Tens of thousands of companies have difficulty opening bank accounts. How to pay for trade between China and Russia?

Author: Lawyer Liu Honglin

Before the Mid-Autumn Festival, Lawyer Liu Honglin of Mankun Law Firm had a business exchange with a bank friend who specializes in Russian foreign trade settlement. This bank is currently the only institution in mainland China that supports Sino-Russian trade settlement. In his words, their business is now "overflowing". How overflowing? There are currently nearly 30,000 companies waiting in line to open accounts... It's so busy that even acquaintances can't get through.

As a core executive of the company, he is now actively exploring how to better solve the cross-border payment and currency settlement problems between Chinese and Russian merchants under the premise of compliance. So, under the recommendation of a friend, he found Lawyer Honglin, hoping to jointly explore virtual currency as a transit solution for cross-border payments.

Russia overturned the table of US dollar hegemony

Faced with sanctions from Western countries, Russia had to find another way. On July 30, 2024, Russia passed the Digital Currency Cross-Border Payment Act and the Crypto Mining Legalization Act, which marked that Russia will use digital currency to achieve a new breakthrough in cross-border payments under global financial sanctions. From September 1, 2024, Russia will allow the use of digital currency for cross-border settlement and transactions under an experimental legal framework. In addition, cryptocurrency mining will also be legalized in November, which provides Russia with an additional source of digital assets to ensure that it is more autonomous in international payments.

From the understanding of lawyer Honglin, this is equivalent to borrowing Bitcoin mining to allow Russia to achieve self-production and self-sale of gold minerals in the crypto world. It can sell them as soon as they are dug out, thereby circumventing the financial sanctions that the United States has imposed on it.

For countries that are also subject to sanctions, Russia's approach undoubtedly provides a reference. Countries that have long been subject to sanctions, such as Iran, have also begun to explore similar digital currency application paths, hoping to bypass the blockade of the Western financial system. Virtual currency has gradually become a tool to circumvent traditional financial sanctions around the world, and countries are using this technical means to strive for more economic and financial autonomy.

At the same time, Western countries have shown a high degree of vigilance against this move. The U.S. Treasury Department issued a warning that it will further strengthen supervision of virtual currency transactions to prevent countries and companies from evading sanctions through virtual currency. Well-known cryptocurrency exchanges such as Binance have also been subject to strict US regulation, and some users have used virtual private networks (VPNs) to hide their identities and continue to trade in sanctioned countries, triggering a strong reaction from Western regulators.

What kind of experience and lessons can China learn from such a financial war? In recent years, China-Russia trade has continued to expand, and the use of the RMB in Russia has reached an unprecedented high, accounting for almost 99.6% of the Russian foreign exchange market. China has been promoting the internationalization of the RMB. It is still a question mark what kind of strong solution support the digital RMB and the Hong Kong dollar stablecoin (HKDG) can provide in the future. Drawing on Russia's experience, China may be able to use virtual currencies more flexibly for cross-border payments, further promote the internationalization of the RMB, and ensure the security and stability of the financial system.

How can Chinese companies comply with the new trend?

Although virtual currencies provide new options for cross-border payments, their anonymity and complex regulatory environment also bring many risks. In the past few years, the bank accounts of many foreign trade companies in China have been frozen, often because they received black money through informal settlement channels. This situation is more common in the use of virtual currencies. Due to its decentralization and anonymity, companies may receive illegal funds without knowing it, leading to serious legal and compliance risks.

When making cross-border payments with Russia, the use of virtual currencies is not without risks. When using virtual currencies such as USDT, companies need to pay special attention to whether the funds received come from legal channels. Previously, in an online exchange between Honglin Lawyer and OKLink, a well-known security service provider in the industry, it was emphasized that the review of virtual assets and on-chain risk investigation services are an indispensable part of the cross-border payment process. If enterprises want to conduct cross-border settlement through virtual currency, they must strengthen the compliance review of on-chain assets to ensure that the source of funds is legal and safe.

From the daily research and practice of lawyer Honglin and colleagues at Mankun Law Firm, when considering cross-border settlement of virtual currency, Chinese foreign trade enterprises can start with the following four aspects of compliance:

1Building of overseas structure

Due to the regulatory policy of mainland China on virtual currency transactions, mainland enterprises will inevitably face the dilemma of exchanging virtual currency with RMB after directly receiving virtual currency. From the perspective of compliance, the safer way is to conduct it in overseas regions that are friendly to virtual currency. By completing the receipt and exchange of virtual currencies in these regions, the funds are transferred back to mainland China through legal and compliant foreign exchange settlement channels. This method not only meets China's regulatory requirements, but also reduces the risk of funds in international transfers.

2Operational details of receiving and paying USDT

When using USDT for cross-border payments, companies need to pay special attention to the legality and security of funds in operations. The virtual assets and legal currencies of both parties to the transaction should be subject to strict compliance review to ensure that there is no inflow of black market funds. In addition, KYC (Know Your Customer) and KYT (Know Your Transaction) are also necessary steps to prevent money laundering and other illegal activities by reviewing the identity and transaction behavior of the other party.

3Safe custody of cryptocurrency

The way of custody of cryptocurrency is directly related to the financial security of the enterprise. It is recommended that enterprises use multi-signature wallets, cold wallets or professional custodian service providers to keep digital assets. This can not only prevent assets from being stolen by hackers during the transfer process, but also prevent losses caused by poor management. Multi-signature wallets can set multiple authorized persons to jointly manage assets to increase security, while cold wallets store assets offline, greatly reducing the risk of being attacked by hackers.

4Introduction of global regulatory policies and compliance lawyers

Although virtual currencies provide a convenient way for cross-border payments, the regulatory policies of countries around the world on virtual currencies are constantly changing. In this complex environment, companies need to pay close attention to changes in relevant policies to prevent possible compliance risks. For companies that frequently use virtual currencies for cross-border payments, it is recommended to hire lawyers who are familiar with cryptocurrency regulatory policies, provided that the compliance budget allows. Compliance lawyers can help companies sort out the legal frameworks of countries around the world, ensure transaction compliance, and reduce legal risks in operations.

Attorney Mankiw's Conclusion

Russia's adoption of the Digital Currency Cross-Border Payment Act is not only a strategy to deal with international sanctions, but also an important milestone in the development of global digital currencies. For Chinese foreign trade companies, the application of virtual currencies in cross-border payments provides new ideas, but the accompanying legal and compliance risks cannot be ignored. Companies must act prudently under the premise of compliance, and ensure the safety of funds and reduce unnecessary legal risks through a sound review mechanism, reliable partners and professional legal advisors.