Hidden Bitcoin "underground bank"

Although Chinese regulators have been very vigilant, the capital movers who are "one step ahead of the law" can always find shadows where the sun doesn't shine and transfer funds overseas. When large insurance policies in Hong Kong and cross-border corporate exchange can no longer meet the demand, the "movers" set their sights on Bitcoin. The large demand for exchange has, to a certain extent, pushed up the price of Bitcoin, and the strong price of Bitcoin, in turn, has strengthened the confidence of exchangers. The funds that escaped supervision have gained convenience, but also given up the security of funds. When the "pleasure" comes, safety is thrown out of mind.

Text: Liu Peng from Beijing Editor: Yan Zheng

In a coffee shop on the East Third Ring Road in Beijing, Duan Wei, who is in his early 20s, kept typing away on the keyboard. Within just a few minutes, the RMB in his account was transferred from the coffee shop to the other side of the earth, and finally withdrawn to a bank card in the form of US dollars.

What is displayed on Duan Wei's screen is not the bank client, but a series of winding curves. The price curve of Bitcoin shows that the value of Bitcoin has continued to rise recently, which undoubtedly provides the necessary safety cushion for Duan Wei's operation.

Buy Bitcoin from domestic trading platforms - withdraw Bitcoin - transfer to foreign trading platforms - sell Bitcoin - withdraw cash to bank cards. Through this path, Duan Wei's funds can move across borders without restrictions.

Bitcoin was born in 2008. It is a digital virtual currency. According to the model constructed by the designer Satoshi Nakamoto, the final total issuance of Bitcoin will be 21 million, and it will be gradually "mined" by computer computing power in the next 30 years.

Bitcoin can be easily and freely exchanged into legal currencies of various countries. At the same time, it is regarded as a commodity rather than a currency by most central banks. Its commodity attributes can avoid capital account controls in some countries.

As the RMB exchange rate continues to fluctuate, Bitcoin, a digital currency consisting of 33 letters and numbers, has become the latest channel for some funds to bypass foreign exchange controls and has caused fluctuations in the country that are imperceptible to outsiders.

Bitcoin has become the latest channel for some funds to bypass foreign exchange controls, causing fluctuations in the country that are imperceptible to outsiders.

New demands from high net worth clients

Zhang Ziya, who works at a private wealth management company in Beijing, has been frequently asked by clients about overseas asset allocation in the past year.

Although the company has equipped overseas investment consultants specifically for these clients and found some high-quality projects, the maximum foreign exchange quota of US$50,000 per person per year has become the primary problem these clients face in transferring their funds overseas.

Among the traditional solutions, Zhang Ziya's clients often use the methods of purchasing large insurance in Hong Kong and finding multinational trading companies to exchange currency. However, Zhang Ziya admits that both methods have certain drawbacks.

By purchasing large-value insurance in Hong Kong, RMB assets can be exchanged for insurance policies denominated in US dollars, and then the insurance policies can be mortgaged to banks to obtain cash loans, thereby completing asset allocation. However, this process depends on the terms of the insurance policy, and the intermediate procedures are relatively complicated.

Zhang Ziya explained that trading companies usually have businesses in both China and the United States, so they can provide convenience in currency exchange. However, this method is more flexible, and it is difficult to find a suitable trading company for customers and match the exchange quotas of both parties.

Purchase large insurance in Hong Kong, replace RMB assets with insurance policies denominated in US dollars, mortgage the insurance policies to banks to obtain cash loans, and then complete asset allocation.

The existence of Duan Wei and others provides a new channel for Zhang Ziya's clients.

In fact, some people have already used Bitcoin to transfer funds overseas. As early as 2013, several people in the Bitcoin circle revealed to Prism that some domestic players used this method to send tuition and living expenses to relatives and friends studying abroad; in addition, some players also used Bitcoin to transfer part of their assets.

A senior person in the Bitcoin circle told The Prism that although such cases existed at that time, they were not common. He attributed the reasons to the following: first, the acceptance of Bitcoin was not high; second, although the process of exchanging Bitcoin for foreign currency was short, it still had to bear the potential risk of sharp fluctuations in the currency price and the risk of the platform running away; third, the RMB exchange rate was very strong at that time.

Trading companies have businesses in both China and the United States and can exchange currency through multinational trading companies.

Bitcoin's rapid rise

Times have changed. Some of the three reasons he cited have changed compared to a few years ago.

First, the development of the Bitcoin industry has gradually diversified. Domestic trading platforms have launched Bitcoin futures trading, allowing players to profit through the reverse operation of short selling; some platforms have even launched the pledge of Bitcoin to obtain funds, and then invest the funds in A-shares or US stocks.

The second is the volatility risk and price difference risk of Bitcoin. However, the person said that Bitcoin has maintained an upward trend in recent months, thus providing a good environment for currency exchange. Regarding the price difference between Chinese and foreign exchanges, there are also domestic platforms that provide price locking functions.

Since the "811 exchange rate reform" in 2015, the general trend of RMB depreciation has driven the price of Bitcoin to continue to rise.

On November 1, 2016, the RMB exchange rate against the US dollar was as low as 6.7768, which was close to the lowest record in the past six years; and the price of Bitcoin hit a four-month high again on the same day, breaking through the 5,000 yuan mark. Bitcoin has entered an upward channel since August, rising from 3,836 yuan to 5,000 yuan.

The K-line charts of the RMB exchange rate and Bitcoin happen to form two almost opposite curves.

Huobi COO Zhu Jiawei said that when the RMB exchange rate fluctuates, investors will consider allocating some hedging and safe-haven assets, especially assets that are weakly correlated and negatively correlated with the RMB exchange rate, such as the US dollar, gold, Bitcoin, etc.

The aforementioned Bitcoin insider said that Bitcoin's natural property of currency exchange has also objectively driven up the price of the currency.

The K-line charts of the RMB exchange rate and Bitcoin happen to form two almost opposite curves.

New channels for capital outflow

As the RMB exchange rate fluctuates more and more, Bitcoin, as a convenient and fast method, has become a new channel for capital to go overseas.

Duan Wei's business opportunity also came from this. "Bitcoin is not recognized as a currency in China, but a commodity, so if you use RMB to buy this commodity and then exchange it for other currencies through overseas platforms, there is no problem in terms of rules," he said.

This is also the logic of many trading platforms. However, in order to shirk responsibility, domestic trading platforms have set corresponding risk control measures to prevent money laundering through this channel.

"The main method is the real-name system, and specific identity information must be left for each transaction." A customer manager of a Bitcoin trading platform said, "Secondly, we must ensure that the funds used to purchase Bitcoin come from compliant and legal sources."

The account manager said that real-name transactions are required mainly to prevent groups including telecommunications fraudsters from using this method to launder money and transfer funds overseas.

An extreme case is that during the stock market crash in 2015, Yishidun, a trading company that made more than 2 billion yuan in profits through high-frequency trading, sought to transfer huge amounts of funds through Bitcoin.

"The Intercept" learned that Yishidun found the trading platform Bitcoin China at that time, but people related to Bitcoin China told "The Intercept" that Yishidun did not pass the corresponding real-name verification at that time, and the transaction amount was huge. This behavior aroused the platform's vigilance and rejected Yishidun's transaction request.

However, for customers who meet the real-name system requirements, different Bitcoin trading platforms have set daily limits ranging from $500,000 to $1 million. As for the use of Bitcoin after customers convert it into US dollars, account managers of several platforms said they did not care.

"Value-added Services" of Underground Banks

The daily limit of 500,000 to 1 million US dollars far exceeds the annual limit of 50,000 US dollars per person set by the State Administration of Foreign Exchange. Combined with the advantage of fast operation, some players prefer to transfer funds overseas through Bitcoin trading platforms.

However, the aforementioned senior person in the Bitcoin circle told The Prism that because it is more troublesome for trading platforms to set up risk control measures, the larger volume may be concentrated in Bitcoin over-the-counter transactions.

Compared with Bitcoin trading platforms, OTC transactions are more hidden and offer larger exchange limits.

The most typical example is the Bitcoin "underground bank". The Prism learned that this type of "underground bank" directly provides RMB-to-USD transactions, and the intermediate Bitcoin transaction link is completely carried out by the "underground bank", eliminating the need for the exchanger to buy and then sell.

"Underground banks" directly provide transactions of RMB against US dollars, eliminating the need for currency exchangers to buy and then sell.

In addition, there are some "underground banks" that can provide anonymous Bitcoin wallets for currency exchangers. This technology can hide any identity information of the holder and allow them to withdraw and exchange money on overseas trading platforms.

"Underground banks" even solicit business directly through instant messaging software. An insider revealed that these banks are mostly concentrated in Guangdong.

In fact, in response to the possible money laundering risks of Bitcoin, the central bank issued Document No. 289 as early as 2013, defining Bitcoin as a virtual commodity and requiring financial institutions and payment institutions not to directly or indirectly provide customers with other Bitcoin-related services. In 2014, the central bank issued the "Notice on Further Strengthening Bitcoin Risk Prevention Work", reiterating its attitude towards Bitcoin, and pointing out Bitcoin's features such as anonymity and convenient cross-border circulation, requiring financial institutions to include Bitcoin in anti-money laundering monitoring.

Despite the regulation, Duan Wei's business is still going on at a time when the RMB exchange rate is fluctuating more. He confidently said that as long as the cost is lower than traditional methods, the market for funds to go overseas using Bitcoin will always exist; moreover, from a purely technical perspective, using Bitcoin to exchange currency is still the most convenient channel.

This seems to be one of the logics supporting the recent continuous rise of Bitcoin. On November 1, Bitcoin once again set a new four-month high, reaching 5,000 yuan.

However, Duan Wei, who had just entered the industry, did not realize the high volatility risk behind the rising Bitcoin price. The price of Bitcoin, which has been rising for many days, is currently only half of the price in 2013. At that time, within a day, the price of Bitcoin plummeted from more than 8,000 yuan to more than 4,000 yuan, and in 2014 it fell all the way to more than 1,000 yuan. This is a memory that some players still don't want to remember.

Under the risk of potential huge fluctuations in currency prices, funds that escape regulation are gaining convenience in going overseas while also silently giving up the security of funds.

(At the request of the interviewees, Duan Wei and Zhang Ziya are pseudonyms. Xiao Lu also contributed to this article)