Blockchain Criminal Case 3.0 How to Reduce Illegal Gains? How to Deduct Reasonable Expenses?

Blockchain Criminal Case 3.0 Reducing Illegal Gains and Deducting Reasonable Expenses

I don’t know if Web 3.0 has arrived, but the criminal cases in the cryptocurrency industry have definitely reached 3.0.

Since 2019, I have been specializing in criminal defense cases in the cryptocurrency industry. My general impression is that before the Plustoken case, it could be called “Cryptocurrency Criminal Case 1.0”. At that time, law enforcement officials had a negative attitude towards cryptocurrency-related cases, making the defense work relatively easy. There were more cases where no arrest or prosecution was made. The Plustoken case marked a turning point. In the period that followed, it could be referred to as “Cryptocurrency Criminal Case 2.0”. There were two notable characteristics: first, some regions became more “enthusiastic” about cryptocurrency-related cases; second, law enforcement officials themselves gained a certain understanding of cryptocurrencies. During the defense, I often had phone conversations with law enforcement officials. Based on the results of the cases I handled, overall, the defense of innocence had a good effect, especially during the stage of transfer for examination and prosecution, where many cases obtained insufficient evidence for prosecution. After the release of the “924” notice and a year of fermentation, starting from the second half of 2022, the cryptocurrency criminal cases entered the 3.0 era. There were more private investigation companies involved in the cases than the projects themselves. It is said that “cryptocurrencies die in the cryptocurrency industry”. In addition, with the release of new judicial interpretations on illegal fundraising and constant breakthroughs in the application of law, the coordination between different stages of the criminal process has been improved, leaving little room for the defense of innocence. Of course, this is also related to the cases I represent, mainly involving project parties, exchanges, hackers stealing cryptocurrencies, and crimes committed by individuals in the cryptocurrency industry. I no longer handle traditional cases such as fraud, concealment, and non-disclosure.

I always believe that the role of lawyers is to assist parties in seeking the best solution and should not sacrifice the freedom of the parties for the sake of defending innocence. In the era of cryptocurrency criminal cases 3.0, even if lawyers have many grievances and want to complain (I am prepared to write a separate article specifically to keep this technical article alive), we should still fight for the rights and interests of the parties within the framework of the law. If there is no room for acquittal, we should actively seek economic benefits. Therefore, I have summarized this article based on my opinions that have been accepted by procuratorates and courts in multiple cases and locations. I hope it can be helpful in handling cryptocurrency-related cases.

1. Legal basis (this part can be skipped by insiders)

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Neither the Criminal Law nor the Criminal Procedure Law of our country explicitly stipulates whether the reasonable costs of a crime should be deducted. However, through relevant legal documents, we believe that in the process of applying certain charges, the illegal gains should be accurately calculated by adopting the “profit theory”. Regarding reasonable costs, they should be deducted accordingly.

1. Crime of illegal business operations. According to the research opinions of the Research Office of the Supreme People’s Court on the determination of “illegal gains” in the crime of illegal business operations, relevant departments have sought the opinions of the Research Office of the Supreme People’s Court on the determination of “illegal gains” in the crime of illegal business operations. After research, the Research Office of the Supreme People’s Court believes that the “illegal gains” in the crime of illegal business operations refer to the amount of profits, i.e., the total income obtained by the perpetrator from the illegal production, sale of goods, or provision of services (i.e., the amount of illegal business operations), minus the reasonable expenses directly used for business activities.

2. Crime of illegal absorption of public deposits. According to the new judicial interpretation of illegal fundraising, the amount of fundraising fraud… The advertising fees, intermediary fees, handling fees, kickbacks paid by the perpetrator for carrying out fundraising fraud activities, or expenses used for bribery, gifts, etc., shall not be deducted. We believe that this judicial interpretation prohibits the deduction of reasonable expenses in fundraising fraud crimes, but from another perspective, it should be considered that reasonable expenses should be deducted in the crime of illegal absorption of public deposits. Of course, it is difficult to consider the expenses mentioned such as bribery and gifts as reasonable expenses.

3. Other judicial interpretations supporting the “profit theory” of illegal gains: First, the reply issued by the Supreme People’s Court to the Higher People’s Court of Hubei Province in 1995, “Regarding how to determine the amount of illegal gains in criminal cases of production and sale of counterfeit products,” clearly states: “‘The amount of illegal gains’ as stipulated in the Decision of the Standing Committee of the National People’s Congress on Punishing Crimes of Producing and Selling Counterfeit Goods refers to the amount of profits from the production and sale of counterfeit products.” Second, Article 17 of the “Interpretation on the Specific Application of Laws in the Trial of Criminal Cases of Illegal Publications” issued by the Supreme People’s Court in 1998 clearly states: “‘The amount of illegal gains’ as referred to in this interpretation refers to the amount of profits.” Third, Article 10 of the “Interpretation on the Specific Application of Laws in the Handling of Criminal Cases of Insider Trading and Disclosure of Insider Information” issued by the Supreme People’s Court and the Supreme People’s Procuratorate in 2012 clearly states: “…illegal gains refer to the benefits obtained or the losses avoided through insider trading.”

4. Pyramid scheme cases are common crimes in the cryptocurrency industry, but based on the author’s experience in handling such cases, the responsibility of the defendants is usually determined based on the amount involved, so it does not involve the issues mentioned in this article.

II. Deduction of illegal gains

1. Repurchase. Based on compliance with the white paper’s provisions or to stabilize the token price, project parties usually promise to repurchase at a certain percentage of profits. From the perspective of users, holding tokens is necessary whether it is to reduce transaction fees or earn interest. Therefore, the defense believes that although the profits from this part were obtained briefly, they were immediately spent and should be deducted from the illegal gains (of course, in actual defense, this part needs to be further elaborated in order to be accepted by the judicial authorities, the same applies below).

2. Destruction. Essentially similar to repurchase, those who understand it know it, and there is no need to elaborate further. It is a common deflationary measure aimed at maintaining the token price. Some have been written into the contract. In short, the project party cannot obtain this benefit at all, so it should be deducted from the illegal gains.

3. Commission rebates. Commission rebates can be considered as advertising expenses to a certain extent and should be deducted from reasonable expenses. However, in the common practices within the industry, commission rebates are also clearly stated through programs and mechanisms, and exchanges cannot obtain this benefit, so it should be deducted from the illegal gains.

4. Pledge. In the new judicial interpretation of illegal fundraising, the behavior of “virtual currency trading” has been added. However, not all virtual currency transactions constitute illegal fundraising. From the perspective of the four characteristics of “non-absorption”, the “inducement” is the most crucial. Some projects only promise returns through pledging, so the calculation of illegal gains should be based on the amount of pledging, and other aspects should be deducted.

Three, deduction of reasonable costs

1. Labor costs. In any project, labor costs account for a large part of the cost expenditure. Therefore, it is of great significance to strive for the deduction of this part. Existing multiple precedents have proven that in non-absorption and operational crimes, the deduction of labor costs is supported, indicating that in relevant criminal activities, labor costs are indeed reasonable and necessary expenditures, including salaries, social security, housing provident fund, year-end bonuses, etc. In practice, it is often difficult to obtain support for project dividends.

2. Rental costs for housing. Similar to labor costs, rental costs for housing are also reasonable and necessary expenditures for the project. Once paid, they are permanently lost. Therefore, when calculating illegal gains, rental costs for housing should also be deducted.

3. Service fees. Service fees include a wide range of content, mainly including server-based, tool-based, SMS-based, and other categories. Commonly used servers include Alibaba Cloud, Cloudflare, etc., which are the core devices that support the operation of exchanges. Therefore, the cost of renting servers should be deducted. In addition, interaction between exchanges and users and SMS services are also indispensable. In addition, essential tools include Zendesk, Travis, Google, Ipinfo, Coveralls, Github, Crowdin, etc.

4. Purchase of mining machines and pledged coins. Some projects, such as computing power mining and pledge mining, require the purchase of a large number of mining machine devices, and some require a model of mining machines + pledged coins to produce coins. In this case, in order to operate normally, it is necessary for the project party to purchase equipment and pledged coins, so this part of the expenditure should be deducted.

5. Market advertising and public relations expenses. If a project wants to gain popularity and reputation, it needs to invest a lot in advertising expenses, including project public relations expenses, to attract user participation. Therefore, this expenditure should be recognized as reasonable and necessary.

6. Intermediary service fees. Mainly refers to the work completed by third-party companies, such as security audits, KYC certification, outsourcing services, etc.

7. Office costs. In order to maintain the normal operation of the project, there is a large amount of office cost expenditure, such as computer hardware, office decoration design, electricity expenses, etc. In practice, some judicial authorities do not adopt this opinion on the grounds that hardware equipment, office decoration, etc., although there are expenditures, are not permanently lost. In mining projects, electricity expenses account for a large proportion, and the possibility of adoption by judicial authorities is higher.

8. Foreign investment necessary for the project. Foreign investment can also be understood as advertising and promotion expenses, but in practice, judicial authorities often do not accept it.

IV. Other issues to be aware of

1. Whether it is the deduction of illegal gains or the deduction of reasonable costs, there needs to be objective evidence to support it. It is recommended to communicate with judicial authorities more about the understanding of evidence and evidence standards.

2. When calculating illegal gains and reasonable costs, due to the involvement of fiat currency and virtual currency, and the involvement of RMB and foreign currency in fiat currency, plus the significant exchange rate fluctuations in the past half year, as a lawyer, it is necessary to propose a more favorable solution for the parties involved and convince the judicial authorities to support it. For example, the exchange rate between RMB and USD may vary in the lowest price displayed on different official websites, so the lawyer should submit the most favorable official website price to the judicial authorities.

3. When disposing of virtual digital assets, it is important to focus on whether the OTC price is at a premium or a discount to the RMB exchange rate, and choose a favorable disposal method. When remitting funds back to China through overseas disposal, it is possible to strive for a higher price based on the official exchange rate, but it will generally be calculated based on the buying rate.

4. The law is lagging behind and limited, and it is applied by specific case handlers. Especially in cases where the defendant admits guilt and accepts punishment, the lawyer needs to be diligent in running errands and communicating, and present well-founded proposals in order to strive for the maximum rights and interests for the parties involved.

I still want to chat about something else, but let’s save it for later.

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