Chinese authorities in Sichuan province have intensified their crackdown on underground banking networks, focusing on large-scale transactions involving Tether’s USDT stablecoin. This operation revealed an extensive scheme designed to evade national foreign exchange regulations and facilitate illicit currency exchanges totaling nearly $2 billion.

According to local reports, the suspects in this scheme used USDT to bypass China's strict foreign exchange controls, establishing illicit settlement channels for foreign exchange transactions. This crackdown led to the closure of two significant underground banking hubs in the Fujian and Hunan provinces. The investigation spanned 26 provinces across China, resulting in the arrest of over 190 suspects nationwide.

Sichuan, once a prominent hub for the crypto industry due to its abundant and inexpensive hydropower, attracted Bitcoin miners seeking low-cost energy for their operations. However, the landscape drastically changed following Beijing’s comprehensive ban on all cryptocurrency mining and transactions. This ban forced miners to cease operations and shifted the focus of illicit activities to underground finance schemes.

In late 2023, the Supreme People’s Procuratorate (SPP) and the State Administration of Foreign Exchange (SAFE) highlighted the rising trend of criminal cases involving stablecoins. These digital currencies, which are backed by fiat currencies, have become a preferred intermediary for yuan trading with other currencies in illegal foreign exchange transactions. Authorities underscored the need for stringent measures to curb the misuse of stablecoins in facilitating unlawful financial activities.

The recent crackdown in Sichuan is part of a broader effort by Chinese authorities to tighten control over financial transactions and enforce compliance with national regulations. The use of USDT in underground banking schemes underscores the challenges regulators face in monitoring and controlling digital currency flows within and across national borders. This case highlights the ongoing tension between the innovative potential of digital currencies and the imperative for robust regulatory oversight to prevent financial crimes.