A recent Reuters article has again attracted the attention of cryptocurrency lawyers and some scholars to the judicial disposal of virtual currencies. As a web3 criminal lawyer who has paid attention to judicial disposal earlier, Lawyer Liu (web3_lawyer) has had in-depth exchanges with some disposal companies and public security organs on how to legally and compliantly dispose of the virtual currencies involved in the case in practice. Based on the current new situation, Lawyer Liu wrote this article to talk about the research on the compliance path of judicial disposal.
1. The necessity of judicial disposal of virtual currency
From the perspective of judicial authorities, there are two common judicial disposal methods for virtual currencies involved in criminal cases: one is that before the court makes a judgment, the public security and judicial authorities dispose of the seized virtual currencies involved in the case and realize the cash; the other is that after the court judgment of the criminal case takes effect, the public security and judicial authorities dispose of the virtual currencies involved in the case. Both disposal modes have corresponding legal basis, which will not be repeated in this article.
Let’s focus on why there is judicial disposal of virtual currency.
Mainland China's regulatory policies on virtual currencies were gradually tightened before 2021. On September 15, 2021, ten ministries and commissions jointly issued the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" (referred to as the "9.24 Notice"), which basically laid the foundation for my country's attitude towards virtual currencies since September 2021. These include:
(1) Bitcoin, Ethereum, Tether and other virtual currencies are not legal tender and should not and cannot be circulated as currency in the market;
(2) It is strictly prohibited for domestic entities to engage in virtual currency and legal currency exchange business, currency-to-currency transactions, and provide pricing and information services for virtual currency transactions;
(3) Overseas virtual currency exchanges are strictly prohibited from providing any services within my country.
Thus, a contradiction arises. In criminal cases involving virtual currency, the property involved is represented by various types of virtual currency, and is also seized as property/evidence involved in the case; for future cases where property involved needs to be confiscated (pyramid scheme crime, casino opening crime, illegal business crime, etc.), based on the provisions of the aforementioned "9.24 Notice", the court cannot rule to confiscate the virtual currency involved in the case and return it to the state treasury. The virtual currency must be disposed of and converted into legal currency.
However, China strictly prohibits anyone from exchanging virtual currency for legal tender. This is an irreconcilable contradiction between the need to dispose of virtual currency in judicial activities and the prohibition of exchanging virtual currency for legal tender in mainland China . This contradiction determines that all legal virtual currency judicial disposal business in China must be conducted overseas .
2. Common Disposal Modes at Present
Based on my experience in communicating with different disposal companies in practice, I have concluded that the current disposal models are as follows:
The first is the domestic + overseas joint disposal model. This is the most common disposal model at present. After the domestic disposal company signs a commission contract with the judicial authority/suspect, it entrusts the overseas disposal entity to carry out the actual disposal. The overseas disposal entity must comply with local laws, regulations and regulatory requirements, and have the financial qualifications for the exchange (trading) of virtual currency and legal currency. Then the overseas entity will remit the legal currency realized by the disposal to the account of the domestic disposal company, and finally the domestic disposal company will settle the disposal proceeds and remit them to the account of the judicial authority or the special non-tax account of the finance.
The second is to dispose of it in free trade zones at home and abroad. At present, there are also companies in China that register in free trade zones jointly developed by China and foreign countries. Because the trade zones are subject to the laws of both countries, they can avoid the disadvantage that China cannot conduct virtual currency transactions. The final disposal needs to be carried out through auction. After signing a contract with the disposal company, the judicial authorities with disposal needs need to take the virtual currency to the company's registered place (that is, in the trade zone) for actual auction. The highest bidder wins. The final disposal company will transfer the auction proceeds into the country through bank settlement.
The third is to dispose through overseas banks . Another disposal model is to cooperate directly with overseas banks that are qualified to exchange virtual currencies for legal tender. After the bank converts the virtual currency into legal tender, it will transfer the legal tender into the country.
Fourth, the overseas virtual currency issuer recovers the virtual currency and disposes of it in cash. In 2023, the Shandong Provincial Department of Finance issued a document (Notice on the "Shandong Province Confiscated Items Disposal Work Procedures (Trial)", Lu Caishui [2023] No. 18), which stipulates that law enforcement agencies can negotiate with the virtual currency issuer for the disposal of confiscated virtual currency, and the issuer can recover it, and the recovery price shall not be less than 80% of the value of the virtual currency. This has led to a model in practice. For centralized virtual currencies (such as the most common USDT Tether), some disposal companies have the ability to negotiate with Tether to recover the USDT involved in the case and pay the disposal company a legal currency of not less than 80% of the value of the recovered virtual currency, and then the disposal company will convert the legal currency into RMB.
3. Exploration of Compliance Disposal Model
Since 2020 (or even earlier), the judicial disposal of virtual currencies has gone through three stages: disposal 1.0, disposal 2.0, and disposal 3.0. Of course, the three periods here are all based on the first model mentioned above. There are no obvious signs of iteration in the second, third, and fourth models mentioned above.
In the disposal 1.0 period, domestic disposal companies used RMB to directly purchase currency from judicial authorities. According to the provisions of the "9.24 Notice", this is essentially an illegal financial activity; in the disposal 2.0 period, modern disposal companies began to appear in China, and the actual disposal business took place overseas, but it was not necessarily legally and compliantly disposed overseas (for example, overseas virtual currency transactions are also prohibited; or virtual currency is sold to overseas individuals, and anti-money laundering and anti-terrorist financing reviews cannot be conducted, etc.). At the same time, when the disposal cash funds are settled in the country, they are generally settled in the name of goods trade, service trade, capital account, etc., which does not conform to the real settlement background and violates the relevant regulations of the State Administration of Foreign Exchange; in the disposal 3.0 era, the aforementioned problems have been basically solved, but some details still need to be optimized, such as how to determine the benchmark price of virtual currency transactions, the lack of legal opinions issued by domestic + overseas law firms, the lack of on-chain transaction appendixes for overseas virtual currency transactions, and the monitoring mechanism to prevent the return of the involved virtual currency to the country afterwards, etc.
In summary, for the current compliance disposal model, we tend to adopt a domestic + overseas joint disposal model, and at the same time, we need to improve the compliance of foreign exchange settlement, overseas transaction compliance, legal compliance, blockchain technology compliance, etc. Lawyer Liu will discuss the details in subsequent articles or videos.
4. Final Thoughts
At present, it is difficult for the judicial disposal of virtual currency to be handled uniformly by a certain department or institution of the state as some people predict or expect, because there are huge financial and judicial ownership issues behind it. Even at present, cases in cities and prefectures do not have to be reported to provincial departments, or even if provincial departments or ministries know about it, it is difficult to directly reach out and take away local cases. These current situations cannot be solved or explained by any law or legal work. For us, it is beyond the control or influence of lawyers. What we can do is to serve our clients well and ensure that every disposal business is legal, compliant, safe and efficient, and has no sequelae.
