Introduction: From last year to this year, there has been a proliferation of "U-card" products on the market, which are being increasingly understood and used by more and more people. So, can "U-cards" be legally used in mainland China, and what are the worst-case legal consequences that may be involved? Through researching relevant information, the author will provide a small analysis here. If there are any errors, corrections from experts are welcome.
What is a U-card
A U-card is actually a virtual or physical card issued by the U-card platform that has the functions of a traditional bank card. The highlight of these cards is that they can be recharged with USDT and then used for daily consumption. Chinese users can also bind third-party payment platforms such as Alipay and WeChat.
The above image is an introduction from a well-known U-card institution's official website.
U-card institutions usually implement a relatively relaxed KYC policy, and Chinese citizens can also apply with their own identification documents such as ID cards and passports. However, some platforms refuse to issue cards to Chinese citizens due to compliance issues. After going through identity verification, facial recognition, and other processes, the platform will mail the physical card to the applicant in China. For ordinary users, the main drawback is the high transaction fees, estimated to be around 4%-5%, and sometimes even as high as 7%.
How U-cards work
According to the author's understanding, at least the following processes are required for offline or online consumption using U-cards:
(1) Have a U-card;
(2) Have USDT (some platforms also support other currencies) and transfer it to the wallet address of the U-card (usually done through a mobile app, such as using centralized exchanges like Binance or cold wallets to transfer USDT to the bank app of the U-card);
(3) Use the U-card for offline card swiping or cash withdrawal. At this time, the U-card issuing platform (such as RedotPay) will exchange USDT for the corresponding fiat currency (RMB, USD, EUR, etc.) based on the market exchange rate;
(4) The U-card issuing platform and the bank that handles the offline business (the bank connected to the cash withdrawal or consumption store) conduct international clearing and settlement.
In other words, when domestic cardholders recharge USDT into U-cards and use them for consumption, the merchants receive RMB, and there is no exchange between virtual currency and fiat currency involved. This exchange process has already been completed by the U-card issuer overseas.
Legal risks of U-cards?
Firstly, for the platform issuing U-cards, their role is somewhat similar to virtual currency exchanges, as they provide services for users to exchange USDT for fiat currency. Of course, actual virtual currency exchanges have more functions. Similar to the U-card service provided by RedotPay, it is only part of the business of the exchange. However, according to the Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation (Yinfa [2021] No. 237), it clearly states that:
(3) Overseas virtual currency exchanges that provide services to residents within China through the internet also engage in illegal financial activities.
However, although exchanges like Binance and OKEx are prohibited from providing services to residents within China, various virtual currency exchanges still meet Chinese regulatory measures through technical means (such as blocking mainland IP addresses, prohibiting mainland KYC), and there are still mainland residents who use services like Binance, Huobi, and U-cards through various methods. Therefore, theoretically, these platforms comply with relevant laws and regulations in mainland China, subjectively do not provide virtual currency services to residents in mainland China, and do not constitute illegal activities.
Another issue is jurisdiction. Even if overseas virtual currency exchanges violate China's regulatory policies and provide services to mainland China, it is difficult for Chinese regulators to enforce laws outside their jurisdiction, including cross-border enforcement against the issuing banks of international U-cards.
U-cards also have their own uniqueness: firstly, the business of U-cards exchanging virtual currency for fiat currency does not comply with the regulatory policies in mainland China; secondly, mainland China currently does not explicitly prohibit mainland residents from using international U-cards; finally, international U-cards require international interbank settlement, which means that Chinese banks need to cooperate with the issuing banks of U-cards to complete a complete transaction.
Once Chinese regulators decide to prohibit the use of U-cards in China, a simple and effective way would be to prohibit international clearing and settlement between mainland Chinese banks and the issuing banks of U-cards. However, this would result in a complete disconnection from international banks, as U-cards are backed by card organizations such as Visa, Mastercard, and Discover. According to current Chinese policies (such as the Notice on Further Optimizing Payment Services in the Commercial Field and Enhancing Payment Convenience issued by the People's Bank of China, the Ministry of Commerce, and the State Administration of Foreign Exchange on April 18, 2024), it can be seen that China is still opening up to other card organizations.
Secondly, for domestic U-card users, as long as they do not engage in illegal activities using U-cards, they generally do not have legal risks. It can be understood that most users of exchanges (without engaging in illegal activities involving virtual currencies) do not have significant legal risks. Even in cases of illegal activities, these exchanges will actively cooperate with mainland Chinese police in investigations and freezing of assets.
Some viewpoints analyze that individual use of U-cards may constitute illegal business activities due to illegal foreign exchange transactions. However, based on the spirit of "fewer arrests, cautious prosecution, and cautious detention" conveyed by the Supreme People's Procuratorate and the Supreme People's Court, such cases would only constitute crimes under special circumstances, if at all. For ordinary U-card holders, after exchanging their RMB for USDT, and then withdrawing funds in foreign currencies (such as USD, EUR) from the U-card, it is difficult to argue that this constitutes illegal foreign exchange transactions in normal circumstances (such as when the exchanged funds are less than 5 million RMB). (As for whether it violates administrative regulations, the author holds a conservative opinion, but this viewpoint does not constitute advice to readers on purchasing or using U-cards); as for large-scale foreign currency exchanges using U-cards (exceeding 5 million RMB), there is indeed a significant risk of criminal liability, especially when U-card holders cannot prove the source and purpose of the funds, or when it involves illicit money, it is easy for the public security organs to initiate criminal investigations.
Finally, for promoters and technical supporters of domestic U-cards, they face the greatest legal risks among the three parties. According to the Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation (Yinfa [2021] No. 237), it states that:
For the domestic personnel of relevant overseas virtual currency exchanges, as well as legal and non-legal entities and individuals who are aware of or should be aware of their engagement in virtual currency-related businesses and still provide them with marketing, payment settlement, technical support, and other services, their relevant responsibilities shall be pursued in accordance with the law.
Final thoughts
Here, I quote the viewpoint of a lawyer. From a pessimistic perspective, as the number of U-card users in mainland China increases, there is a possibility that it will attract strong attention from judicial authorities, ultimately leading to a ban on U-cards in mainland China. From an optimistic perspective, the judicial supervision of U-cards will likely remain the same in the near future, especially if existing cardholders adopt a low-key approach of "making money quietly". However, regardless of whether one is optimistic or pessimistic, under the current regulatory policies, once someone commits a crime based on the convenience of U-cards, especially if it involves a major crime that attracts public attention, the space for U-cards in mainland China will undoubtedly be severely restricted. The future of U-cards in China is still uncertain.