At the beginning of this month, the People's Procuratorate Magazine published an article titled "An Analysis of the Judicial Disposal of Virtual Currency Involved in Cases" written by Prosecutor Bao Jian and others from the Yuhang District People's Procuratorate of Hangzhou City, Zhejiang Province. The article elaborated on the current status of judicial disposal of virtual currency in my country, the causes of the difficulties in judicial disposal, and the suggestions for judicial disposal models. As a lawyer with some experience in judicial disposal research in China, Liu Zhengyao (web3_lawyer) made a brief analysis of the aforementioned article, especially a comprehensive analysis of the disposal model suggestions mentioned in the aforementioned article.
1. Current Status of Judicial Disposal of Virtual Currency
In the prosecutor's view, there are currently five ways to deal with virtual currencies involved in Chinese judicial practice:
The first type is that in cases where the victim's property needs to be returned, the court orders the defendant to directly return the virtual currency;
The second type is still a case where compensation to the victim is required, and the court orders the defendant to pay the victim an equivalent amount of RMB;
The third option is that the public security organs will dispose of the seized virtual currency first, and the court will decide to confiscate the liquidated funds;
Fourth, the judicial authorities adopt alternative methods and do not directly deal with the virtual currency involved;
The fifth type is that the court does not clearly state the disposal of the virtual currency involved in the case in its judgment, or expresses it in a vague way. The prosecutor said that this situation is the most common.
According to Lawyer Liu’s experience in handling criminal cases in the cryptocurrency industry, the first situation is actually rare. The main reason is that there is still no unified conclusion on whether virtual currency is property under my country’s criminal law. Although some judicial officials have begun to believe that virtual currency, especially mainstream virtual currency (such as BTC, ETH, USDT, USDC, etc.), should be considered property under my country’s criminal law, rather than just computer information system data; however, there are still many judicial officials who do not agree with the property attributes of virtual currency;
The second situation mentioned above is common when the victim's RMB is defrauded/stolen/robbed, and the defendant converts the victim's money into virtual currency. At this time, when the court returns the compensation, the court will return the victim the "corresponding" virtual currency (not the "equivalent" virtual currency), because the second situation still involves the need for judicial disposal of the virtual currency involved, and it can only be returned after it is converted into RMB. Once it involves judicial disposal, there will inevitably be value loss, and it is definitely impossible to return the equivalent value. Take a simple example: Zhang San was defrauded of 900,000 RMB by Li Si, and Li Si used the defrauded money to buy a BTC. After Li Si was finally arrested, the BTC was also seized. At this time, the court either returns the BTC seized by Zhang San (actually the first situation mentioned above), or returns the RMB converted from the disposal of a BTC to Zhang San. In practice, even if the price of Bitcoin does not fluctuate during the case handling period, the price of a BTC after judicial disposal cannot be equal to its market price (i.e. 900,000 yuan), because the disposal agency also charges a certain amount of handling fees.
The third situation is actually more common in practice. There are no victims in this case, and the money involved will eventually be returned to the state treasury.
The fourth situation is that the prosecutors are not clear about the description. For example, what kind of alternative means are they? Does “avoiding direct disposal of virtual currency” mean indirect disposal of virtual currency?
Lawyer Liu agrees with the fifth situation and the prosecutor’s conclusion: the current judicial disposal of virtual currencies involved in the case is “far from forming a relatively unified standard” in practice. In fact, based on my experience in representing cases, I can clearly say that there are still some judicial authorities that deal with the virtual currencies involved in the case through illegal financial activities (such as directly engaging in the exchange of virtual currencies and legal tender within the country).
II. Dilemma of Judicial Disposal and Prosecutors’ Suggestions
1. Dilemma of Judicial Disposal
Regarding the above-mentioned disposal status, the prosecutor also raised what he believed to be the practical difficulties of judicial disposal, such as lack of control measures, improper storage methods, and different execution methods. In fact, this is only part of the reason, not the fundamental reason.
The lack of control means is not a problem of the judicial organs or even the professional technology companies (investigation companies) that cooperate with the judicial organs. This is determined by the characteristics of blockchain technology or virtual currency. From this perspective, technology is beyond the law, and it is impossible to have an omnipotent control method that can manage suspects/defendants in an obedient manner (even if the judicial organs use torture to extract confessions illegally).
Lawyer Liu fully agrees with the prosecutor's views on the problems existing in the storage and execution methods.
2. Suggestions for future judicial disposal
Regarding the judicial disposal of virtual currency, prosecutors believe that two principles should be adhered to:
First, centralized disposal . To avoid local judicial organs acting independently, the Ministry of Public Security can take the lead in establishing a national or provincial "virtual currency liquidation management platform".
The second is official disposal . Prosecutors do not approve of the current model of judicial organs entrusting third-party companies to handle the situation, and believe that banks should be responsible for the virtual currency monetization business.
3. Are the prosecutor’s suggestions reliable?
Let me first state the conclusion: the prosecutor’s suggestion is extremely unreliable.
First of all, we must make it clear that among China's current regulatory policies on virtual currencies, the latest, strictest and most authoritative one is the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" jointly issued by ten ministries and commissions (including the "two high courts and one ministry") on September 15, 2021. The regulation clarifies the following: Any entity in mainland China is prohibited from engaging in the exchange of virtual currencies and legal currencies . So how can we talk about establishing a domestic management platform or banks directly engaging in the cash conversion business of virtual currencies and legal currencies?
Secondly, the current third-party disposal is not done by third-party companies directly purchasing virtual currencies from judicial authorities. Strictly speaking, domestic compliant third-party disposal companies should be called "agent disposal companies". After domestic third-party agent disposal companies accept the entrustment of judicial authorities/defendants or suspects, they will transfer the entrustment to overseas compliant entities for disposal, avoiding the direct cash-out business of virtual currencies and legal currencies by domestic entities (even if domestic companies go overseas for disposal and cash-out, it is a violation of the aforementioned "Notice");
Finally, judicial disposal is not just a legal issue, but also involves complex issues such as finance, taxation, and central-local relations. It is difficult to say who can directly take away the case source for disposal. Of course, given my country's strong top-down administrative power, the "upper" can indeed require the "lower" to hand over the case source for unified disposal. However, this will also lead to grassroots judicial organs having no motivation to crack down on crimes involving virtual currency, and ultimately lead to higher-level organs having no cases to deal with.
This seems like a paradox, but it is also reality.
