Legal expert Shao Shiwei provides an in-depth analysis of the legal boundaries surrounding ‘U merchant’ cross-border arbitrage activities involving virtual currencies like USDT, specifically examining when such actions may constitute the crime of illegal business operations. Virtual currency-related criminal cases are transitioning from a niche area to a focal point in judicial practice. Disputes over the legal classification of activities such as ‘virtual currency crimes,’ ‘illegal business operations,’ and ‘USDT trading’ are garnering increased attention. This analysis draws upon recently published typical cases and practical experience to explore the legal qualification, defense strategies, and judicial trends pertaining to this issue. **Case Analysis: Why USDT Trading is Deemed Illegal Business Operations** The 2022 case of Zhao et al. (the Zhao Dong case) handled by the Xihu District People’s Court in Hangzhou, Zhejiang Province, is a representative instance where cross-border virtual currency arbitrage was classified as illegal business operations. This case was also listed as a typical case for punishing foreign exchange-related crimes by the Supreme People’s Procuratorate and the State Administration of Foreign Exchange. The official case briefing indicates the defendant’s modus operandi involved cross-border ‘arbitrage’ through buying and selling USDT, leading to prosecution for illegal business operations. This initially suggests that any virtual currency cross-border arbitrage activity involving currency exchange for profit might fall under this charge. However, legal scrutiny reveals evolving judicial interpretations. A 2024 case from Jiangsu Province (Lin and Yan) clarified that the core issue is not the ‘arbitrage’ form itself, but whether the activity实质上 constitutes providing unauthorized foreign exchange services for others using virtual currency as a medium. Further refinement is seen in a December 2025 review published by the Shanghai No. 2 Intermediate People’s Court. It emphasizes a nuanced approach, distinguishing between personal investment/trading and operational activities that provide currency conversion services, advocating for a case-by-case analysis based on the behavior’s essence. **Determining the Boundary: Operational Activity vs. Personal Arbitrage** The key to distinguishing between legal arbitrage and illegal business operations lies in a detailed assessment of the specific circumstances. Lawyer Shao emphasizes that high frequency, scale, or team-based operations do not automatically equate to ‘operational’ activity in the criminal law sense. The crime of illegal business operations requires two core elements: 1) the activity has an ‘operational’ nature, and 2) it is conducted for profit. ‘Operational behavior’ typically refers to planned, organized, and managed economic activities that consistently provide goods or services to the market. **Guidelines for Assessment:** * **Likely Personal Use/Investment (Non-Operational):** Activities motivated by personal investment needs or profit from virtual currency price differences across markets; sporadic, non-continuous transactions with non-fixed counterparts; funds and currency circulating within personal accounts. * **Likely Illegal Business Operations:** Activities where the individual provides unauthorized foreign exchange conversion or payment settlement services for profit; profit stems实质ively from exchange rate differences or fixed service fees; involves long-term, organized ‘foreign currency ↔ virtual currency ↔ RMB’ conversion services for others; utilizes pools of third-party accounts to match and settle funds across borders. Lawyer Shao illustrates this with a defended case where surface features (long duration, high frequency, team structure) suggested illegality. However, a detailed factual analysis revealed critical differences: the defendant was not acting on others’ instructions to provide conversion services, did not manage a capital pool for clients, and profits came from market price differences, not service fees for facilitating forex transactions. This led to a successful application for bail pending trial on grounds of ‘unclear facts and insufficient evidence.’ Regarding the question of whether charging service fees automatically constitutes a crime, the analysis concludes that the determinative factor is the substantive nature of the service provided, not the mere act of charging a fee. However, in practice, such fee-charging models carry significant criminal risk due to varying interpretations by law enforcement. **Risk Advisory** For ‘U merchants’ engaged in cross-border arbitrage, this remains a high-risk endeavor. The risk stems not only from policy but from significant uncertainty and disparity in understanding across different regional judicial authorities. Activities in this grey area require extreme caution and a thorough assessment of potential legal liabilities.