Original title: "Behind the 'All-In' Investigation of USDT Grey Industry: Drug Trafficking, Online Gambling, Money Laundering"

Original source: TechFlow

Recently, the "anti-fraud propaganda film" "All In" set in northern Myanmar was released, which also brought attention to the cryptocurrency mentioned in the film, KTAI, and focused people's attention on the connection between crypto and the black market. This is not a new phenomenon. As early as many years ago, "USDT money laundering" became a key target of the police crackdown. This article takes you back to TechFlow's in-depth investigation article in 2020 and takes you into the hidden corner of USDT.

USDT and other cryptocurrencies are becoming a "green channel" for collecting illegal funds.

"Compared to WeChat and Alipay transfers, the flow of cryptocurrency cannot be fully verified. Both the buyer and seller are secure," wrote a drug-related individual on their self-built blog website.

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

Shenzhen TechFlow conducted an interview and investigation with individuals involved in the black cryptocurrency industry, attempting to reveal the hidden corners of USDT.

Buy Marijuana with USDT

"Compared to WeChat and Alipay transfers, the flow of cryptocurrency cannot be fully verified. Both the buyer and seller are secure," wrote Zhou Xiao (pseudonym) on his self-built blog website.

Zhou Xiaocheng said that because of Bitcoin, people who buy "Feiyezi" from him don't have to worry. Buying Bitcoin on an exchange requires real-name authentication, but this only proves that you have bought Bitcoin (invested in Bitcoin). As for where the Bitcoin went and why it went there, "if you don't actively say it, no one knows".  

"You can say that you have been pleased with the rise of Bitcoin this year and have invested in some Bitcoin for fun. Then you transferred it to another Bitcoin wallet. I wrote the password for the other wallet on a piece of paper, but it's gone missing. I've been looking for it these past few days," he explained.

There are many people like Zhou Xiao who use cryptocurrency to buy and sell drugs and "earn a living at the risk of their lives". 

According to a report from Justice Online, a couple in Changchun used a Bitcoin address to collect and transfer drug money.

Wife Liu entrusted her Bitcoin account to her husband Ma. Ma used the account to collect drug money and transferred the funds to Liu's bank card, totaling over 100,000 yuan. 

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

The reason why Zhou Xiaozhi is at large is because his Bitcoin address is difficult to trace. He stated that his Bitcoin address was generated in bulk offline using elliptic encryption algorithm, allowing him to generate addresses and corresponding keys at will without any restrictions. 

He initially chose Bitcoin, but later, due to the bear market and the decline in BTC prices, the seller requested a hedging transaction, so he used the stablecoin USDT for the transfer.

USDT is a cryptocurrency launched by Tether that is pegged to the US dollar. 1 USDT is equal to 1 USD, which means that for every 1 USDT token issued, there is a corresponding $1 USD held in reserve in a bank account.

Recently, he also plans to launch the electronic Renminbi (E-RMB). He introduced that the currency has greatly improved security and privacy, stable currency value, and is always anchored to the price of Renminbi at a ratio of 1:1. It is only available for old users who have made purchases.

More and more people like Zhou Xiao, who are proficient in cryptocurrency and flexible in its application, are emerging in the gray industry. They operate on the edge of the law and make money at the risk of their lives under the anonymity of cryptocurrency.

The Gray World of Cryptocurrency  

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

Chainalysis report data shows that from July 2019 to June 2020, over $50 billion worth of cryptocurrency was transferred from East Asian addresses to overseas addresses. Of this, over $18 billion was in USDT.

There are three main uses of cryptocurrency in the gray industry: drug trafficking, online gambling, and capital flight. This is a secretive gray industry chain with mixed motives.

Using cross-border remittance as an example, a Zhihu user introduced their operation for cross-border remittance in 2016: purchasing Bitcoin on a domestic exchange, transferring it to Bitfinex, and before withdrawing, the platform needs to authenticate personal information by filling in ID card, passport, and address proof as prompted. After withdrawal, the platform will charge a 0.1% handling fee, with a minimum of $20. This completes the entire process of Bitcoin cross-border remittance.

Insiders told TechFlow that the above is practical. They have tried to enter a Chinese address into a US exchange, exchange it for US dollars, and transfer it to a US account, "but this is just an example". 

If the above operations are limited to personal exploration and require taking risks on one's own, with the popularization and development of digital currency, an industry chain has emerged that uses encrypted currency for cross-border remittances.

"We deal with US dollars and Australian dollars," said Ji Nan (pseudonym), who provides a service of receiving USDT and exchanging it for fiat currency. All that is needed is to inform them of the receiving bank, whether it is a personal or business account, which bank it is registered with, and in which region it is registered. The funds will be credited within one working day. If the client is a personal account, it will be done under the guise of borrowing or owing money, and if it is a business account, it will be done under the guise of labor compensation."

Compared to the "simple" operations used for cross-border transfers mentioned above, professional cryptocurrency running teams are more secretive and massive.

The term 'benchmarking' originated from performance testing on computers or mobile phones, but in the payment industry, it has a new meaning.

In the past, online gambling platforms would purchase a large number of bank cards to collect money. However, this is very costly - the cost of acquiring one bank card can be in the hundreds or thousands. Once a bank card is blocked, the money collected becomes worthless.

After 2018, benchmarking mode began to rise. Many benchmarking platforms have emerged in the market, which greatly reduces the cost of money laundering through crowdsourcing. These benchmarking platforms claim that "as long as you have a QR code, you can make money even lying at home".  

Scoring players on the scoring platform pay a deposit (such as 10,000 yuan) and upload their WeChat and Alipay payment QR codes. Recharging players will transfer money to the scoring players through payment integration. After reaching 10,000 yuan, the scoring ends. The scoring platform will give the scoring players a certain percentage of commission and transfer the 10,000 yuan deposit to the gambling platform.

"Similar to Didi Chuxing, which transports funds, we transport money.," said a runner. Throughout the process, the gambling platform does not participate in the flow of funds, and the runners become money laundering tools.

USDT benchmarking is a new model of benchmarking that uses digital currency for payment. In traditional benchmarking, RMB is used for payment; in USDT benchmarking, USDT is used instead.

The above runners introduced that the biggest advantage of USDT running score is decentralized trading. "All transactions are between customers and our drivers (acceptance merchants), there is no fund pool in the middle, effectively preventing funds from being frozen on a large scale. And with USDT as a barrier in the middle, the whole process is a traceless transaction and cannot be traced to the destination. Our trading volume is large enough and diversified."

"We provide deposit and withdrawal services for gambling platforms." A person familiar with the matter on QQ claimed that by trading with the cryptocurrency USDT, "you can earn commission with your principal, settle each transaction separately, and earn 150-200 yuan commission with a principal of 10,000 yuan, which will be directly returned to your bank card."

According to TechFlow, a group of benchmarking 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. The most commonly used cryptocurrency is USDT, which is then transferred to the benchmarking platform.

"There are some who do legitimate U-turn transactions, where they convert U.S. dollars to Chinese yuan and vice versa. However, these are rare, with over 90% being fraudulent investment schemes or scams," said Aiba. Even with face-to-face transactions, there is still a risk of sudden disappearance.

The law is strict and impartial. A crackdown on cryptocurrency money laundering is coming.

严打来袭

translates to

Strict Crackdown is Coming

in English.

"Can't be as rampant as before," said Aiba. Recently, the wind has been tight, and he no longer accepts USDT transactions, but instead uses cash for exchange, with a ratio of 100:105.

On September 24th, 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 one trillion yuan of gambling funds flow out of China every year, with encrypted currencies specifically mentioned as being used to transfer gambling funds.

"In recent cases, it has been discovered that some gambling groups have used virtual currency to collect and transfer gambling funds, and even engaged in online gambling in some areas of Myanmar under the guise of investing in virtual currency. These new types of digital currency channels are difficult to freeze and trace due to their anonymity, which poses a great challenge to our efforts to combat and regulate such activities."

Since the beginning of this year, the whole country has launched a vigorous "anti-money laundering" and "cut-off card" campaign.

On October 10th, the Inter-Ministerial Joint Conference of the State Council for Combating and Governing New Types of Illegal Crimes in the Telecommunications Network deployed the "Cutting off Cards" action nationwide to severely crack down on illegal activities such as the illegal operation and sale of telephone and bank cards.

And there is no doubt that the cryptocurrency industry is a key area of attack. Some OTC traders in the cryptocurrency industry have also been affected, with frozen cards and even investigations.

According to the Criminal Law's standards for filing money laundering cases, those who "provide financial accounts" for money laundering activities will be prosecuted and face a maximum sentence of "more than five years but less than ten years of fixed-term imprisonment, and a fine of no less than five percent but no more than twenty percent of the amount involved in the money laundering."

On June 8th of this year, the 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, 4 studios involved in the case were investigated, and 2 online gambling gangs were destroyed.

This case is the first nationwide investigation into the use of USDT digital currency to provide online payment services for illegal 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 a total amount involved of 120 million yuan.

TechFlow of DeepTech found that USDT is becoming increasingly popular among criminals due to its stable value and anonymity. Whether it is drug trafficking, online gambling, or cross-border transfers, all of them use USDT without exception.

USDT is the culprit?

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

According to a report by Chainalysis, USDT surpassed Bitcoin in June this year to become the most popular cryptocurrency in East Asia, with China having the highest proportion. The report states that "Tether has become the de facto fiat substitute for Chinese cryptocurrency users and is the main means of transitioning to Bitcoin and other standard cryptocurrencies."

The total market value of USDT currently exceeds 19.1 billion US dollars, but in 2017, this number was only about 100 million. In just 3 years, the market value of USDT has achieved a leapfrog growth of 191 times.

Where are the application scenarios for these rapidly increasing USDT?

As early as July 2019, Coindesk reported a case of USDT being used in cross-border trade in Russia, where "20% of sales are in Bitcoin and 80% are in USDT." An OTC trader in Russia stated that "Chinese companies can purchase a total of 10 to 30 million US dollars worth of USDT per day."

This trend has been noticed by regulatory agencies around the world, and legislation is approaching.

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

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

Returning to China, on October 23, 2020, the draft revision of Article 22 of the "People's Bank of China Law" was announced, which stipulates that "no unit or individual may produce or sell token tickets and digital tokens to replace the circulation of RMB in the market."

According to the previous content, USDT has replaced the position of RMB fiat currency in cross-border transfers, money laundering gray areas, and is actually the fiat currency substitute for Chinese cryptocurrency users.

Will USDT go bankrupt? When will it go bankrupt? This is probably the question hanging over the head of every cryptocurrency user.

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

"Bitcoin is born with the mission of deleveraging and hard currency. USDT is the source of high leverage in exchanges. It is theoretically a good thing for more people to use a currency, but if its use is limited to black production and speculation, should we examine the original intention of cryptocurrency?" commented Pan Chao, the head of MakerDAO China."

(Respecting the interviewee's opinion, Zhou Xiao, Ai Ba, and Ji Nan are all pseudonyms.)

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