Exploring the Hidden Corner of USDT Drug Trafficking, Online Gambling, Money Laundering

USDT Uncovering Drug Trafficking, Online Gambling, and Money Laundering

Recently, the “Anti-Fraud Publicity Film” “All-In” set in northern Myanmar has been released, which has also sparked interest in the cryptocurrency mentioned in the film, Crypto. At the same time, it has drawn attention to the connection between crypto and the black market. This is not something new. As early as many years ago, “USDT money laundering” became a key target for law enforcement. This article takes you back to the in-depth investigation article by DeepTechFlow in 2020, taking you into the hidden corner of USDT.

Cryptocurrencies like USDT are becoming a “green channel” for collecting illegal funds.

“Compared to WeChat and Alipay transfers, the flow of cryptocurrency has no verifiable information. Both buyers and sellers are safe.” a person involved in drug-related activities wrote on their self-built blog website.

• Do the sender and receiver need to be online at the same time? Low capital efficiency? Dispelling six misunderstandings about the Lightning Network.
• TG BOT Rising Upstarts in Blockchain Marketing and Grassroots Counterattack, Security Issues Await Resolution
• 10 Steps to Enhance Encryption Security

Cryptocurrency is a great experiment in financial history. 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 decentralization and hard currency, but it also planted a time bomb. Due to its anonymity, it has gradually become a favorite of criminals, with USDT being the most popular.

USDT is not only limited to buying and selling drugs, but it is also used in black industries such as online gambling, money laundering, and capital flight.

DeepTechFlow interviewed and investigated individuals involved in the cryptocurrency black market chain, attempting to reveal the hidden corner of USDT.

Buying Cannabis with USDT

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

Zhou Xiao claimed that because of Bitcoin, people who buy “weed” from him don’t have to worry. Buying Bitcoin on an exchange requires real-name authentication, but this can only prove that you have bought Bitcoin (invested in Bitcoin). As for where the Bitcoin went and why it went there, “no one knows unless you voluntarily disclose it.”

“You can say that you have seen the bullish trend of Bitcoin this year and have invested in some Bitcoin for fun. Then you transferred it to your other Bitcoin wallet. I wrote the password for the other wallet on a piece of paper, but I lost it. I’m still looking for it these days,” he explained.

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

There are not a few people like Zhou Xiao who use cryptocurrency to buy and sell drugs and “earn a living.”

According to a report by Justice Net, a couple in Changchun City used a Bitcoin address to collect and transfer drug-related funds.

The wife, Liu, gave her Bitcoin account to her husband, Ma. Ma used the account to collect drug-related funds and transferred the funds to Liu’s bank card, totaling over 100,000 yuan.

The prosecutor, after reviewing the case, believes that Liu, knowing that Ma was selling drugs, still provided a Bitcoin account for Ma to collect drug money and transfer it through bank cards, which meets the elements of money laundering.

On January 20th of this year, the court accepted the sentencing proposal from the prosecution, with Ma being convicted of drug trafficking and sentenced to three years and two months in prison, and Liu being convicted of money laundering and sentenced to six months in prison.

The reason Zhou Xiaozhi has been able to evade the law is because his Bitcoin address is difficult to trace. He stated that his Bitcoin address is generated in bulk offline through elliptic encryption algorithm, generating addresses and corresponding keys at will without any restrictions.

Zhou Xiaozhi has chosen three types of cryptocurrencies for transfers: Bitcoin, USDT, and his own E-RMB.

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

USDT is a cryptocurrency launched by Tether, which is pegged to the US dollar. 1 USDT = 1 USD, which means that for every issued USDT token, there is a guarantee of 1 USD in the bank account.

Recently, he also prepared to launch the electronic Renminbi, E-RMB. He explained that this currency has significantly improved security and privacy, with a stable value anchored to a 1:1 exchange rate with the Renminbi, and is only available to old users who have made purchases.

More and more people like Zhou Xiaozhi, who are proficient in cryptocurrencies and flexibly utilize them, are emerging in the gray market. They operate on the edge of the law, earning money using cryptocurrencies’ anonymity.

The Gray World of Cryptocurrencies

“I have 900,000 U (USDT) in my account.” Aiba (alias) operates an offline casino in Mong La, Myanmar. He told the author that he needs to convert cash into foreign currency or USDT every day.

According to Chainalysis report data, from July 2019 to June 2020, over 50 billion US dollars’ worth of cryptocurrencies were transferred from East Asian addresses to overseas addresses, with over 18 billion US dollars being USDT.

Cryptocurrencies serve three main purposes in the gray industry: drug trafficking, online gambling, and capital flight. This is a secretive gray industry chain with a mix of good and bad.

As an example of cross-border transfers, a user on Zhihu described their process for cross-border transfers in 2016: buying Bitcoin on a domestic exchange, transferring it to Bitfinex, and before withdrawing, the platform requires authentication of personal information, including filling in ID cards, passports, and address proof as instructed. After withdrawal, the platform charges a 0.1% fee, with a minimum of $20. This completes the entire process of Bitcoin cross-border remittance.

Insiders told TechFlow that the above operations are practical, and they have tried to send Chinese addresses to US exchanges, exchange them for US dollars, and transfer them to US accounts, “but this is only an example”.

If the above operations are limited to personal exploration and individuals need to bear the risks themselves, with the popularity and development of digital currencies, there is now an industrial chain of using cryptocurrencies for cross-border remittances.

“We deal with US dollars and Australian dollars.” Ji Nan (pseudonym) said that he provides services for converting USDT into fiat currencies (remittances) and only needs to “inform us of the receiving bank, whether it is a private account or a public account, which bank it is registered with, and in which region it is registered. It will be credited within one working day”. If the client is an individual account, it will be done in the name of borrowing or owing money, and if the client is a public account, it will be done in the name of labor remuneration.

Ji Nan introduced that compared to traditional bank telegraphic transfers, which can take weeks and have fees as high as 5%, the fees for USDT transfers are lower (close to 0) and the transfers are instant.

“The minimum is 5,000 (USDT), there is no upper limit, and if a single transaction exceeds 1 million (USDT), just let me know in advance.” Ji Nan said that the typical purpose of customer transfers is for US stock trading or buying houses and immigrating.

Compared to the “simple” operations used for cross-border transfers mentioned above, professional criminal gangs involved in cryptocurrency have a more secretive and vast operation.

The term “run scores” originated from performance tests of computers or mobile phones, but in the field of payments, it has a new meaning.

In the past, online gambling platforms would purchase a large number of bank cards to collect money. However, doing so is costly—it costs hundreds or thousands of yuan to acquire one bank card. Once the bank card is frozen, the money is lost.

After 2018, “run score” models began to emerge. Many run score platforms appeared on the market, which greatly reduced the cost of money laundering through crowdsourcing. These run score platforms claim that “as long as you have a QR code, you can make money while lying at home”.

Run score players deposit money (such as 10,000 yuan) into run score platforms and upload their WeChat and Alipay QR codes. Recharging players transfer money to run score players through payment platforms, and once the amount reaches 10,000 yuan, the run score is completed. The run score platform will give run score players a certain percentage of commission and transfer the 10,000 yuan deposit to the gambling platform.

“It’s similar to Didi, which transports funds. Didi transports people, and we transport money.” A run score person explained that in the entire process, the gambling platform does not participate in the flow of funds, and the run score players become tools for money laundering.

USDT run score is a new model of run score payment using digital currencies. Traditional run score models involve RMB, while USDT run score involves USDT.

The above run score person explained that the biggest advantage of USDT run score is decentralized trading, “the transactions are between customers and our drivers (acceptance merchants), and there is no fund pool in between, which effectively prevents funds from being frozen on a large scale. Moreover, with USDT as a barrier in the middle, the entire process is a traceless transaction and cannot be traced to the destination. Our transaction volume is large and well-distributed.”

“We provide deposit and withdrawal services for gambling platforms.” A person familiar with the matter on QQ said that they earn commissions by trading with the cryptocurrency USDT. “You can earn a commission of 150 to 200 yuan for every 10,000 yuan of principal, which is directly deposited into your bank account.”

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

“There are some legitimate scalping opportunities, but they are rare. More than 90% are scams or Ponzi schemes.” Aiba said, even in face-to-face transactions, they can suddenly disappear.

The law is strict and comprehensive, and a crackdown on cryptocurrency money laundering is imminent.

Crackdown Imminent

“It’s not as rampant as before.” Aiba explained that recently, things have become more difficult, and he no longer accepts USDT transactions. Instead, he uses cash to exchange for foreign currency at 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 each year, specifically mentioning the use of cryptocurrencies to transfer gambling funds.

“In recent cases, we have found that some gambling groups collect and transfer gambling funds using virtual currencies. They even engage in online gambling in some areas of Myanmar under the guise of investing in virtual currencies. These new types of digital currency channels are difficult to freeze and trace, which brings great challenges to our efforts to combat and govern them.”

Since the beginning of this year, the whole country has carried out a vigorous campaign against money laundering and card termination.

On October 10th, the Inter-Ministerial Joint Conference of the State Council for Combating and Governing Telecom Network New-Type Illegal and Criminal Activities deployed the “card termination” action nationwide to crack down on illegal operations and sale of phone cards and bank card-related crimes.

And cryptocurrency is undoubtedly a key area of focus. Some OTC cryptocurrency traders have also been affected, with their bank accounts frozen or investigated.

According to the Criminal Law’s criteria for filing money laundering cases, those who “provide funding accounts” for money laundering activities will be prosecuted and face a maximum penalty of “imprisonment for more than five years but less than ten years, and a fine of no less than five percent but no more than twenty percent of the laundered amount.”

On June 8th of this year, the Huizhou police cracked down on a criminal gang that operated a fourth-party payment platform using the cryptocurrency USDT. They arrested 76 suspects and investigated four network payment studios and two online gambling groups involved in the case.

This case is the first case in the country to use the 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, involving an amount of 120 million yuan.

TechFlow discovered 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, all of them use USDT without exception.

Is USDT the culprit?

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

According to a Chainalysis report, in June of this year, USDT surpassed Bitcoin and became the most popular cryptocurrency in East Asia. Among them, China accounts for 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 191-fold leap.

Where are these rapidly issued USDT used?

As early as July 2019, Coindesk reported a case of USDT being used for cross-border trade in Russia, where “20% of the sales are in Bitcoin, and 80% are in USDT.” A Russian OTC trader said, “Chinese companies can buy a total of 10 to 30 million US dollars worth of USDT per day.”

In fact, USDT has become the most “out-of-the-box” cryptocurrency and is closely linked to the gray market. Criminal incidents related to USDT are becoming more and more prominent. According to data from the Chinese Prosecution Network, there have been 85 cases of USDT-related criminal cases this year, compared with only 5 cases before 2020.

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

The European Union officially 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.

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

Returning to China, Article 22 of the draft amendments to the Law of the People’s Bank of China, which was announced on October 23, 2020, stipulates: “No unit or individual shall create or issue tokens and digital tokens to replace the circulation of RMB in the market.”

As mentioned above, USDT has already replaced the status of the RMB legal tender in the fields of cross-border transfers, money laundering, and the gray market, and is de facto fiat substitute for Chinese cryptocurrency users.

Will USDT collapse? When will it collapse? This is a question that hangs over the head of every cryptocurrency user.

In the eyes of some geeks, technology is innocent and only used by ill-intentioned people. However, the increasing number of cryptocurrency crime cases reminds us that technology cannot completely absolve the responsibility of human nature’s evil.

“The Genie is out of the Bottle.” This is how Ted Rogers, the CEO of Bitcoin wallet company Xapo, describes the BCH fork war. This proverb originates from the story of Aladdin’s magic 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 like USDT.

“Bitcoin is inherently missioned with deleveraging and hard currency. USDT is the source of high leverage in exchanges. It’s theoretically a good thing for more people to use a currency, but if its use is limited to illicit activities and speculation, should we examine the original intention of cryptocurrencies?” commented Pan Chao, the head of MakerDAO China.

(Respecting the opinions of interviewees, Zhou Xiao, Ai Ba, and Ji Nan are all pseudonyms.)

We will continue to update Blocking; if you have any questions or suggestions, please contact us!