What are the common charges involved in NFT digital collectible platforms?

What are the typical fees associated with NFT digital collectible platforms?

Source: Lawyer Liu Honglin

In the past two years, there have been numerous criminal cases involving NFT or digital collectibles. Fraud is the most common charge, and it is also the easiest to be sentenced for a heavy punishment. This is because many platforms easily exceed 500,000 RMB in the amount involved in the case (some platforms have investments that easily reach millions or even tens of millions). Once the fraud amount reaches 500,000 RMB, the sentence is usually more than 10 years, firmly falling into the category of a serious crime.

However, a recent judgment from the Minhang Court in Shanghai regarding a digital collectibles platform case concluded with the charge of collective fundraising fraud, and the defendants Xiao Zhang and Xiao Liu were given a suspended sentence. Compared to the frequent appearance of fraud charges in the world of digital collectibles, Xiao Zhang and Xiao Liu can be considered lucky in a certain sense.

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Today, Lawyer Liu will talk about the possible charges that a digital collectibles platform may face if involved in criminal activities, and what are the differences between these charges.

01 Why are digital collectibles platforms involved in criminal activities?

The main reason for the involvement of digital collectibles platforms in criminal activities is the non-compliance of their operations. Based on several similar cases represented by Lawyer Liu, the problematic platforms are mainly focused on opening secondary markets, and all or part of them have the following issues:

(1) Self-buying and Selling, Malicious Speculation

Some platforms would “purchase” digital collectibles by themselves or through their employees, and wait for the opportune moment to sell them at high prices. This moneymaking scheme essentially scams ordinary users and can be considered a crime of fraud under criminal law, as it involves “illegally possessing property for the purpose of unlawful gain”.

(2) Manipulation of Supply

They would promote the products as limited editions to the public, but in reality, the platform retains some of the collectibles and waits for the prices to rise before selling them. This situation is essentially the same as the previous one and may also involve the crime of fraud.

(3) False Intellectual Property

They use false claims of owning intellectual property rights as a gimmick to attract attention. They would claim to be well-known artists in a certain field, but in reality, they are just art technicians whose work can be easily found on certain online platforms for less than 100 RMB. Some even blatantly “borrow” other artists’ works. These actions can easily constitute infringement of intellectual property rights or even criminal offenses.

(4) False On-chain Information

The biggest difference between digital products or NFTs and traditional electronic images is their uniqueness and their place on the blockchain. However, in practice, we have found that some platforms claim to issue NFTs but do not actually put them on the blockchain, or provide fake blockchain addresses to deceive inexperienced users. These behaviors also constitute the crime of fraud.

(5) Incomplete Qualifications

We know that to operate a digital asset platform, especially one with a secondary market, at least three qualifications are required: ICP and EDI operating licenses, online literature permit, and blockchain information service filing. Of course, it would be great to have additional registrations or licenses, such as art trading registration or auction operating license. However, reality is often harsh, and some platform operators have nothing but a passionate “childlike heart” for digital assets. Although incomplete qualifications do not necessarily lead to police investigations, once it involves criminal offenses, it’s too late for remedies, and it is often difficult for lawyers to find favorable arguments.

02 What crimes are typically associated with digital asset platforms?

Currently, the main crimes related to digital asset platforms in practice are three: fraud, fundraising fraud, and illegal absorption of public funds.

(1) Fraud

Fraud is the most frequently triggered crime for non-compliant digital asset platforms. What is fraud? The “Criminal law” does not directly define it. According to the general understanding of ordinary people, it means deceiving others for money. Legal practitioners may judge whether the perpetrator’s behavior involved “fabrication of facts, concealment of the truth, causing the victim to fall into a mistaken understanding, and the victim disposing of property based on the mistaken understanding, resulting in the victim losing the property, and the perpetrator or a third party gaining the property”.

The reason why fraud is often charged is because many operations in the digital asset space are perceived by the judicial authorities as having the purpose of “deceiving others of their property”. Common scenarios include the above-mentioned “rat trading,” malicious speculation, large-scale issuance, and other behaviors.

Once convicted of fraud, the sentencing is usually severe. According to current regulations, if the amount involved is between 3,000 and 10,000 RMB, a sentence of less than 3 years can be imposed (specific standards may vary by province). If the amount involved exceeds 500,000 RMB, a sentence of more than 10 years can be imposed. We know that once a digital asset platform is involved in criminal activities, it is easy to reach amounts exceeding 500,000 RMB.

(2) Illegal absorption of public funds

Digital asset platforms may issue a few thousand to tens of thousands of copies of a collection. Some platforms explicitly promote high returns, which can easily trigger the crime of illegal absorption of public funds. This crime requires four conditions: illegality, publicity, inducement, and sociality. Illegality means violating national financial regulatory provisions in absorbing funds; publicity means publicly promoting through media; inducement means promising to repay principal and interest or provide returns; and sociality means that the funds collected are from the general public (in contrast, fundraising among relatives and friends does not constitute this crime).

The Shuzang platform does not have a financial license and promotes through public networks. The fundraising targets are the general public, and the platforms that run into trouble often entice with high returns and profits. When these four characteristics are met, if it is determined by judicial authorities to disrupt the national financial order, it is likely to constitute a crime. According to regulations, as long as the amount of illegal absorption exceeds 1 million or the number of illegal absorptions exceeds 150 persons, or if the direct loss caused to depositors exceeds 500,000, one of these conditions, it could be sentenced to less than 3 years in prison.

(III) Fundraising Fraud

This is the charge of the Minhang Court in this case. The key behaviors of the perpetrator include fabricating IP sources, publicly promoting high returns to unspecified individuals through the internet, self-buying and self-selling, and artificially increasing transactions. The crucial point is that the platform eventually stops renewing the servers and runs away after closing the platform. This is the main difference between the crime of illegal absorption of public funds and fundraising fraud: the purpose of whether there is illegal possession of the raised funds. The crime of fundraising fraud is committed by the perpetrator with the intention of not repaying the funds raised illegally, while the perpetrator of the crime of illegal absorption of public funds does not have this intention.

If the perpetrator closes the platform, disappears, and refuses to refund, it is very likely to be identified as fundraising fraud by judicial authorities. The threshold for this crime is that as long as the amount of funds raised exceeds 100,000 yuan, it could be sentenced to 3 to 7 years in prison.

03 Conclusion

The Shuzang market has been in a downward trend for the past two years, but the more the market is in recession, the more it needs to adhere to the bottom line of compliance. Otherwise, it will only lead to the expulsion of good actors by bad actors, and the digital investment industry will completely cool down. As a criminal lawyer, Liu suggests that all Shuzang platforms should pay attention to avoiding the red-line behaviors mentioned above. Even if they have to exit due to poor management, they should develop reasonable refund plans to avoid mass rights protection incidents and involvement in criminal activities.

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