Virtual Currency Judicial Disposal Merchants How to Ensure Their Own Security?

Ensuring Security for Virtual Currency Judicial Disposal Merchants

Author: Lawyer Liu Honglin

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Introduction

In criminal cases, how to handle virtual currencies involved in the case is a topic that the judicial theory community will provide various logically rigorous arguments for. However, in practice, pragmatic law enforcement agencies (especially the public security agencies) will not be bound by various “claims and arguments” style legal theories. The reason is simple: in the eyes of the public security agencies, once a case is prolonged, it will only be more detrimental to themselves, so it must be resolved. As long as this act of disposal, procedure does not clearly violate the law, even if it is illegal, but the legal consequences of the disposal are obviously better than the legal consequences of not disposing, the public security agencies will choose to dispose.

In the current process of disposing virtual currencies involved in the case for realization, it is inevitable to involve third-party disposal companies. Since we say that the disposal of virtual currencies by public security agencies is a “necessary step in handling the case”, does this mean that third-party disposal companies necessarily come with a “legal aura” in the process of cooperation with public security agencies? The answer is definitely no.

Lawyer Liu has come into contact with many third-party disposal companies in the process of handling cases, and many people have concerns about the security of their own situation. Based on this, Lawyer Liu wrote this article as a practical reference for third-party disposal companies, but not as specific business advice.

01 Why must virtual currencies involved in the case be realized?

Using the crime of fraud as an example: Criminal suspects commit fraud through virtual currencies and obtain 70,000 USDT, which is approximately around 500,000 RMB according to the market price. After filing a case and investigating, the public security agencies have to determine how much money is involved in the case, and this “money” must be legal tender, preferably RMB. If the public security agencies can convert 70,000 USDT into more than 500,000 RMB, the future criminal suspects may be sentenced to more than 10 years’ imprisonment. But if the public security agencies do not convert the virtual currencies into legal tender, at least two situations need to be considered:

One is that due to the volatile market of virtual currencies, if after a month the value of 70,000 USDT drops to 490,000 or even less, the sentencing range for future criminal suspects will become 3-10 years. If the value of 70,000 USDT is below 3,000, the criminal suspect may not even be considered guilty, which is absolutely unacceptable for the public security agencies.

The second situation is that if the public security agencies transfer the seized virtual currencies intact to the procuratorate, the procuratorate must also determine the amount of money involved in the case when reviewing the indictment, whether it is 500,000 or 499,000? Otherwise, the indictment cannot be written. However, when the procuratorate realizes the virtual currencies at its stage, generally speaking, the criminal case has been ongoing for at least 3-4 months. At this time, if the realization price of the virtual currencies involved in the case is lower than the price at the time of the crime (at this time, it is the criminal suspects who have actually benefited, and they and their defense lawyers generally will not raise any objections to the realization), but if the price of the seized virtual currencies at this time is significantly higher than the price at the time of the crime, especially if it significantly affects the conviction and sentencing of the criminal suspects, then there will be a huge controversy over the rationality and legality of determining the amount of money involved in the case.

Using fraud cases as an example, if virtual currency is cashed out at the time of the crime, the sentence in the future will be less than 3 years if the amount involved is below 30,000 based on market value. However, if the cashing out occurs during the prosecution stage and the market value is 500,000, the future sentence could be 10 years or more, which is unacceptable for anyone.

Therefore, it is important to cash out virtual currency involved in criminal cases in a timely manner.

02 How can disposal companies do it safely?

Since the police need to cash out virtual currency involved in criminal cases, but the current regulatory provisions prohibit any individuals, organizations, institutions, etc. from exchanging virtual currency for legal tender (see “Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation,” Article 1, Item 2, also known as the “9.24 Notice”), most law enforcement agencies entrust third-party disposal companies in the market to handle the disposal and cashing out of virtual currency involved in cases.

In this way, for law enforcement agencies, they are not directly involved in the exchange activities between virtual currency and legal tender, but they can ensure the timely progress of the case, avoiding regulatory risks and not delaying the investigation. As for the third-party disposal companies, they can collect service fees and have certain security guarantees (helping governments, especially powerful law enforcement agencies), so why not do it?

However, Lawyer Liu believes that according to the current judicial situation, for disposal companies, even if they are working for law enforcement agencies, they cannot guarantee safety in the sense of legal compliance as long as the national regulatory attitude towards virtual currency remains unchanged (at least before separate regulations are made for cashing out virtual currency involved in criminal cases). Of course, the suggestions in Lawyer Liu’s article cannot achieve 100% safety for disposal companies, but they can be considered relatively safe based on the current judicial practice.

(1) Legalize the delegation procedure

Law enforcement agencies must sign a written contract with third-party disposal companies. In addition to the specific law enforcement agency, it is best to have a cooperation framework agreement from the municipal level or even the provincial level. It would be more compliant if they can participate in bidding and obtain the delegation after winning.

(2) Specify the delegated matters

The disposal company should clarify the services it can provide. In practice, in addition to the disposal and cashing out of virtual currency involved in cases, they usually provide services such as tracing and auditing of funds involved in the case, analysis of the organizational framework of individuals involved in the case, and preservation of electronic evidence related to the case.

(3) Reasonable service fees

The current disposal fees generally range from 10% to 20%. Lawyer Liu has encountered cases with service fees as high as 30%, but we suggest that the service fees should not exceed 20%. A 20% service fee is reasonable and profitable in the current context, while a service fee higher than 20% easily raises suspicions of interest transfer during the disposal process.

(4) Compliance in the Disposal Process

When disposing of the involved virtual currency, it is necessary to choose a licensed virtual currency exchange abroad that complies with local laws, regulations, and regulatory requirements. It is recommended to verify the identity of the counterparty and avoid trading with Chinese mainland residents or organizations. Do not directly accept Chinese Yuan (which may be illegal proceeds).

(5) Risks in Fund Repatriation

After the disposal company monetizes the involved virtual currency, there is a significant legal risk in transferring the funds back into the country (fund repatriation). Some disposal companies currently attempt to evade the supervision of institutions such as the central bank and foreign exchange regulators by using fabricated trade contracts, tracking numbers, or contracts related to computing power, computer software services, and cloud computing services. This poses considerable risk. If the public security agency can communicate with relevant institutions or departments (such as the central bank, foreign exchange regulators, the China Banking Regulatory Commission, and related banks), the monetized funds can be transferred to the designated account of the public security case through the Cross-Border Interbank Payment System (CIPS).

03 Conclusion

Until the 9.24 notice is amended or abolished, any institution or individual engaged in the exchange of virtual currency and fiat currency is engaged in illegal financial activities. Any measures or suggestions mentioned in this article cannot change the above conclusion. However, as mentioned earlier, in the face of the “hard demand” for public security agencies to handle criminal cases, someone must be engaged in the exchange of virtual currency and fiat currency. For disposal companies engaged in this business, it seems that they already bear some kind of “original sin” as long as they engage in this business. Therefore, what disposal companies need to do is to maximize their self-protection under the looming threat and even work with relevant departments to promote the early clarification of disposal rules for the involved virtual currency. This is the most practical and fundamental security approach.

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