How is the amount of criminal offenses determined when an NFT digital collection platform is involved?

How are criminal offenses determined in an NFT digital collection platform?

Considering that different crimes have different standards for calculating the amount of criminal proceeds and whether deductions can be made in judicial practice, in line with the principle of practicality, in this article we analyze three common crimes frequently involved in domestic NFT digital collectible platforms as examples.

There is always a question that cannot be avoided in every NFT digital collectible case investigated by the public security, which is how much is the amount of the criminal offense?

This question is not only of concern to the parties involved, but also to the public security. Previously, Lawyer Liu Honglin, director of Mankun Law Firm, conducted a detailed study on this issue and provided countermeasures (see the article: “How is the amount of criminal offenses determined when NFT platforms are criminally filed?”). Based on this, this article will continue to expand on this topic and provide a summary. Your feedback is welcome.

Considering that different crimes have different standards for calculating the amount of criminal proceeds and whether deductions can be made in judicial practice, in line with the principle of practicality, in this article we analyze three common crimes frequently involved in domestic NFT digital collectible platforms as examples.

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01. How is the amount calculated for the crime of illegal business operation?

According to the Criminal Law, the amount of criminal proceeds in the crime of illegal business operation is the illegal gains. According to the Research Opinion on the Determination of “Illegal Gains” in the Crime of Illegal Business Operation issued by the Research Office of the Supreme People’s Court in 2012, the “illegal gains” in the crime of illegal business operation refers to the “amount of profit”, which means all income obtained by the perpetrator through illegal production, sale of goods, or provision of services (i.e. the amount of illegal business operation), minus the reasonable expenses directly used for business activities.

Therefore, if an NFT platform constitutes a crime of illegal business operation due to the lack of certain qualifications or approval from relevant departments, the “profits” generated by subtracting the operating expenses (operating costs) from the operating income are considered as the illegal gains of the crime of illegal business operation. The rental of the operating premises and the cost of labor wages can be deducted as they belong to the reasonable expenses directly used for business activities. In addition, based on the characteristics of NFT platforms, some network expenses (such as cloud services, website fees, advertising and promotion expenses, etc.) should also be deducted.

In formula, it can be expressed as: Amount of criminal offense = Total operating income – Reasonable operating costs.

02. How is the amount calculated for the crime of fraud?

According to the popular theory of criminal law, the purpose of criminal law is to protect legal interests, and the essence of a crime is to protect legal interests. Therefore, the crime of fraud protects public and private property. Therefore, the amount of the crime of fraud should be reflected in the actual losses suffered by the victims. For example, Article 9 of the “Interpretation of the Supreme People’s Court on Several Issues concerning the Specific Application of Laws in the Trial of Disturbing the Order of the Telecommunications Market” implemented on May 24, 2000, stipulates: “If a person uses false or impersonated identity documents to complete the procedures for network access and uses a mobile phone, causing significant losses in telecommunications fees, the crime of fraud shall be punished in accordance with Article 266 of the Criminal Law.”

However, cybercrime has a wide spread, high concealment, and difficulties in collecting evidence. After the cases occur, it is impossible to verify and calculate the actual losses of the victims one by one. Therefore, the “Opinions of the Supreme People’s Court, Supreme People’s Procuratorate, and Ministry of Public Security on Several Issues Concerning the Application of Laws in the Trial of Telecommunications Network Fraud Cases” (Fa Fa [2016] No. 32), issued on December 19, 2016, stipulates that in handling telecommunications network fraud cases, due to the objective conditions such as a large number of victims, it is not possible to collect statements from each victim. Instead, it can be combined with the collected victim statements, as well as verified evidence such as bank account transaction records, third-party payment settlement account transaction records, call records, electronic data, etc., to comprehensively determine the number of victims and the amount of fraud.

However, this leads to the issue of which type of data should be used to determine the amount of fraud funds. Is it the user’s recharge amount? The sales amount in the primary market? Or the transaction flow in the secondary market? In addition, what amounts can be deducted?

We believe that the above situation depends on the specific analysis of the NFT platform project. For example, in the case of secondary transactions between users, settlements are usually made directly between users, and the flow of funds is from user to user. The platform usually only charges 6% to 8% of the transaction amount. It is somewhat inappropriate to consider the total transaction amount as “criminal proceeds.” Therefore, according to the opinion of Lawyer Mankun, due to the special nature of Factor藏 platform, the “criminal proceeds” of Factor藏 platform can be determined as the company’s operating income from a financial perspective, that is, the sales revenue of primary collectibles + sales revenue of non-collectible items such as whitelist + transaction fee revenue from user-to-user transactions. Only in this way can it better comply with the industry’s characteristics and logic.

In addition, the funds refunded before the crime occurred should be deducted from the criminal proceeds. For example, the handling of refund complaints from some users and the complete refund of the entire project by the Factor藏 platform are also supported by the “Minutes of the National Court’s Symposium on the Trial of Financial Crime Cases” in 2001.

03. How to Calculate the Amount of Non-Fraudulent Crimes?

In the crime of illegally absorbing public deposits, the amount of the crime generally refers to the amount of funds illegally absorbed or disguised as public deposits. According to the Interpretation of the Supreme People’s Court on the Specific Application of Laws in the Trial of Criminal Cases of Illegal Fundraising, the amount is calculated based on the full amount of funds absorbed by the perpetrator, often based on the direct investment amount by the user.

Regarding the deduction of the amount of criminal proceeds in the crime of illegally absorbing public deposits, the following points need to be noted:

1. If it is not publicly advertised and funds are collected from specific targets within relatives or within the organization, it does not belong to illegal absorption or disguised absorption of public deposits and should be deducted;

2. The amount of funds that participants in the fundraising scheme recover their principal or receive returns and then reinvest should not be deducted but can be considered as a sentencing factor;

3. The amount of funds invested by the suspect himself and his immediate family should be deducted;

4. Funds recorded under the suspect’s name but not actually involved in absorption and not receiving any form of benefit should be deducted.

Returning to the perspective of operating digital collections, some digital collection platforms will launch buyback activities. For example, if a user spends 100 yuan to purchase a certain collection, the official promises to repurchase it at a specific price as long as the user holds it in lock-up for a certain period of time. In this case, there is a higher risk of being suspected of non-sustainable criminal legal risks.

In this case, we believe that it is more appropriate to determine the amount involved based on the sales revenue in the primary market, because this is where the funds are raised. As for price speculation among users, the increased amount should not be considered as the amount of criminal involvement.

04. Summary

The less the amount of criminal involvement is determined, the lighter the sentence will be.

When the nature of the case is unchangeable, it is extremely important to reasonably determine the amount of criminal involvement through a detailed analysis of the company’s operating situation. In economic cases, the amount of criminal involvement often determines whether there is innocence or non-prosecution, whether bail or probation is possible, and the amount of fines in the judgment. This should be the focus of attention for NFT digital collection entrepreneurs in pre-compliance or post-criminal involvement.

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