China arrests $28 million digital yuan money laundering case


China appeared to be leveraging the “managed anonymity” feature of its digital yuan to combat money laundering, as Chinese police this month arrested a criminal group allegedly involved in money laundering. worth nearly 200 million yuan ($28 million) using e-CNY – the country’s new central bank digital currency (CBDC) being tested.

Police in Longyan, a prefectural city in southeast China’s Fujian Province, said on Sunday they arrested 20 suspects last week on suspicion of illegal business operations and money laundering using e -CNY, as part of a law enforcement campaign titled “Hundred-action du jour.

Police said the suspects used e-CNY and virtual tokens to offer illegal funds settlement services for overseas gambling and telecommunications scam activities.

The move underscores efforts by the People’s Bank of China (PBoC) to require e-CNY wallets that hold higher balances and engage in larger transactions to go through a know-your-customer (KYC) process to support what the central bank calls “managed anonymity”. .”

“They are definitely the dumbest thieves in the world,” Richard Turrin, a Shanghai-based fintech consultant who posted “Cashless: the digital currency revolution in China,” Told Forkast.

Turrin said there was no practical way for a criminal to effectively launder the digital yuan because authorities could track transaction history if they got a warrant.

Since last year, e-CNY scams and money laundering cases have emerged across China as police have begun investigating digital flows of yuan to solve money laundering cases. money and fraud in Inner Mongolia, Jiangsu and Henan.

China has also stepped up its e-CNY testing. By the end of May, the country had recorded more than 264 million yuan-denominated digital transactions, with a total value exceeding 83 billion yuan, according to official data released in July.

Apart from e-CNY crimes, the world’s second largest economy has seen a large amount of illicit fund flows involving cryptocurrencies. On Monday, Chinese police said they busted a major criminal group believed to be behind a 40 billion yuan ($5.6 billion) crypto money laundering case and arrested 93 suspects across the country.

Although China banned cryptocurrency trading in September 2021 to crack down on what it calls a sector that has disrupted economic and financial order, the country has still claimed 10th place on Chainalysis’s 2022 list of top crypto adoption countries released earlier this month.

The PBoC said on Monday that it continues to clamp down on crypto trading on the Chinese mainland and that its global share of Bitcoin trading volume has declined significantly. The central bank, however, did not disclose how much the size of crypto trading has shrunk.

Taming money laundering

In a white paper published in July 2021, the PBoC noted that e-CNY is not a 100% anonymous system, but supports “managed anonymity” with levels of complexity based on KYC needs while protecting user privacy and information.

Mu Changchun, managing director of the PBOC’s digital currency institute, has made it clear that complete anonymity will never be a feature of his CBDC. Mu wrote in an article published on local media Modern Bankers on Thursday that the central bank has designed four types of e-CNY wallets in a way that adheres to the principle of “anonymity for small values ​​and traceability for large values. values”.

The type 4 wallet, which can be set up simply with a mobile phone number, only allows up to 2,000 yuan for a single transaction. Transactions through these types of wallets, in Mu’s words, are anonymous, as holders do not need to link bank accounts.

However, in the event of theft or fraud, authorities could obtain a warrant to uncover the identity of those e-CNY users, Turrin said.

“If a criminal gang specialized in low value theft – less than 2,000 yuan – authorities would (still) be able to unmask their identity through digital means,” Turrin added.

Find the right balance

Mu said anonymity on the basis of risk control is what central banks around the world have generally agreed to.

Mu wrote in the article that CBDCs will only be used for illegal purposes if authorities do not pay attention to privacy protection without proper monitoring and control.

Turrin said recent guidance documents issued by US and European authorities have made it clear that there will be no 100% anonymous digital dollar or digital euro. “This is not a position unique to the PBoC,” Turrin added.

Amnon Samid, managing director of Israel-based cybersecurity firm BitMint, which helped develop the e-CNY trials in 2018, said Forkast that in the first digital yuan pilot project in 2018 in Shanghai, there was a “controlled anonymity” tested, which examined levels of anonymity from zero to 100%.

But later it was changed to “managed anonymity”, which is designed to prevent personal information from being obtained by traders or third parties not authorized by law, Samid added.

“Freedom without control is not true freedom,” Mu wrote.

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