Recognition of the Property Nature of Virtual Currency and Issues Regarding the Disposal of Assets Involved in Cases

Virtual Currency Property Recognition and Asset Disposal Issues

Author: Wang Zhongyi, Yang Conghui, Author Affiliation: People’s Court of Siming District, Xiamen City, Fujian Province

Virtual currencies have become increasingly prominent as “accomplices” to illegal crimes. The global transaction volume of virtual currency-related crimes has increased from $8.4 billion in 2020 to $20.6 billion in 2022, reaching a historical high. Currently, there is a growing divergence in judicial practice regarding the characterization of virtual currency-related crimes and the handling of related assets. It is necessary to further clarify the criminal law attributes of virtual currencies and the disposal of assets involved in such cases.

1. Analysis of the Criminal Law Attributes of Virtual Currencies

In practice, there are several opinions regarding the criminal law attributes of virtual currencies:

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The first opinion holds that virtual currencies are merely electronic data stored in computer systems. Currently, they are circulating in the “black market” in China as illegal currencies, mostly serving as means of illegal crime payments, media for illegal entry of foreign funds, and other “gray” roles. In the absence of explicit legal provisions, they should not be recognized as property in the criminal law sense. The second opinion holds that virtual currencies belong to virtual commodities, have property value, and from the perspective of judicial interpretations on theft, robbery, and illegal drugs, virtual currencies should also be recognized as property in the criminal law sense. However, considering that the current policy in China prohibits the circulation of virtual currencies, they should not be recognized as lawful property deserving protection. The third opinion holds that virtual currencies are property in the criminal law sense and are also lawful property. Unless they are used for illegal crimes by the holders or directly derived from the holders’ illegal crimes, the property rights and interests of virtual currency holders should be protected. The author agrees with the third opinion. The reasons are as follows:

(1) Virtual currencies have economic attributes and can be attributed as property

1. Virtual currencies themselves have utility value. Legal tender, especially banknotes (excluding those with collectible value), apart from having functions such as value scale, medium of exchange, and means of payment, does not have general utility value. However, virtual currencies are different. They can have certain utility value, manifested in: (1) Serving as a settlement medium. In some blockchain application fields, such as securities settlement, the circulation of encrypted assets within the blockchain system is indispensable. For example, to realize the delivery versus payment (DVP) in the blockchain securities settlement system, it is necessary for the controlling or designated nodes in the blockchain to issue virtual currencies, also known as “settlement coins,” based on the premise of depositing an equivalent amount of legal tender in the custody bank, thereby achieving the settlement of securities and funds within the system. (2) Serving as virtual vouchers or assets. For example, as concert or music event tickets, they can be implemented with tamper-proof functionality through blockchain technology. As electronic voting or game props, blockchain technology can be used to ensure the immutability of virtual assets. In this case, although its monetary function should be denied according to the law, it does not affect the recognition of its property attributes, which is also a reflection of the function of the law to reserve necessary channels for the development of emerging technologies.

2. The exchange value of virtual currencies objectively exists. Virtual currencies such as Bitcoin connect strangers from any corner of the world through blockchain, transferring value through a “consensus mechanism” and “decentralized” peer-to-peer transactions, becoming a convenient settlement tool worldwide. After stablecoins such as Tether (USDT) emerged, which maintain price stability by anchoring to fiat currencies (or assets), the monetary function of virtual currencies has become increasingly perfected. With the decentralized feature of virtual currencies operating through distributed encrypted systems, all virtual currency hardware systems in the world maintain virtual currency ledgers, and virtual currencies will not disappear due to the loss of a single hardware. Also, based on the immutability and antifragility of virtual currency technology, virtual currencies are regarded as “hard currency” by some groups and become a means of payment for purchasing goods and services in real life. In the current world payment system, virtual currencies have surpassed their physical characteristics as computer data and have been recognized as a new financial technology. Many countries have incorporated them into their financial systems and use them as legal currencies, such as Japan, the United States, Europe, Australia, New Zealand, and other countries. According to statistics, there are already nearly 30,000 virtual currency ATMs in 73 countries worldwide.

Currently, in order to safeguard the status of the Chinese yuan as legal tender and combat illegal activities, our country has not recognized the legal tender status and monetary function of virtual currencies. However, their exchange value objectively exists due to the recognition and legal circulation in overseas markets, and cannot be ignored. If virtual currencies are treated as prohibited items like drugs and not recognized for their exchange value, it will inevitably lead to the inflow of virtual currencies from overseas to the domestic market, resulting in the abandonment of the accumulated labor value and market value, which objectively leads to the loss of assets and is not conducive to the recovery and compensation work in virtual currency-related criminal cases.

3. Those who obtain others’ virtual currencies through illegal means shall be dealt with as property crimes. As mentioned earlier, virtual currencies objectively have positive use value and exchange value, unlike prohibited items such as drugs that have no positive value. In the case of property crimes related to theft, robbery, fraud, and drugs, which are regulated for the purpose of protecting possession in judicial interpretations, virtual currencies should naturally become the object of property crimes.

Based on the physical characteristics of virtual currency as computer data, there has always been a practice and viewpoint in judicial practice and theory that virtual currency crimes should be punished as computer information system crimes, which obviously abandons the evaluation of the use value and exchange value of virtual currencies. However, it also has to seek ways to criminalize such behaviors by expanding the interpretation of computer information system crimes stipulated in our country’s criminal law, which violates the principle of “nullum crimen, nulla poena sine lege.” In a certain case, the defendant involved did not illegally invade a computer information system using the technical means specified in Article 285 of the Criminal Law, nor did they delete or modify the functions of a computer information system as stipulated in Article 286 of the Criminal Law. Their behavior essentially involved illegally obtaining virtual currencies, infringing upon the property rights, and did not violate the public order protected by computer information system crimes. Abandoning property crimes and punishing them as computer information system crimes goes against the basic principle of proportionality between crime and punishment and deprives the victim of the right to participate in litigation and the protection of property rights.

Based on the above analysis, the author agrees that the act of obtaining other people’s virtual currency through fraud, theft, robbery, and other illegal means should be regarded as a conflict of laws and not a conflict of imagination. For theft of virtual currency and other acts where the amount does not meet the criteria for criminal punishment, they should not be treated as a second choice but should be punished according to the conviction and punishment for computer information system crimes.

(2) Current laws and policies do not classify virtual currency as illegal items

1. Relevant regulations clearly define them as virtual commodities. The “Notice on Guarding Against Bitcoin Risks” (Yinfa [2013] No. 289), jointly issued by the People’s Bank of China, the Ministry of Industry and Information Technology, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission in December 2013, clearly states: “From its nature, Bitcoin should be considered a specific virtual commodity and does not have the legal status equivalent to currency and should not be used as a circulating currency in the market.” Therefore, other virtual currencies such as Tether that have similar characteristics to Bitcoin, such as “no centralized issuer, limited total supply, unrestricted use, and anonymity,” should also be classified as virtual commodities. Article 127 of the Civil Code of China stipulates: “If the protection of data and network virtual property is provided by law, it shall be governed by its provisions.” It can be seen that the protection of virtual commodities such as Bitcoin falls under the protection of virtual property and is supported by the open attitude of the Civil Code.

2. Administrative laws and policies do not completely prohibit virtual currency transactions. Article 1, paragraph 2 of the “Notice on Further Preventing and Dealing with Risks in Virtual Currency Trading Speculation” (Yinfa [2021] No. 237), jointly issued by the People’s Bank of China, the Supreme People’s Court, and other ten departments on September 15, 2021, stipulates that the following virtual currency-related business activities, such as conducting legal currency and virtual currency exchange businesses, exchange businesses between virtual currencies, buying and selling virtual currencies as a central counterparty, providing information intermediation and pricing services for virtual currency transactions, token issuance financing, and virtual currency derivative trading, are suspected of illegal issuance of token tickets, unauthorized public offering of securities, illegal operation of futures businesses, and illegal fundraising, and are strictly prohibited and firmly banned according to the law. There are two interpretations in judicial practice regarding this provision: one is that all virtual currency trading activities are considered prohibited illegal financial activities, and the other opinion is that only virtual currency trading activities that are suspected of illegal issuance of token tickets, unauthorized public offering of securities, illegal operation of futures businesses, and illegal fundraising are considered illegal financial activities and therefore prohibited. The term “business” refers to the professional work of an individual or an institution. For occasional buying and selling activities, it is obviously inappropriate to define them as business activities. For example, in a certain case, Li, who sold virtual currency domestically for the first time on behalf of his son, cannot be classified as a business activity based on the existing evidence. Therefore, the author believes that the “Notice on Further Preventing and Dealing with Risks in Virtual Currency Trading Speculation” does not classify all virtual currency trading activities as illegal financial activities and prohibit them. Judicial practice must make determinations on whether they should be classified as prohibited illegal financial activities based on the characteristics of individual case behaviors.

Looking at the provisions of Article 1, Paragraph (4) of the “2021 Ten Department Notice”, buying and selling virtual currency can be regarded as “virtual currency investment and trading activities”. Actions that violate public order and good customs are deemed invalid, not because they violate mandatory provisions of laws and regulations. Virtual currency trading activities that do not involve illegal financial activities do not have administrative illegality. Although the civil act of buying and selling virtual currency can be deemed invalid because it harms the country’s financial order, the virtual currency itself is not an illegal item.

3. From the perspective of civil trial practice, the act of “disgusting” the transaction does not deny the legitimate property attribute of virtual currency. From the 16 final civil judgments involving virtual currency transactions randomly selected from the China Judgments Online since 2022, the judicial practice deems civil acts aimed at producing, trading, and investing in virtual currency as invalid on the grounds of violating public order and good customs. However, the virtual currency and the transaction price involved in the case were not transferred to the relevant administrative department for handling, and measures such as recovery were not taken by the administrative department. Among them, the most representative and instructive Supreme People’s Court (2022) Supreme Court Civil Judgment No. 1581 holds that the software development contract entered into to obtain virtual currency is invalid due to damage to the public interest. However, both parties to the contract have faults, so the judgment requires the appellant to return the contract payment of 100,000 yuan to the respondent rather than confiscate the 100,000 yuan or exclude it from the scope of legal protection, which is consistent with the spirit of the “2021 Ten Department Notice”. For virtual currency trading activities that do not involve the destruction of financial order or the harm of financial security, the civil actors bear the risks and responsibilities themselves. The current legal policies have not yet prohibited them, nor have they classified virtual currency as prohibited items of the same nature as drugs, obscene books and periodicals, and controlled knives. Therefore, holding virtual currency by relevant entities is legitimate. For example, Lin Nong owns forest trees, which can be legally owned before obtaining a logging permit, but they cannot be disposed of by logging.

In summary, under the current legal policy framework, virtual currency held by relevant entities in our country still belongs to legitimate property and is protected by law.

II. Dealing with the property involved in the case from the perspective of legitimacy

Based on the above analysis, the author believes that for criminal acts involving virtual currency, the property involved in the case should not be uniformly confiscated or returned. It should be treated separately on the basis of the unity of criminal and civil law and achieve a balanced protection of personal property rights and the public interest.

(I) Cases where the victim has not engaged in any transaction. For example, in cases of stealing other people’s virtual currency, the victim has not engaged in any behavior or expressed intention to sell the virtual currency they hold to the outside world. If the defendant illegally obtains the victim’s virtual currency key and steals the virtual currency, the theft infringes on the victim’s legitimate property right to the virtual currency, and the victim has not engaged in any behavior that violates public order and good customs, such as harming the country’s financial order. In this case, the defendant should be sentenced to bear the obligation to compensate the victim for economic losses. For virtual currency that has not been transferred by the defendant, it should be ordered to be returned to the victim; for virtual currency that has already been transferred, the criminal amount should be determined and the defendant should be ordered to compensate the victim based on the defendant’s sale price, the victim’s purchase price, the previous purchaser’s purchase price, or the recent transaction price of similar virtual currencies of the defendant or the victim. For cases where the sale price or purchase price cannot be determined, since various forms of domestic virtual currency trading platforms have been abolished in our country and there is a lack of corresponding market reference prices, the prices of the relevant virtual currencies are not included in the criminal amount in accordance with the provisions of the “Price Law of the People’s Republic of China”. However, the criminal act should still be established.

(2) Victims engaged in transaction activities. For crimes involving fraud, robbery, theft, etc. of virtual currencies committed by the defendant through the victim’s transaction activities, if the victim’s legitimate property is infringed upon during the process of engaging in acts that violate public order and good customs, the victim also bears some fault. When determining the defendant’s responsibility for restitution in a criminal judgment, attention should be paid to maintaining consistency with civil judgments. In cases where there are multiple transactions involving virtual currencies, inability to explain the legal source of the virtual currencies, and evidence proving that the transactions of virtual currencies were carried out for the purpose of committing illegal crimes, the court may order the confiscation of all illegal gains obtained by the defendant without further ordering restitution to the victim. In cases where the aforementioned circumstances are not present, the court should consider the degree of the victim’s fault in civil matters and order the defendant to partially or fully compensate the victim. If a partial restitution is ordered, the remaining amount should be recovered from the defendant and confiscated. Confiscated virtual currencies can be legally sold in the international market through special channels, and the proceeds should be turned over to the national treasury.

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