Legal Risks for OTC Traders Under the New Cryptocurrency Regulations

Author: Liu Zhengyao Lawyer

Introduction

In the cryptocurrency field, OTC traders (also called “U traders”) are often humorously referred to as “dancers on the tip of a knife.” On November 28, 2025, thirteen national ministries and commissions held a mechanism meeting on cracking down on virtual currency trading speculation. Although this meeting did not introduce new industry regulatory policies in terms of legal authority—essentially a continuation of the 2021 “9.24 Notice”—it marks a further refinement of regulatory granularity in judicial practice. See “People’s Bank of China: Continuing to Crack Down on Virtual Currency Trading Speculation, Does Virtual Currency Still Have a Breeding Ground in China?”

As a Web3 lawyer, the author observes that this “new policy” in the crypto circle effectively shifts virtual currency trading from “administrative violations” to the brink of “criminal crackdown.” In this context, the business logic of U traders is facing an unprecedented legal restructuring.

01 “New Policy” Impact: Regulatory Policies vs. Judicial Rulings

The core of the November 28, 2025, meeting is “overall coordination and penetrating strikes.” For OTC traders, this means that the previous naive understanding of “as long as I don’t violate the law, the public security authorities have no jurisdiction” may no longer apply. This is mainly reflected in two aspects:

First, extension of regulatory qualitative boundaries. The meeting reaffirmed that activities related to virtual currency are classified as “illegal financial activities.” In criminal defense, this means that cases involving U traders will be more inclined to regard the defendant as “knowingly engaging in prohibited activities,” i.e., the threshold for “presumed knowledge” is lower. It will be harder for defendants to argue “I didn’t know that buying and selling virtual currencies was illegal.”

Second, closed-loop of evidence chain. The coordinated efforts of thirteen ministries and commissions strengthen data sharing among banks, anti-money laundering monitoring centers, and public security authorities. This means that tracking fund flows will be more real-time, and the space for some black and gray U traders to evade risk control through “technical means” will be greatly compressed.

02 Arbitrage: Why Is It No Longer a “Pure Business”?

From a business logic perspective, buying low and selling high in virtual currencies (arbitrage) is a legal commercial activity; however, under legal scrutiny, such behavior easily evolves into criminal risks. Commonly involved are concealment crimes and illegal business operations:

(1) Crime of disguising or concealing criminal proceeds: Presumption of subjective knowledge

This is the most common charge involving U traders. As Web3 lawyers, through extensive practical and theoretical research, we find that the trend in judgments related to concealment crimes involving cryptocurrencies is increasingly leaning toward “presumption of subjective knowledge.”

This poses a major challenge for criminal defense: judicial authorities often infer that U traders have “a duty to know” based on features such as “transaction prices significantly deviating from market prices,” “using encrypted communication software (like Telegram, Bat, Potato) and deleting records,” and “frequent card changes.” As a result, without objective evidence, oral defenses are often pale and ineffective.

For individuals, this judicial reality means that even if you genuinely only aim to earn a few cents profit, under the evidence chain, it is difficult to prove that you were “completely unaware” of the involvement of electric fraud or online gambling funds.

(2) Crime of illegal business operation: The boundary of operational behavior is blurred

The Shanghai Second Intermediate Court once discussed the identification of illegal business crimes involving virtual currencies. Lawyer Liu also analyzed this in detail in the article “How to Identify Illegal Business Crimes in Virtual Currencies? The Shanghai Court Provides a ‘Standard Answer’.” However, frankly, judicial understanding of virtual currencies varies across regions, and judgments differ. In my view, the Shanghai court’s legal evaluation of virtual currencies and related activities is relatively tolerant. But this does not mean that other jurisdictions across the country will necessarily accept the Shanghai court’s view.

In practice, many large U traders are not just arbitrageurs but actually act as “underground banks,” especially involving RMB and foreign currency exchange. For example, “using coins as a bridge”—if a U trader collects RMB domestically and pays foreign currency abroad (or vice versa), such currency hedging via virtual currency, especially when it has long-term operational characteristics (some judicial authorities even do not require this), can easily be identified as " disguised foreign exchange trading," thus violating illegal business operation laws.

Therefore, in practice, even if the source of funds is legal, as long as there are features like “business operation” and “cross-border settlement,” the legal risks of illegal business crimes increase exponentially.

03 Cost-Benefit Analysis for Practitioners: The Cost of Compliance in a Frustrating Industry

As legal advisors to some Web3 entrepreneurs, the author often recommends that practitioners reassess the cost-effectiveness of their business. For U traders, the characteristics often include:

Our view is:

The OTC business has now become a “low profit, high probability of criminal charges” activity. When you risk 90% or more of criminal liability for just 1% profit, such a decision is extremely irrational from a business perspective.

04 Conclusion: Web3 Lawyers’ Compliance Recommendations

If OTC practitioners still need to deepen their involvement in this field, they must establish a professional compliance barrier. Specifically, this includes but is not limited to:

(1) Extreme enforcement of KYC. Not only verifying the identity card but also verifying proof of the legal source of funds.

(2) Transparency of transaction paths. Avoid using communication tools that may be presumed to be “evading regulation” for core transaction steps.

(3) Physical separation of fund pools. Strictly distinguish personal living funds from business funds to reduce the risk of “one person involved, entire family frozen.”

(4) Maintain a complete chain of evidence. Including transaction background, communication records, statements provided by the other party, etc., as defense evidence for possible future “subjective ignorance” claims.

…

The “new policy” in the crypto circle in 2025 is not a legal overhaul but a thorough upgrade of enforcement logic. OTC traders should realize that the underlying logic of this business has shifted from “resource-driven” to “risk-control-driven.” In the current environment where regulatory intensity exceeds expectations, compliance is no longer just a slogan but the only ticket to stay at the table.