How to legally deal with virtual currencies in criminal cases?

Legal Management of Virtual Currencies in Criminal Cases A Guide

In the current judicial practice, the disposal of virtual currencies seized in criminal cases is a highly controversial issue. On the one hand, from the perspective of judicial authorities, especially the public security organs, it is crucial to dispose of the virtual currencies involved in a timely manner in order to secure the assets related to the case and determine the amount of suspected criminal activities. On the other hand, considering the current regulatory framework for virtual currency transactions in China, any form of exchange between virtual currencies and fiat currencies by any institution is prohibited. The severity of these conflicting interests can give one a sense of division. With this in mind, Lawyer Liu wrote this article to explore the challenges of disposing of virtual currencies in criminal cases in current judicial practice.

How will virtual currencies be disposed of in criminal cases?

After the “SIM Card Replacement Operation,” institutions such as telecommunications companies and banks have increased their regulatory efforts concerning SIM cards and bank accounts. Due to the anonymity feature of virtual currencies, they have become favored by traditional “black and gray market” industries. Individuals engaged in criminal activities such as fraud, gambling, money laundering, and pyramid schemes have begun to use virtual currencies for illicit purposes.

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It is important to note that this does not mean that everyone involved in virtual currency operations is engaged in criminal activities, but rather that individuals already engaged in illegal activities have chosen to use virtual currencies. Many friends Lawyer Liu has met in the cryptocurrency industry have ideals, aspirations, and work diligently; there are decent people among them.

For virtual currency cases related to crimes, the current practice of judicial authorities generally falls into two categories: firstly, during the public security investigation phase, they may appoint a third-party company to handle and monetize the assets. Of course, it is also possible for the suspects or their family members to entrust a third-party company to dispose of virtual currencies for them. However, since suspects in virtual currency-related criminal cases are generally in detention or under residential surveillance, during this period, they cannot proactively contact third-party companies and must have the permission or even “guidance” of the public security organs. Secondly, the virtual currencies involved in the case may only be seized by the public security and procuratorate departments, and after the case is adjudicated, it is the responsibility of the court’s enforcement bureau to dispose of and monetize the assets. The specific approach can only be done through the appointment of a third-party company (often appearing in the form of xxx technology companies) to handle and monetize the assets.

Therefore, under the current regulatory policies, judicial authorities also understand that they cannot actively participate in the disposal process of virtual currencies. Whether it is the judicial authorities actively appointing a third-party company for disposal or the parties involved or their family members entrusting a third-party company for disposal, the exchange between the virtual currencies involved and fiat currencies seems to only be possible through the third-party company. But is this legal?

Is it legal for a third-party company to dispose of virtual currencies involved in a case?

The so-called third-party companies disposing of virtual currencies involved in a case refers to the behavior of a domestic company accepting the commission of judicial organs to realize the virtual currencies involved in a case and transfer them to the designated account of the judicial organs. There are two common ways to commission:

(1) Direct acceptance of individual commission

In the case of the disposal company accepting the commission to dispose of virtual currencies involved in a case by the parties to the case or their family members, it is generally possible for the parties to the case or their family members to directly sign an agreement with the disposal company, without the direct and obvious intervention of judicial organs. In this case, the disposal company faces the greatest legal risk because the “Notice on Further Preventing and Dealing with Risks of Virtual Currency Trading Speculation” (hereinafter referred to as “9.24 Notice”), issued by ten ministries including the Supreme People’s Court, the Supreme People’s Procuratorate, and the Ministry of Public Security, makes it clear that “carrying out the exchange of legal currency and virtual currency, the exchange between virtual currencies, acting as a central counterparty to buy and sell virtual currencies, providing information intermediary and pricing services for virtual currency transactions, etc.” are illegal financial activities. At this time, for the disposal company, violation of regulatory provisions is a minor offense, while involvement in illegal activities (such as illegal business operations) is a serious offense.

(2) Acceptance of commission from judicial organs

In the case of disposal companies being commissioned by judicial organs (mainly public security organs) to realize virtual currencies involved in a case, although the commission itself has legal basis (such as Article 236 of the “Procedures of Public Security Organs for Handling Criminal Cases” and Article 34 of the “Provisions on the Application of Sealing and Freezing Measures in the Handling of Criminal Cases by Public Security Organs”), the content of the commission obviously does not comply with the requirements of the 9.24 Notice, which means that as long as the disposal company carries out the exchange of legal currency and virtual currency in mainland China, it is considered to be engaged in illegal financial activities. As for whether the purpose of providing disposal services for judicial organs can prevent or offset the illegal financial activities specified in the 9.24 Notice, lawyer Liu believes that in terms of legal sentiment or moral sentiment, it is commendable for a disposal company to assist in the realization of virtual currencies involved in a case detained by judicial organs in order to facilitate the smooth progress of judicial activities. However, strictly speaking from legal provisions or current regulatory provisions: regardless of the purpose, as long as the exchange of virtual currencies and legal currencies is conducted, it is prohibited. Lawyer Liu has also encountered a situation in practice where company B (a virtual currency disposal company) commissioned by the public security organs in region A for disposal and realization, was approached by the public security organs in region C, because during the disposal process, some of the realized funds collected by company B involved in telecom fraud funds. This is the reality, and many disposal companies like company B, even with the endorsement of the public security organs in the commissioning region, cannot guarantee 100% safety.

Therefore, in the current judicial environment, the essence of compliance judgment is not about which third-party company accepts the commission, but rather the actions taken by the third-party company after accepting the commission. Whether the third-party company is engaged in the exchange of virtual currency and legal tender for profit purposes or for serving judicial authorities, it cannot escape the regulatory provisions of the September 24th notice, and it is considered illegal financial activity.

In conclusion

Currently, although the exchange of virtual currency and legal tender is considered illegal financial activity in mainland China, due to the practical needs of judicial activities (and it is a necessity), judicial authorities have no choice but to liquidate virtual currencies. Where there is demand, there will be a market, even if this market is under prohibited regulatory policies. Furthermore, there are not many cases in practice where third-party disposal companies have been held accountable for assisting judicial authorities in the disposal of virtual currencies, which gives many of these companies a certain sense of security, thinking that they will not be held accountable themselves. However, what Lawyer Liu would like to say is that even if the third-party company accepts the commission for the disposal and liquidation of virtual currency for the work needs of the judicial authorities, they must always pay attention to the latest regulatory trends and keep sufficient and complete business materials, so that even if they are held accountable by other judicial authorities, they can protect themselves to the maximum extent.

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