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 scenarios in terms of legal consequences? Based on the information obtained through research, the author will provide a small analysis, and welcomes any corrections from experts if there are any errors.
What is a U Card
A U Card is actually a virtual or physical card issued by the U Card platform that has the functionality of a traditional bank card. The highlight of these cards is that they can be recharged with USDT, and the cardholder can then use it for daily expenses. Chinese users can also bind third-party payment platforms such as Alipay and WeChat to their U Cards.
The above image is an introduction from a well-known U Card institution's official website.
U Card institutions usually have relatively relaxed KYC policies, and Chinese citizens can also apply with their ID cards, passports, and other documents. However, some platforms refuse to issue cards to Chinese citizens due to compliance issues. After going through the identity verification and facial recognition processes, the platform will mail the physical card to the applicant in China. For regular 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
Based on the author's understanding, at least the following steps are required for offline or online consumption using U Cards:
(1) Have a U Card;
(2) Have USDT (Tether) or other supported cryptocurrencies, and transfer them 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 U Card's banking app);
(3) Use the U Card for offline card payments or cash withdrawals. At this point, the U Card issuing platform (such as RedotPay) will convert the USDT into 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 transactions (the bank connected to the cash withdrawal or merchant) will conduct international clearing and settlement.
In other words, when domestic cardholders recharge USDT into the U Card and use it 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 that of a cryptocurrency exchange, as they provide services for users to exchange USDT for fiat currency. Of course, actual cryptocurrency exchanges have more functions. Similar to the U Card service provided by RedotPay, it is only a part of the exchange's business. However, according to the Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation (Yinfa [2021] No. 237) issued by the China Banking and Insurance Regulatory Commission, it is explicitly mentioned that:
(3) Overseas virtual currency exchanges providing services to residents within China via the internet also constitute illegal financial activities.
However, although exchanges like Binance and OKEx are prohibited from providing services to residents within China, various cryptocurrency exchanges still find ways to meet regulatory measures in mainland China through technical means (such as blocking mainland IP addresses and prohibiting mainland KYC). Therefore, theoretically, these platforms comply with relevant laws and regulations in mainland China and subjectively do not provide virtual currency services to residents within China, thus not constituting 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 converting virtual currency into fiat currency by U Cards does not comply with the regulatory policies in mainland China; secondly, mainland China has not explicitly prohibited 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 for the completion of a complete transaction. If Chinese regulators decide to ban 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. Based on current policies in mainland China, such as the Notice on Further Optimizing Payment Services in the Commercial Sector 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:
Strengthen cooperation with banking and financial institutions, non-bank payment institutions, and clearing institutions, optimize international services, enrich multilingual services, multiple payment options, and other product features, and enhance the payment experience for online shopping.
It can be seen that mainland China's policies towards other card organizations are still in the process of opening up.
Secondly, for domestic users of U Cards, as long as they do not engage in illegal activities using U Cards, they should not face legal risks in principle. It can be understood that the current users of exchanges (who do not engage in illegal activities involving virtual currencies) basically do not have significant legal risks. Even in cases of illegal activities, these exchanges will actively cooperate with mainland Chinese police in investigations, tracking, and freezing of assets.
Some viewpoints analyze that individuals using U Cards may potentially be involved in illegal foreign exchange activities, which could constitute illegal business crimes. 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 regular U Card holders, after exchanging their RMB into 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 activities 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 view 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 the funds are suspected to be illicit, it is easy for the public security organs to initiate criminal investigations.
Finally, for promoters and technical supporters of U Cards within mainland China, 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) issued by the China Banking and Insurance Regulatory Commission:
For the domestic personnel of relevant overseas virtual currency exchanges, as well as legal persons, non-legal persons, and individuals who are aware of or should be aware of their engagement in virtual currency-related businesses and still provide marketing, payment settlement, technical support, and other services, their relevant responsibilities shall be pursued in accordance with the law.
Final Thoughts
Here, I would like to 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 unchanged in the near future, especially if existing cardholders adopt a low-key approach to their activities. 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 leads to a major crime that attracts public attention, the space for U Cards in mainland China will undoubtedly be greatly restricted. The future of U Cards in China remains uncertain.