crypto and black industries. This is not new. As early as many years ago, "USDT running points and money laundering" became the focus of the police. This article takes you to review TechFlow's in-depth investigation article in 2020 and walk into the hidden corners of USDT.

Cryptocurrencies such as USDT are becoming a "green channel" for collecting drug money.

"Compared to WeChat and Alipay transfers, there is no fully verifiable information on the flow of cryptocurrency. Both buyers and sellers are safe," a drug-related person wrote on his own blog.

Cryptocurrency is a great experiment in the history of finance. Its invention began in 2009 with a paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System" written by an account named "Satoshi Nakamoto". It was born with the mission of deleveraging and hard currency, but also buried a time bomb - due to its anonymity, it has gradually become the favorite of criminals, among which USDT (Tether) is the most popular.

Not only limited to drug buying and selling, USDT is also used in black industries such as online gambling, money laundering, and capital flight.

TechFlow interviewed and investigated the parties involved in the cryptocurrency black industry chain, trying to reveal the hidden corners of USDT.

Buy marijuana with USDT

"Compared to WeChat and Alipay transfers, there is no fully verifiable information on the flow of cryptocurrency. Both buyers and sellers are safe," Zhou Xiao (pseudonym) wrote on his self-built blog.

Zhou Xiao said that because of Bitcoin, people who come to him to buy "Flying Leaves" don't have to worry. Real-name authentication is required to buy Bitcoin on an exchange, but this can only prove that you have bought Bitcoin (invested in Bitcoin). As for where the Bitcoin has gone and why it went there, "if you don't take the initiative to tell us, no one will know."

“You can say that you saw the promising rise of Bitcoin this year, so you invested in some Bitcoin for fun. Then you transferred the money to your other Bitcoin wallet. I wrote down the password of the other wallet on a piece of paper, but it’s gone. I’ve been looking for it these days,” he said.

Zhou Xiao runs an online drug trading platform, mainly helping domestic players purchase new drugs such as marijuana and LSD.

There are many people like Zhou Xiao who use cryptocurrencies to buy and sell drugs and "risk their lives to make money."

According to Justice.cn, a couple in Changchun used Bitcoin addresses to collect and transfer drug money.

The wife, Liu, gave her Bitcoin account to her husband, Ma, who used the account to collect drug money and then cashed it out to Liu's bank card, totaling more than 100,000 yuan.

After reviewing the case, the prosecutor believed that Liu, knowing that Ma was selling drugs, still provided Ma with a Bitcoin account to collect drug money and provided a bank card to transfer drug money, and his actions met the constituent elements of the crime of money laundering.

On January 20 this year, the court adopted the sentencing recommendation of the procuratorate in court. Ma was convicted of drug trafficking and sentenced to three years and two months in prison, and Liu was convicted of money laundering and sentenced to six months in prison.

Zhou Xiao is at large because his Bitcoin address is difficult to track. He said that his Bitcoin address was generated offline in batches using the elliptic encryption algorithm, and the address and corresponding key were generated at will without restriction.

Zhou Xiao once chose three cryptocurrencies for transfers: Bitcoin, USDT and E-RMB issued by himself.

He initially chose Bitcoin, but later, due to the bear market and the drop in BTC prices, the seller required a hedging transaction, so he used the stable currency USDT for transfers.

USDT is a cryptocurrency launched by Tether that is pegged to the legal currency US dollar. 1 USDT = 1 USD, that is, for every USDT token issued, there will be 1 USD of funds guaranteed in its bank account.

He is also preparing to launch the electronic RMB E-RMB in the near future. He introduced that the currency has high security and privacy, stable value, and is always pegged at 1:1 with the RMB. It is only available to old users who have bought it.

There are more and more people like Zhou Xiao who are proficient in cryptocurrencies and can use them flexibly in the gray market. They walk on the edge of the law and make money with their lives under the cover of cryptocurrencies.

The grey world of cryptocurrency

"I have 900,000 U (USDT) in my account." Aiba (pseudonym), who runs an offline casino in Mongla, Myanmar, told the author that he needs to exchange cash for foreign currency or USDT every day.

Chainalysis report data shows that from July 2019 to June 2020, more than $50 billion of cryptocurrencies were transferred from addresses in East Asia to overseas addresses, of which more than $18 billion was USDT.

Cryptocurrency is mainly used in three ways in the gray industry: drug trafficking, online gambling and capital flight. This is a hidden gray industry chain with a mix of good and bad.

Taking cross-border transfer as an example, a Zhihu user introduced his cross-border transfer operation in 2016: buying Bitcoin on a domestic exchange and transferring it to Bitfinex. Before withdrawing the money, the platform needs to verify personal information and fill in the ID card, passport, and proof of address according to the prompts. After the withdrawal, the platform will charge a handling fee of 0.1%, with a minimum of US$20. In this way, the entire Bitcoin cross-border remittance process is completed.

People familiar with the matter told TechFlow that the above is practical. They have tried to transfer the Chinese address to a US exchange, exchange it for US dollars and transfer it to a US account, "but this is just an isolated case."

If the above operations are limited to personal exploration and one needs to bear the risks by oneself, then with the popularization and development of digital currency, an industrial chain of cross-border remittances using cryptocurrency has now emerged.

"We deal in US dollars and Australian dollars." Ji Nan (pseudonym) said that he provides a service of receiving U (USDT) and issuing legal currency (spot exchange). All you need to do is "tell us the receiving bank, whether it is a private account or a public account, which bank it is registered in, and which region it is registered in, and it will be credited to your account within one working day." If the customer is an individual account, it will be in the name of loan or arrears, and if the customer is a public account, it will be in the name of labor remuneration.

Ji Nan introduced that compared with traditional bank wire transfers that take up to several weeks and have a handling fee of up to 5%, USDT transfers have lower fees (close to 0) and transfers are immediate.

"The minimum is 5,000 (USDT), and there is no upper limit. If a single transaction exceeds 1 million (USDT), just tell me in advance." Ji Nan said that customers usually transfer money for US stock trading, house buying, or immigration.

Compared with the above-mentioned "simple" operations for cross-border transfers, professional cryptocurrency running groups are more secretive and larger.

The term "benchmarking" originates from the performance testing of computers or mobile phones, but benchmarking in the payment field has a new meaning.

In the past, online gambling platforms would purchase a large number of bank cards to collect money. But doing so is very costly - collecting a bank card costs hundreds or thousands. Once the bank card is blocked, the money will be wasted.

After 2018, the running point model began to rise. Many running point platforms appeared in the market, which used crowdsourcing to greatly reduce the cost of money laundering. These running point platforms claimed that "with just a QR code, you can make money lying at home."

The players who run the points pay a deposit (for example, 10,000 yuan) on the running point platform and upload their WeChat and Alipay payment QR codes. The recharge players transfer the money to the running points players through the payment party. After receiving 10,000 yuan, the running points are completed. The running point platform will give the running points players a certain percentage of the collection commission and transfer the 10,000 yuan deposit to the gambling platform.

"It's similar to Didi Taxi that transports money. Didi Taxi transports people, and we transport money." According to the people who run the points, during the whole process, the gambling platform does not participate in the flow of funds, and the players of the points have become tools for money laundering.

USDT running points is a new mode of payment using digital currency running points. Traditional running points use RMB, while USDT running points use USDT.

The above-mentioned runner introduced that the biggest advantage of USDT running is decentralized transactions. "Transactions are conducted between customers and our drivers (acceptors). There is no capital pool in the middle, which effectively prevents funds from being frozen on a large scale. And there is USDT in the middle as a block. The whole process is a traceless transaction and its destination cannot be tracked. Our transaction volume is large enough and dispersed enough."

"We provide deposit and withdrawal services for gambling platforms." A person running points on QQ said that when trading in the cryptocurrency USDT, "we use the principal to earn commissions, and settle each order. For a principal of 10,000 yuan, we can earn 150 to 200 yuan in commissions, which will be directly refunded to your bank card."

According to TechFlow, these scoring gangs attract traffic on platforms such as QQ groups, Baidu Tieba, and Xianyu, and then communicate transaction details on communication software such as Bat, Telegram, and Paper Plane, and buy cryptocurrencies on exchanges, and finally transfer the coins to the scoring platform. The most commonly used cryptocurrency is USDT.

"There are some people who run U, U in and Y (RMB) out. There are very few of them, more than 90% are Ponzi schemes or scammers." Aiba said that even if they meet in person for transactions, there are still some who suddenly disappear.

The law is strict and there is no loophole. A crackdown on cryptocurrency money laundering is underway.

Crackdown is coming

"We can't be as rampant as before." Aiba said that the situation has become tense recently and he no longer accepts USDT business. Instead, he uses cash to exchange foreign exchange at a ratio of 100:105.

On September 24, at the 9th China Payment and Clearing Forum held in Beijing, Liao Jinrong, director of the International Cooperation Bureau of the Ministry of Public Security, pointed out that more than 1 trillion yuan of gambling-related funds flow out of China every year, and specifically pointed out that cryptocurrencies are used to transfer gambling funds.

"In recent cases, we have found that some gambling gangs use virtual currency to collect and transfer gambling funds, and even in some parts of Myanmar, they use virtual currency investment as an excuse to conduct online gambling. This new type of digital currency channel cannot be frozen, is anonymous and difficult to trace, which poses a great challenge to our crackdown and governance work."

Since the beginning of this year, anti-money laundering and card-cutting operations have been carried out in full swing across the country.

On October 10, the State Council's inter-ministerial joint meeting on combating new types of crimes in telecommunications networks deployed a nationwide "card-cutting" operation to severely crack down on and rectify illegal crimes such as opening and selling phone cards and bank cards.

Cryptocurrency is undoubtedly the focus of the crackdown. Some cryptocurrency OTC traders have also been affected, with their cards frozen or even investigated.

According to the criminal law's standards for filing a case for money laundering, those who "provide a financial account" for money laundering will be prosecuted and the maximum penalty is "imprisonment of not less than five years but not more than ten years, and a fine of not less than 5% but not more than 20% of the amount of money laundering."

On June 8 this year, Huizhou police cracked down on a criminal gang that used USDT digital currency to operate a fourth-party payment platform. A total of 76 suspects were arrested, four online payment studios involved in the case were investigated and dealt with, and two online gambling gangs were destroyed.

This case is the first case in China that used USDT digital currency to provide online payment services for illegal and criminal activities. After preliminary verification, the platform has been operating for nearly 15 months, providing fund settlement services for 120 overseas gambling websites and 70 investment fraud platforms, with the amount involved reaching 120 million yuan.

TechFlow found that USDT is increasingly favored by criminals because of its stable value and anonymity. Whether it is drug trafficking, online gambling or cross-border transfers, USDT is used without exception.

Is USDT the culprit?

Contrary to popular belief, the most popular cryptocurrency among Chinese people is not Bitcoin, but USDT.

According to the Chainalysis report, USDT beat Bitcoin in June this year and became the most popular cryptocurrency in East Asia. Among them, China accounts for the highest proportion. The report stated that "Tether has become the de facto legal currency alternative for Chinese cryptocurrency users and the main means of transitioning to Bitcoin and other standard cryptocurrencies."

The current total market value of USDT exceeds 19.1 billion US dollars, but in 2017, this figure was only about 100 million. In just three years, the market value of USDT has achieved a leapfrog growth of 191 times.

What are the application scenarios for these rapidly issued USDTs?

As early as July 2019, Coindesk reported that USDT was used in cross-border trade in Russia. "20% of sales were Bitcoin and 80% were USDT." A Russian OTC trader said, "The total amount of USDT purchased by Chinese companies in one day can reach 10 million to 30 million US dollars."

In fact, USDT has become the most "out-of-the-box" cryptocurrency, and is most closely associated with the gray market. Crimes involving USDT are becoming more and more serious. According to data from the China Procuratorate Network, there have been 85 USDT-related criminal cases this year, while before 2020, there were only 5 cases.

This trend has been noticed by regulators in various countries, and legislation is approaching.

The European Union formally proposed a regulatory framework for crypto assets and stablecoins in September, explicitly stating that all crypto assets not covered by existing EU financial laws will be included in the regulation.

The UK Treasury recently issued a statement that it is drafting regulations for private stablecoins and is also studying the possibility of central bank digital currencies as a substitute for cash.

Back in China, Article 22 of the revised draft of the "People's Bank of China Law" published on October 23, 2020 stipulates: "No unit or individual may produce or sell token tickets and digital tokens to replace the circulation of RMB in the market."

As mentioned above, USDT has replaced the status of RMB as legal tender in areas such as cross-border transfers and money laundering, and is also the de facto legal tender substitute for Chinese cryptocurrency users.

Will USDT crash? When will it crash? This is probably a question hanging over the heads of every cryptocurrency user.

In the eyes of some geeks, technology is innocent and is only used by people with bad intentions. However, the increasing number of cryptocurrency crime cases reminds us that technology cannot completely absolve us of responsibility for the evil of human nature.

"The Genie is out of the Bottle." This is how Ted Rogers, president of Bitcoin wallet company Xapo, described the BCH fork civil war. This proverb comes from the story of Aladdin's magic lamp in "One Thousand and One Nights", which means that once the genie is out of the bottle, it will have an irreversible negative impact on the world. Today, this saying can still be applied to cryptocurrencies such as USDT.

“Bitcoin is born with the mission of deleveraging and hard currency, and USDT is the source of high leverage in exchanges today. In theory, it is a good thing for more people to use a currency, but if its use is limited to illegal activities and speculation, isn’t it time to examine the original intention of cryptocurrency?” Pan Chao, head of MakerDAO China, once commented.