Week In Crypto: US Indicts Chinese Firms For Drug Trafficking Using Tether

October 6, 2023
The US reveals a major sting of suspected Chinese drug traffickers who take payments in crypto, Ripple swerves an appeal from the US Securities and Exchange Commission, and Circle throws Binance a lifeline in court.

The US reveals a major sting of suspected Chinese drug traffickers who take payments in crypto, Ripple swerves an appeal from the US Securities and Exchange Commission (SEC), and Circle throws Binance a lifeline in court.

The US Department of Justice (DOJ) has unsealed eight indictments accusing Chinese companies and individuals of using cryptocurrency to traffic drugs into Mexico and the United States.

Filed by the Middle and Southern Districts of Florida, the indictments charge eight Chinese companies and 12 Chinese nationals with multiple crimes related to the production of fentanyl and methamphetamine.

Each indictment names a Chinese company as its lead defendant, and each company purports to be in the business of shipping, medicine, pharmaceuticals or biotechnology.

The cases were all built by undercover agents who posed as buyers, and who used WhatsApp to arrange shipments of precursor chemicals to either Mexico or the US.

The agents found that all of the alleged drug traffickers accepted cryptocurrency as a payment method, with Tether’s USDT stablecoin being the asset of choice among them.

All of the wallet addresses linked to the defendants were passed by the DOJ to the Office of Foreign Assets Control (OFAC), where they have now been designated as sanctioned.

CryptoArgos, a blockchain analytics firm, analysed the defendants’ wallet addresses and found that each has a long history of transacting through major crypto exchanges.

All of the defendants had received USDT using wallets hosted by OKX, and the outbound USDT was mostly sent from wallets hosted by KuCoin, OKX and Binance.

Moreover, ChainArgos found that the defendants transacted six times more USDT using the Tron blockchain than the Ethereum blockchain.

“The difference in volume is striking,” said ChainArgos. “Either the fentanyl dealers on Tron are better at their job, or there is a clear preference for using USDT on Tron over Ethereum.”

The most active of the defendants was Zhang Wei, a Chinese national who is said to be a director of Hubei Guanlang Biotechnology.

Between 2021 and 2023, Wei received almost 200 USDT transfers with a total value of almost $700,000.

The eight indictments are not the first time the US government has highlighted the use of cryptocurrency by Chinese drug traffickers.

Last December, Senator (D-MA) Elizabeth Warren made a presentation on fentanyl trafficking to the Senate Banking Committee, using research from blockchain analytics firm Elliptic.

According to Elliptic, more than 90 Chinese companies had received over $27m in crypto payments in 2022, and had shipped enough precursors to produce $54bn worth of fentanyl.

In August, Warren and Senator (R-KS) Roger Marshall reintroduced their bipartisan Digital Asset Anti-Money Laundering Act.

Among its provisions, the act would require US persons receiving $10,000 or more in digital assets from an “offshore account” to declare the transaction to the Internal Revenue Service (IRS).

Ripple triumphant after SEC appeal rejected

A district court judge has rejected an appeal from the SEC against Ripple’s landmark victory over the regulator in July this year.

Judge Analisa Torres of the Southern District of New York rejected all elements of the SEC’s appeal and rejected the SEC’s call for a stay on remedies litigation.

As per the judge’s order, the SEC appealed against the court’s ruling that “programmatic” sales of Ripple’s XRP on public exchanges could not “lead investors to reasonably expect profits from the efforts of others”.

In addition, the SEC appealed against the court’s ruling that Ripple’s distribution of XRP as a “form of payment for services” was legally insufficient to constitute an “investment of money”.

In the appeal, the SEC argued that the court had applied a different standard to XRP than that applied to LUNA and TerraUSD, both issued by Terraform Labs, in a judgement in July this year.

Torres disagreed, arguing that there are significant differences between the two cases.

In the Terraform Labs case, the defendants had stated explicitly that the proceeds of token sales would be “fed back” into the Terra blockchain ecosystem and would “generate additional profits” for token holders.

In contrast, Ripple did not make such statements to those who bought XRP through “programmatic” (i.e., blind sales) on public exchanges.

With both elements of the appeal rejected, Torres said the SEC should prepare for its related charges against Ripple executives Brad Garlinghouse and Christian Larsen to go to trial in April 2024.

Circle comes to Binance’s aid in SEC lawsuit

Finally, this week stablecoin issuer Circle came to the defence of crypto exchange Binance in its ongoing battle with the SEC.

In June, the SEC charged several Binance entities and CEO Changpeng Zhao with offences including fraud, market manipulation and unregistered securities violations.

Of interest to Circle is the SEC’s claim that Binance offered BUSD, a dollar-backed stablecoin, as an “investment contract” and therefore as a security.

From 2019 to 2023, the SEC alleges that Binance offered and sold BUSD as part of various profit-earning schemes within the Binance ecosystem.

Binance “touted” the returns that investors could make from buying BUSD or from deploying it in a profit-generating staking programme such as Binance Earn, the SEC said.

Circle has objected to the SEC’s characterisation of BUSD, and has filed an amicus curiae (“friend of the court”) brief to state its views.

“Payment stablecoins, on their own, do not have the essential features of an investment contract,” said Circle.

“They do not independently give buyers any potential for profit, and certainly not based on the efforts of the stablecoin issuer.

“As a result, the SEC has no jurisdiction over such stablecoins, absent additional factors that turn the sale of the stablecoin into an investment contract.”

Circle added that the court should be mindful of pending legislation on stablecoins which, if passed, would conflict with the SEC enforcement action.

In August, the House Financial Services Committee passed the bipartisan Clarity for Payment Stablecoins Act, which would remove the SEC from stablecoin regulation and is now headed to Congress for a final vote.

“The court should be especially cautious before extending SEC enforcement authority over BUSD,” said Circle.

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