In two recent criminal cases involving virtual currencies, we encountered two common problems: the investigative agency (i.e., the public security agency) indirectly or passively participated in illegal financial activities during the case investigation stage by disposing of the virtual currencies involved in the case. For the legitimate rights and interests of the parties, defense lawyers will of course put forward our opinions to the relevant departments.
It seems that in the judicial disposal of virtual currency involved in the case, once the judicial authorities "meet the wrong person" and entrust an unreliable disposal company, it will not only bring hidden dangers to the handling of the case, but also bring risks to the judicial authorities themselves.
1. What is the “unreliable” judicial disposal model?
In a case involving the opening of a casino involving currency, the local public security organ entrusted Company A to conduct judicial disposal of the virtual currency involved in the case. Company A continued to entrust Company B, an overseas company, to conduct the disposal overseas. After Company B completed the disposal, it issued a letter of authorization to its employee "Xiao Liu" (a mainland Chinese), entrusting Xiao Liu to directly transfer RMB (i.e. judicial disposal funds) to the Finance Bureau where the judicial organ is located. The total amount was several hundred million RMB. The figure below is only a small part of the transfer.
In addition to this case, we often see in other currency-related cases that third-party disposal companies entrusted by judicial authorities directly use the domestic RMB payment model in actual disposal business and transfer the disposal funds to the judicial authority’s bank account or special fiscal account. Based on the confidentiality requirements of information in criminal cases, we have coded the payer, payee, transaction amount, serial number and other information.
This mode of directly using domestic RMB for payment is the most primitive and non-compliant way of handling. According to current regulatory requirements, it is the most unreliable and purest illegal financial activity .
II. The distance between judicial disposal and illegal financial activities
The reason why "judicial disposal" is named "judicial" is because it is a judicial activity. The property attributes of virtual currencies, especially mainstream virtual currencies (such as Bitcoin, Ethereum, Tether, etc.), have been widely recognized in China's current criminal justice practice. Just like traditional property involved in the case, such as real estate, vehicles, and even stocks and bonds, judicial disposal can be carried out.
However, virtual currency is different from traditional property involved in a case.
According to the "9.24 Notice" ("Notice on Further Preventing and Dealing with the Risks of Virtual Currency Speculation Transactions") issued by ten national ministries and commissions (the two high courts, one ministry, the central bank, the State Administration of Foreign Exchange, etc.) in September 2021, all virtual currency-related business activities in mainland China are illegal financial activities and must be strictly prohibited and resolutely banned in accordance with the law. Those who engage in related illegal financial activities that constitute a crime will be held criminally liable in accordance with the law.
So what are the virtual currency-related business activities?
The first is the exchange business of legal currency and virtual currency ;
The second is the exchange business between different virtual currencies;
The third is to buy and sell virtual currencies as a central counterparty;
4. Providing information intermediary and pricing services for virtual currency transactions;
The fifth is to conduct token issuance financing (i.e. ICO) and virtual currency derivative transactions.
For judicial disposal, it is essentially to convert the virtual currency involved into legal tender, and then impose fines on the converted legal tender. Based on the provisions of the "9.24 Notice", judicial organs cannot directly exchange the virtual currency involved in the case with legal tender. In practice, they entrust third-party companies to do so, and third-party companies cannot directly exchange virtual currency with legal tender. The common operation mode at present is that third-party companies entrust overseas disposal entities to dispose of and convert the virtual currency into legal tender overseas (in practice, there are also disposal methods such as overseas auctions or direct recycling of virtual currency by the issuing company).
The most basic knowledge point here is: no matter which disposal model is used, virtual currency and legal currency cannot be exchanged/cashed out in China, and it must be entrusted to individuals to transfer RMB, because this model is essentially a domestic individual directly purchasing virtual currency from the judicial authorities. Once a disposal company does this, it is actually engaging in illegal financial activities . For the judicial authorities that cooperate with such disposal companies, they have collected funds exchanged through illegal financial activities, or actually sold the virtual currency involved to individuals in the country. They should be identified as directly or indirectly involved in illegal financial activities. According to the provisions of the "9.24 Notice", the legal consequences are that they should be "strictly prohibited and resolutely banned in accordance with the law; those who conduct related illegal financial activities that constitute a crime shall be held criminally responsible in accordance with the law."
3. Advice from web3 lawyers
As a web3 criminal defense lawyer, Lawyer Liu strongly recommends that judicial authorities should be extremely cautious in cooperating with third-party technology companies and disposal companies in handling criminal cases involving virtual currencies. We also understand that some judicial authorities, especially grassroots judicial authorities, may not have professional technical knowledge of virtual currencies and blockchains, so they need the assistance of third-party companies, but this assistance should be established within the scope of laws, regulations, and regulatory policies.
If the judicial authorities ignore compliance and believe that the inherent correctness of combating criminal offenses can overcome the violations or even illegalities in judicial disposal, then once they encounter a professional web3 criminal lawyer (Lawyer Liu does not dare to call himself a professional, but he is qualified), he will definitely bring up the illegal acts in the judicial disposal activities for argument, and the judicial authorities will inevitably fall into an embarrassing situation.
