NFT Digital Collectibles Platform Involved in Crime, How is the Criminal Amount Determined?

How is the criminal amount determined in NFT digital collectibles platform crime?

Considering that the calculation standards for the amount of crime and whether deductions can be made are different for different charges in judicial practice, in the spirit of practicality, this article analyzes three charges frequently involved in domestic NFT digital collection platforms as examples.

There is always one question that cannot be avoided in every NFT digital collection case investigated and filed by the public security authorities, and that is: how much is the amount of the crime?

This question is not only of concern to the parties involved, but also to the public security authorities. Previously, attorney Liu Honglin, director of Mancun Law Firm, conducted a detailed study on this issue and provided countermeasures (see the article “How to Determine the Amount of Crime in NFT Platform Criminal Cases?”). Based on this, this article will continue to expand on this topic and summarize it. Your feedback is welcome.

Considering that the calculation standards for the amount of crime and whether deductions can be made are different for different charges in judicial practice, in the spirit of practicality, this article analyzes three charges frequently involved in domestic NFT digital collection platforms as examples.

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

According to the criminal law, the amount of crime in the charge of illegal business operation is the illegal gains. According to the “Research Opinions on the Determination of ‘Illegal Gains’ in the Charge of Illegal Business Operation” issued by the Research Office of the Supreme People’s Court in 2012, the “illegal gains” in the charge of illegal business operation refers to the “amount of profit”, which means 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 operation), minus the reasonable expenses directly used for business activities.

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

Expressed in formula, the amount of crime is: Crime Amount = Total Operating Income – Reasonable Operating Costs.

02. How is the amount calculated for the charge 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. In this regard, the protection of public and private property is what the charge of fraud aims to protect. Therefore, the amount of crime in the charge 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 Cases Involving Disturbance of the Order of Telecommunications Market” implemented on May 24, 2000, states: “If someone uses false or forged identity documents to go through the procedures for access to the telecommunications network and incurs significant losses in telecommunications fees, they shall be punished for fraud in accordance with Article 266 of the Criminal Law.”

However, cybercrime has a wide spread, high concealment, and difficulties in obtaining evidence. After a case occurs, it is impossible to determine the identity of the victim one by one for verification and calculate the actual losses. Therefore, the “Opinions on Several Issues Concerning the Application of Laws in the Handling of Cases of Telecommunication Network Fraud” (Fa Fa [2016] No. 32) issued on December 19, 2016 by the Supreme People’s Court, the Supreme People’s Procuratorate, and the Ministry of Public Security stipulates that in handling cases of telecommunication network fraud, if it is impossible to collect the statements of the victims one by one due to objective conditions such as a large number of victims, the statements of the victims that have been collected, as well as evidence such as verified banking transaction records, third-party payment settlement account transaction records, call records, electronic data, etc., can be combined to determine the number of victims and the amount of fraud.

However, at this point, there is an extended problem: which type of data should be used to determine the amount of fraud? The amount of user recharge? The sales amount in the primary market? Or the transaction flow in the secondary market? In addition, which amounts can be deducted?

We believe that the above situation depends on the specific analysis of the NFT platform project. For example, in secondary transactions between users, settlements are usually made directly between users, and the flow of funds is also from users to users. The platform often only charges 6% to 8% of the transaction amount. It is somewhat inappropriate to regard the total transaction amount as “criminal proceeds”. Therefore, according to lawyer Man Kun’s opinion: due to the special nature of the platform, the “criminal proceeds” of the platform can be determined as the company’s operating income from a financial perspective, that is, the sales revenue of primary collections + non-collection type sales revenue such as white lists + transaction fee revenue between users. Only in this way can it better conform to industry characteristics and logic.

In addition, the funds refunded before the case occurred should be deducted from the amount of fraud. For example, the handling of refund complaints from some users, the overall project refund of the NFT platform, etc. This viewpoint is also supported by the “Minutes of the National Court’s Seminar on the Trial of Financial Crime Cases” in 2001.

03. How to Calculate the Amount in Non-Ponzi Schemes?

The amount of criminal proceeds in the crime of illegally absorbing public deposits generally refers to the amount of funds illegally absorbed or disguisedly absorbed by the perpetrator. According to the Supreme People’s Court’s “Interpretation on the Specific Application of Laws in the Trial of Criminal Cases of Illegal Fundraising,” the full amount of funds absorbed by the perpetrator is calculated, and this amount is often based on the direct investment amount by users.

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

1. If it is not publicly advertised and funds are absorbed from specific targets within relatives, friends, or within the unit, it does not constitute illegal absorption or disguised absorption of public deposits and should be deducted;

2. The amount of funds that participants in fundraising have withdrawn their principal or obtained returns and reinvested should not be deducted, but can be considered as a factor in sentencing;

3. The amount of funds invested by the suspect and their immediate relatives should be deducted;

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

Returning to the perspective of managing digital collections, some digital collection platforms will launch repurchase activities for collections. For example, if a user spends 100 yuan to purchase a certain collection, the platform 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 high risk of being suspected of non-withdrawal criminal law.

In this case, we believe that it is relatively prudent to determine the amount involved based on the sales revenue on the primary market, because this is the fundraising situation. As for the price speculation among users and the inflated amount, it should not be considered as the criminal amount involved.

04. Summary

Less determination of the criminal amount naturally leads to lighter sentences.

When the nature of the case is unchangeable, it is extremely important to reasonably determine the amount involved through a detailed analysis of the company’s operations. In economic cases, the amount of the criminal amount often determines whether there will be acquittal or non-prosecution, whether there will be bail or probation, and the amount of fines in the verdict. This should be a matter of prior compliance or post-criminal focus for NFT digital collection entrepreneurs.

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