The truth hidden in 6,599 blockchain case judgments the verdicts are a mystery, and the execution is even more challenging.

The truth in 6,599 blockchain case judgments is mysterious and execution is challenging.

LianGuai reporter Jessy

In 2021, lawyer Liu Lei won a dispute case involving 410 Ethereum entrusted investments. Unlike previous cases where courts often deemed contracts invalid or directly dismissed litigation requests on the grounds that virtual currency assets are not currency and disrupt financial order, this time the court, while also determining the invalidity of the entrusted investment contract, required the party entrusted with the investment to return the original virtual currency.

This is not a common precedent in judicial practice for disputes over virtual currency investment contracts. However, when it came to the execution of the judgment, a difficult problem arose. The other party refused to comply, and the court did not have any compulsory measures. If they were unable to freeze his wallet account, they would not be able to execute other property equivalent to virtual currency. The difficulty in execution points to the fundamental issue that virtual currency is not considered property in judicial practice.

Dispute over whether it is property

The executing judge was in a dilemma, “How can I execute this? Can’t I seal, detain, or freeze it (referring to Ethereum)?”

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Liu Lei asked, “Can you seal and detain equivalent real estate or put it on the list of dishonest debtors?”

Obviously, these courts cannot operate in that way. Although the automatic performance reminder at the end of the judgment clearly states, “If the debtor fails to fulfill its obligations within the period and in the manner specified in this judgment, causing the creditor to apply for enforcement by the people’s court, the people’s court will, in accordance with the law, take measures such as restricting consumption and including the debtor in the list of dishonest debtors.”

For the executing court, they have no way and no power to freeze the wallet addresses storing virtual currency. And if they were to enforce it by sealing other assets of equivalent value, it would be pricing virtual currency, which the court cannot directly accomplish.

More than a year has passed since the second-instance judgment became effective, but because there has been no way to execute it, Liu Lei, as the authorized agent of the party involved, has filed a “confirmation suit” in order to determine the pricing of Ethereum.

Putting aside the specific difficulties in execution, Liu Lei also knows that such a precedent is not universal. Precedents are not posted online and do not provide reference for similar cases in the future.

Most of the time, cases similar to the aforementioned one are generally rejected by judges in domestic cases, citing reasons such as virtual assets not being currency, virtual asset transactions not being protected, and disrupting financial order. Or they directly determine the invalidity of the contract without considering the situation of virtual currency. In civil cases, not only disputes regarding investment and financial management, but also disputes over the division of marital property and labor disputes arising from the issuance of virtual currency salaries, judges generally make similar judgments.

Liu Lei feels that the direction has changed strictly after the notice 924 came out in 2021. From the announcement 94 in 2017 to the release of notice 924 in 2021, the “illegal” status of virtual currency-related businesses has gradually been recognized by relevant departments.

Specifically, in announcement 94, the entities that were regulated and required were specific institutions – “financial institutions and non-bank payment institutions are not allowed to engage in businesses related to token issuance financing transactions”. At that time, the main warning and restriction were on ICO-related activities. However, in notice 924, the entities that are required and restricted have directly become individuals, and it directly states that “virtual currency-related business activities are illegal financial activities. All such activities are strictly prohibited and resolutely banned in accordance with the law; if they constitute a crime under the Criminal Law, criminal responsibility shall be investigated in accordance with the law.” And “virtual currency does not have the legal status equivalent to legal tender.”

After the notice 924, although the “illegal” status of virtual currency-related business activities has been established, it does not deny that virtual currency is a specific virtual commodity. In the notice on preventing bitcoin risks issued by the People’s Bank of China and other five ministries in 2013, when defining the attributes of bitcoin, it was mentioned that “in terms of nature, bitcoin should be a specific virtual commodity, not having the legal status equivalent to currency, and should not be used as a circulating currency in the market.” Here, bitcoin is defined as a virtual commodity, and virtual commodities are a kind of property.

Liu Lei clearly remembers that before the release of notice 924, judges would still discuss what bitcoin is, whether it is a thing or property, and whether it is protected by law.

For example, in a criminal case, the reason for the rejection of the appeal by the Guangdong Provincial Higher People’s Court is: “Bitcoin” is a network virtual commodity, not currency, but it objectively exists with real currency transactions on the Internet and has the attribute of being convertible into real material benefits. It should be recognized as property in terms of legal attributes. In real life, “bitcoin” is no longer recognized by the general public as data representing its original physical attributes, but as wealth to be pursued. There are professional “bitcoin” trading websites both internationally and domestically, and the general public can hold “bitcoin” and participate in transactions.

However, after the release of notice 924 in 2021, this discussion was avoided. In the trial process of the case mentioned at the beginning of the article, the judge avoided discussing whether Ethereum is property.

The judgment results of cases involving virtual currency have become a mystery. Sometimes judges rule that contracts are valid, and sometimes they rule that contracts are invalid. Sometimes they support the return of virtual currency, and sometimes they do not. Many times, what lawyers have to do is to educate the local judges, from the simplest virtual currency transfer wallet address to how virtual currency should be defined legally, so that the judges can understand and make relatively reasonable judgments.

Lawyer Liu Yang believes that it is precisely because virtual currency is not recognized as property in specific civil judicial practice, it is difficult to protect the rights and interests related to virtual currency through existing judicial channels. In order to deal with civil disputes related to virtual currency, Liu Yang’s litigation strategy is to minimize the “property rights” of virtual digital currency and define virtual currency as “goods” for specific cases, using the “property rights” path to help clients safeguard their rights. In addition, choosing arbitration would be more effective. He has represented a arbitration case in which the arbitration tribunal determined that the contract for entrusting investment in virtual digital currency was “valid”.

Space for rent-seeking

The world of blockchain is a dark forest, and when conflicts and collisions occur between people and things on and off the chain, the world on the chain is always obscure when it comes to judicial practice.

When it comes to criminal cases, this obscurity is similar to the situation where the victim’s digital currency is defrauded. Public security agencies often refuse to file a case by claiming that the investment in virtual currency should bear the losses on its own. However, when it comes to cases involving pyramid schemes and fundraising fraud that public security agencies want to crack down on, they are very diligent in investigating. Moreover, from the perspective of criminal defense, Liu Yang feels that the difficulty of defense is increasing.

In the past two years, there have been frequent incidents of card freezing, and various exchanges and project parties being arrested. For those in the industry, encryption has become a high-risk industry, and the safety of both personal and property cannot be guaranteed.

In 2018, Liu Lei received his first case in the blockchain industry. His friend’s card was frozen when withdrawing funds, and he hoped that Liu Lei could help unfreeze it. Now, freezing cards during fund withdrawal has become normalized, but at that time, it was still a new business for lawyers.

The logic and basis for public security agencies freezing cards is that they found this fund “suspected of being guilty” during the investigation. However, they do not have a complete judicial procedure to determine whether this money is “guilty”, and for the person whose card is frozen, there is no legal avenue to appeal for their money’s “innocence”. From whether to freeze the card to whether to unfreeze it, it all depends on the judgment of the investigators. The process for a lawyer to unfreeze the card is to negotiate with the investigators, list evidence and reason with them to prove the money’s “innocence”. However, due to the lack of specific rules and avenues for appeal, there is a large space for rent-seeking in this process.

Similar to the process of unfreezing frozen cards, cases involving exchanges also put a great test on the negotiation skills of lawyers. Over the years, Liu Lei has taken on many cases involving exchanges. The exchanges we are talking about here refer to platforms like OKEX and Binance, which have obtained licenses in other countries and have complied with the Chinese government’s requirement to withdraw domestic users, but some operating entities and staff of the exchanges remain in China. Although domestic users are prohibited from using these platforms, they can still bypass the platform’s restrictions through means such as VPN.

Currently, in cases involving exchanges, there are generally three charges involved: 1. Illegal operation 2. Organizing and leading pyramid schemes 3. Running a gambling establishment. Specifically, in some places, judicial authorities interpret contracts as futures and treat them as illegal operations. In some cases, contracts are interpreted as gambling and treated as running a gambling establishment. Some consider the referral rebates of exchanges to be pyramid schemes, where the exchange is the first level, users are the second level, and the new users recruited by users are the third level, thus meeting the definition of “three-level distribution” in pyramid schemes.

Liu Lei believes that given the complexity of cases involving cryptocurrency exchanges and project issuers, defense lawyers can still obtain a larger defense space in these cases under the current system of leniency for confession and punishment. This space can be reflected either in sentencing or in illegal gains and fines.

From another perspective, in the context of local fiscal tightening, the handling of criminal cases related to cryptocurrencies has undoubtedly become a lucrative source of revenue for local governments.

For individuals involved in illegal activities, there are certainly legal loopholes to exploit in the chaos. Illegal activities can become easier in the world of blockchain and escape punishment due to the lagging nature of relevant laws in reality.

Liu Yang has a case where a client was accused of embezzlement by the company. Initially, the public security authorities filed and investigated the case for embezzlement, but the procuratorate approved the arrest for the crime of illegally obtaining computer information system data. Liu Yang believes that the change in the alleged crime is because the crime of embezzlement requires embezzlement of company property, but in the actual situation of blockchain companies, virtual currencies are mostly used as a means of fund payment and settlement in business transactions. However, it is difficult to determine whether the wallet address belongs to the company or to the actual controller, and this address is definitely not the recognized public account address of the company under current laws.

In terms of legal punishment, the maximum sentence for the crime of embezzlement can reach life imprisonment if the amount involved is particularly large, while the maximum sentence for the crime of illegally obtaining computer information system data is only seven years.

The Future of Legal Regulations in the Blockchain Industry

Prior to becoming a lawyer, Liu Yang worked in the public security system for many years. In 2018, he entered the field of criminal defense related to blockchain. He clearly felt that there was a significant change in the attitude of the police when investigating cases related to blockchain after the bull market in 2020. At that time, a large amount of off-market funds entered the market, attracting a lot of illicit money. Although the government does not recognize virtual currencies as legal tender, in specific cases, law enforcement officers know that virtual currencies are real money, and at that time, there were indeed many problems in the industry, such as Ponzi schemes, pyramid schemes, and illegal fundraising. Therefore, the police pay more attention to criminal cases involving virtual currencies.

Moreover, the police generally believe that the cryptocurrency industry has an inherent original sin, assuming that it is suspected of illegal activities, and will investigate it more vigorously.

A fraud police officer told LianGuai reporters that in the actual process of handling cases, they found that the most popular money laundering method in underground banks is USDT, which is extremely covert. Regarding virtual currencies, he and the police around him always have a negative attitude, and in his mind, he always believes that virtual currencies cannot escape the trap of Ponzi schemes.

Undeniably, virtual currencies are often associated with money laundering, pyramid schemes, and other illegal activities. According to statistics from the European Chain Research Institute, money laundering, fraud, pyramid schemes, and gambling are the four most common forms of virtual currency crimes in 2022, with 54.72% of virtual currency crimes related to money laundering and 21.13% related to fraud.

In the past two years, an increasing number of cases of virtual currency money laundering have been cracked by the police, such as the case known as the “first national virtual currency case,” which involved money laundering for online gambling using virtual currencies. All transactions by gamblers were settled in USDT, with a total transaction volume of over 400 billion yuan.

Most of the time, virtual currencies are involved in the final step of illegal activities: money laundering. There are also direct pyramid selling activities involving virtual currencies. For example, nearly 200 judgments involving the well-known domestic pyramid scheme Five Elements Coin have been published on the Judicial Documents Network.

According to common sense, it should be difficult to trace virtual currency money laundering to individuals in the real world. However, in the process of cracking the “first national virtual currency case,” the issuer of the stablecoin used by the criminal gang played an important role in tracing the flow of funds.

LianGuai reporters found that according to judgments of some criminal cases on the Judicial Documents Network, centralized exchanges such as Huobi and Binance also provide transaction records related to the criminals during the police investigation process. It is reported that currently, some security companies in the industry, as well as stablecoin issuers, cooperate with the police.

Although we often say that blockchain is decentralized and a paradise for anarchists, in reality, blockchain cannot become a completely lawless place. When blockchain connects with the real world, friction is inevitable. Behind every blockchain project are people, and they cannot “cut” the on-chain activities, but they can directly “cut” centralized institutions. Implementing off-chain regulation is just a matter of whether the government wants to do it, not whether it is difficult to do.

If we don’t talk about off-chain regulation, blockchain technology itself is a positive technology. The essence of technology is to fight against the existing financial system, protecting people’s private property, personal information security, and more. Clearly distinguishing from money laundering and pyramid schemes is definitely the mainstream of blockchain technology development. As the influence of the blockchain world grows, the collision with the real world will become more intense, and the path to compliance will become the only way forward.

The soundness of relevant laws is both the means to crack down on real illegal activities and the basic path to safeguard people’s related rights and interests.

In April of this year, the Supreme People’s Court issued the “Summary of the National Court’s Financial Trial Work Conference (Draft for Solicitation of Opinions)” (hereinafter referred to as the summary). In this summary, it responded to the phenomenon of a one-size-fits-all approach and inconsistent judgments on virtual currency investment disputes, and clearly stated that for disputes arising from entrusted investment in virtual currency, factors such as the time of the entrustment, the reasons for the occurrence of the entrusted matters, and the degree of fault of both parties should be comprehensively considered.

Regarding the specific court judgment on the delivery of virtual digital currency, Article 87 of the summary stipulates that “for lawsuits requesting the delivery or return of virtual currencies such as Bitcoin, the people’s court shall ascertain the holding status of the virtual currency, clarify whether there is a possibility of delivery or return, and state it in the document. If it is found through trial that it cannot be returned or delivered, the people’s court should guide the parties to make reasonable claims and encourage them to reach a consensus on property rights. If it is found through trial that there is a basis for actual performance, the people’s court shall clearly specify the delivery or return of virtual currency in the judgment upon the party’s request, and if the party obligated to deliver or return fails to fulfill the obligations as determined by the effective judgment, the people’s court may take corresponding measures in accordance with the relevant provisions of the Civil Procedure Law.”

According to this provision, it can be clearly seen that the demand for the return of virtual currency can be supported, and failure to fulfill the obligation will also bear certain legal consequences.

Liu Lei believes that theoretically, this summary will provide guidance on the execution of the case proposed at the beginning of the article: for example, will the losing party in a case involving unenforceable virtual assets be listed as a dishonest executor?

With more and more legal disputes and criminal cases involving the blockchain field, the relevant judiciary will certainly gradually catch up. Maintaining order in the blockchain world cannot rely solely on code to completely regulate human nature. Code can be law, but real-life law is equally important.

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