Which public security authorities in China have jurisdiction over virtual currency exchange cases?

Which Chinese authorities oversee virtual currency exchange cases?

【Introduction】If we want to prove whether the unconventional and irregular exchanges that operate as fund pools under the guise of virtual currency exchanges or directly embezzle the assets entrusted by exchange users, or exchanges that manipulate market prices and cause forced liquidation, etc., constitute criminal offenses in China. Lawyer Liu believes that they definitely do, and there is no room for defense. However, the scenario I want to discuss today is: virtual currency exchanges registered overseas, with financial regulatory licenses obtained in compliance with overseas regulations, and servers used by exchanges located overseas, clearly refusing registration and access by mainland Chinese users.

Of course, these legitimate exchanges generally only have three factors associated with mainland Chinese users: first, the management: the ultimate controller or executives of the exchange are Chinese; second, the users: there are Chinese users on the exchange, who bypass the restrictions imposed by the exchange on mainland Chinese users by using VPN to “climb over the wall,” or by “tampering with mainland IP,” or by “purchasing overseas disguise identities”; third, the place of operation: the exchange’s place of operation is partially or entirely within China. These three factors have led to the impression that “overseas exchanges with purely foreign capital” can also fall within the jurisdiction of law enforcement agencies in China.

In the following text, Lawyer Liu will discuss the application of Chinese laws to the legal issues of this type of exchange model in China, based on numerous related cases in judicial practice and the criminal offenses involved in the so-called “legitimate” virtual currency exchanges in China.

I. Which Public Security Organs Have Jurisdiction over Exchange Cases?

(I) Legal Basis for Jurisdiction over Criminal Cases

First, Article 19 of the Criminal Procedure Law:

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“The investigation of criminal cases shall be conducted by public security organs, except as otherwise provided by law.” The phrase “as otherwise provided by law” refers to two situations: first, although it is classified as a criminal case in substantive law, it does not require investigation in procedural law, and the People’s Court can directly accept it, which includes self-prosecuted cases; second, it refers to criminal cases that should be investigated and filed by other organs or departments according to the law.

Second, Article 25 of the Criminal Procedure Law:

Criminal cases shall be under the jurisdiction of the people’s court at the place where the crime was committed. If it is more appropriate for the people’s court at the place where the defendant resides to try the case, it may be under the jurisdiction of the people’s court at the place where the defendant resides.

Third, Article 2 of the Interpretation of the Supreme People’s Court on the Application of the Criminal Procedure Law of the People’s Republic of China:

The place of the crime includes the place where the criminal act was committed and the place where the criminal result occurred. For crimes committed or mainly utilizing computer networks, the place of the crime includes the location of the server used for the criminal act of the network service used to commit the crime, the location of the network service provider, the location of the information network system being infringed and its administrator, the location of the information network system used by the defendant and the victim during the criminal process, as well as the location where the victim was when being infringed and the location where the victim’s property suffered loss, etc.

Fourth, “Interpretation of the Supreme People’s Court on the Application of the Criminal Procedure Law of the People’s Republic of China” Article 3:

The defendant’s household registration is considered as their place of residence. If the place of habitual residence is different from the household registration, the place of habitual residence is considered as the place of residence. The place of habitual residence refers to the place where the defendant has continuously resided for more than one year before being prosecuted, except for hospitalization for medical treatment. If the defendant is a legal entity, the registered address is considered as the place of residence. If the main place of business or main office location is different from the registered address, the main place of business or main office location is considered as the place of residence.

(2) Based on legal basis, which public security bureau has jurisdiction?

If the trading activities of the exchange occur on the Internet and are suspected of constituting a criminal offense, the provisions of Article 25 of the Criminal Procedure Law, Article 16 and Article 17 of the Ministry of Public Security’s “Provisions on the Procedures for Handling Criminal Cases by Public Security Organs,” and Article 2 of the Opinions of the Supreme People’s Court, the Supreme People’s Procuratorate, and the Ministry of Public Security on the Application of Criminal Procedure in Handling Network Crime Cases, etc., should be applied. It follows the basic principle of territorial jurisdiction that the public security organ with jurisdiction is primarily based on the place of the crime and secondarily based on the place of residence of the criminal suspect. Based on the degree of close connection between the disputed case’s facts and location, jurisdiction is determined within the scope of “the location of the website server, the location of network access, the location of the website builder and administrator, the location of the computer information system used by the criminal suspect and the victim, the location where the victim was infringed, and the location where the victim’s property suffered loss.”

Based on the legal basis, it can be seen that:

First, the public security organ with jurisdiction has jurisdiction over the crime committed by the operating model of the virtual currency exchange;

Because: In the view of the investigating unit, the operation of the virtual currency exchange constitutes a “crime committed using a computer network.” Therefore, the public security organ has jurisdiction over the location of the server used for the crime, the location of the network service provider, the location of the information network system being infringed and its administrator, the location of the information network system used by the defendant and the victim during the criminal process, as well as the location where the victim was infringed and the location where the victim’s property suffered loss. This means that the following areas may obtain jurisdiction when handling cases related to virtual currency exchanges:

1. Location of the server: The server of the virtual currency exchange is generally provided by Amazon and is located overseas, so it is not considered. However, if “Alibaba Cloud” or “Huawei Cloud” is used, the public security organs in Hangzhou or Shenzhen have jurisdiction due to being the location of the server. Here, it is also worth reminding everyone of an issue: Some Internet giants, out of consideration for shipping costs and labor costs, do not necessarily place all servers in their headquarters but may make other choices for server deployment locations. For example, Guian Huawei Cloud Data Center is the largest data center of Huawei Cloud globally. The total land area of this data center is 1521 acres, with a construction scale of over 1 million servers. It is also an important carrier node for Huawei Cloud’s business in the Southwest region. So, if a legal case arises from the extension of servers in that area, does the public security agency in Guian also have jurisdiction? From the current judicial practice, it is worth questioning, but theoretically, Guian can obtain jurisdiction. Therefore, the jurisdiction of the public security range for the crime committed by the operating model of the virtual currency exchange has become broader.

2. Location of network service provider: There are mainly five types of network service providers: Internet Service Provider (ISP), Network Service Provider (NSP), Network Application Service Provider (ASP), Network Infrastructure Service Provider (IaaS), and Network Security Service Provider (SaaS).

However, if you want to apply the location of the network service provider, it must correspond to the “main business scope of the exchange”. It must be the location of the network service provider centered around the main business of the exchange. Therefore, if the domestic institution is only a cooperative institution of the exchange, or the business operated is a non-main business of the exchange, such as responsible for marketing and promotion, etc., the location of the network service provider cannot be directly applied. If the main business of the exchange is in the domestic market, or if the main operating team and research and development team of the exchange are in the domestic market, then the location of the network service provider is generally under the jurisdiction of the public security where the exchange is located.

3. Location of the information network system and its administrator being infringed. Since the virtual currency exchange does not have a network infringement model and there is no infringed information network system, this clause does not apply to the situation of the exchange.

4. Location of the information network system used by the defendant and the victim during the criminal process, as well as the location of the victim at the time of the infringement and the location of the victim’s property loss, etc.

Using this clause mainly refers to the existence of “victims” in the process of using the exchange. So, does the so-called “compliant virtual currency exchange” have victims? According to law enforcement agencies, users who invest in virtual currencies on exchanges and suffer losses are considered victims. However, Lawyer Liu believes that this view is problematic. The reason is that even if the model of the virtual currency exchange may constitute a criminal offense in China, users who make normal investment losses on exchanges cannot be regarded as victims of the criminal offense committed by the exchange. Because even if the exchange constitutes a criminal offense, the infringement of legal interests and the losses suffered by users are not directly related. Therefore, as long as there are users who make normal investment losses on the exchange, applying the jurisdiction of the public security based on the “location of the victim” is a “relevance error”. This is also widely criticized by law enforcement agencies in many remote areas that handle virtual currency exchange cases based on the jurisdiction of the “location of the victim”. Lawyer Liu will provide specific arguments on this issue in the following text.

5. Place of residence of the defendant. When using this clause for jurisdiction, law enforcement agencies need to provide reasons according to Article 25 of the Criminal Procedure Law: why “it is more appropriate for the people’s court at the place of residence of the defendant to hear the trial”?

Lawyer Liu believes that the jurisdiction of the court at the place of residence of the defendant can only serve as an auxiliary principle for determining jurisdiction. The so-called place of residence of the defendant refers to the place where the defendant is registered or resides. However, what conditions are considered “more appropriate”? This generally refers to situations where it is difficult to determine the place of the crime or where there is strong public anger at the place of residence and a demand for the defendant to be brought back for trial, etc. Therefore, when the case does not meet these special conditions, it cannot be simply and rudely jurisdictionally assigned to the place of residence of the defendant without any reason. Instead, it is necessary to comprehensively analyze the specific circumstances of the case before assigning jurisdiction to the place of residence of the defendant.

2. If I lose money buying coins on an exchange, does the local law enforcement agency where the victim is located have jurisdiction?

To determine whether the local law enforcement agency where the victim is located has jurisdiction, it is necessary to consider the specific charges involved. Taking the possible criminal offenses of “illegal use of information networks” and “organizing and leading pyramid schemes” as examples in the case of exchanges:

First, regarding the offense of “illegal use of information networks,” according to Article 287 of the Criminal Law, this offense regulates three types of statutory acts using information networks, without involving victims or their property losses. The jurisdiction of the police should be limited to the “location of the website server, location of network access, location of the website creator or administrator, and location of the computer system used by the suspect.” In other words, the appropriate jurisdiction can only be determined based on the location of the exchange’s servers, the location of the website creator or administrator, and the location of research and promotion activities related to the exchange.

Second, regarding the offense of “organizing and leading pyramid schemes,” the jurisdiction can be determined based on the “location of the computer information system used by the victim,” “location of the victim at the time of the infringement,” and “location where the victim’s property suffered losses.” However, this requires the indictment to establish that there are people involved in pyramid schemes and that there have been property losses in a certain location. If there is no evidence or material indicating that victims in a particular location have reported the case or assisted in the investigation, and there is no evidence or material indicating a practical connection between that location and the case, then that location does not have jurisdiction over the “organizing and leading pyramid schemes” case.

In addition, for the jurisdiction to be based on the location of the victim, that location should also have a strong connection to the case. Specifically:

First, for users who have invested in exchanges and suffered losses, the law enforcement agency should investigate whether the exchange has deceptive factors related to the user and the investment funds, rather than simply intervening in all actions of the exchange based on this. Here’s a simple example: If a consumer reports to the local food safety department that a restaurant has food safety issues, the food safety department can only intervene in the restaurant based on its own authority to address the food safety issue, and cannot investigate and deal with unrelated issues such as fire safety. Otherwise, it will inevitably lead to abuse and misallocation of power.

Second, due to the cross-regional and widespread nature of cybercrime cases, and considering that pyramid scheme crimes typically involve significant confiscation of profits, when determining jurisdiction, factors such as facilitating the investigation of the facts of the case, protecting the legitimate rights and interests of the victims, ensuring fair handling of the case, and ensuring a balanced and unified outcome should be taken into account. The appropriate law enforcement agency should have jurisdiction. If it is a major case with significant impact nationwide, directly involving the property interests of tens of thousands of people, it would be imbalanced to assign the case to grassroots-level police for investigation, which would result in handing over the private property of tens of thousands of individuals to the local finance. In other words, criminal cases involving the substantial property interests of tens of thousands of users across the country should not be subject to jurisdiction based on the weak connection of a few users. Instead, the main location of the activity, the location of the main participants, the actual affected location, or the main affected location should be considered to determine jurisdiction.

In conclusion, for users who suffer losses from buying coins on exchanges, whether the local law enforcement agency has jurisdiction should be determined based on the specific charges and circumstances, taking into full consideration the elements of relevance. If there is no corresponding legal and factual basis, initiating an investigation and filing a case would be a clear violation of the Criminal Procedure Law and should be corrected.

III. Can designated jurisdiction be applicable to cases involving virtual currency exchanges?

According to Article 27 of the Criminal Procedure Law and Articles 18 to 21 of the 2021 Supreme People’s Court Interpretation of Criminal Procedure, designated jurisdiction only applies to the following three situations: first, cases with unclear jurisdiction; second, cases that are more suitable for trial in other courts; third, cases that have been accepted by lower courts being transferred to other courts for trial. According to Article 22 of the Provisions on the Procedures for Public Security Organs to Handle Criminal Cases, for criminal cases with unclear or disputed jurisdiction, the relevant public security organs can negotiate, and if the negotiation fails, the jurisdiction shall be designated by the common higher-level public security organ.

Lawyer Liu believes that cases involving virtual currency exchanges have similarities with complex and difficult cases related to securities and futures. Articles 13 and 14 of the Opinions on Strictly Cracking Down on Securities Violations Issued by the General Office of the Communist Party of China Central Committee and the General Office of the State Council in 2021 stipulate that “counteracting securities violations should establish securities crime handling and trial bases in some districts and cities where securities trading venues, futures trading venues, and other relevant locations are located. Strengthen the allocation of major securities crime cases to the bases and have corresponding procuratorates and courts respectively responsible for prosecuting and adjudicating, appropriately centralize jurisdiction over securities crime cases through territorial jurisdiction or designated jurisdiction, and strengthen local territorial responsibility. Strengthen information exchange and law enforcement cooperation between the China Securities Regulatory Commission, local governments, and relevant departments, explore the establishment of an internal reporting system for major illegal cases in the capital market, effectively prevent and restrain local protection and other obstacles and interferences encountered in case handling, and promote efficient investigation and handling of cases. While adhering to the premise that financial management is primarily a central responsibility, strengthen local risk disposal responsibility. Local governments should regulate various regional trading venues, crack down on various illegal securities and futures activities in accordance with the law, and do a good job in preventing and disposing of financial risks in the region, maintaining social stability.”

Therefore, for cases involving virtual currency exchanges, the application of designated jurisdiction should comply with Articles 21 and 22 of the Rules of Criminal Procedure of the People’s Procuratorate. If it is not a case with unclear jurisdiction and there is no court that has already accepted the case, it is obviously not in line with the specific circumstances of designated jurisdiction and cannot be arbitrarily designated in advance, but should be reported to the Supreme People’s Procuratorate.

IV. In cases where virtual currency exchanges constitute criminal offenses, which local law enforcement agency should have jurisdiction?

Regarding the issue of which law enforcement agency should have jurisdiction over cases involving criminal offenses related to virtual currency exchanges, the first consideration is the location of the exchange’s main business. Since most virtual currency exchanges operate in a decentralized manner, determining the location of the main business involves primarily considering the location of the project’s controlling shareholders and executives, as their location often represents the location of the company’s business. It also includes the location of the exchange’s technical, operation, and research and development teams. Even if there is a specific operating location for non-exchange main business, it should not be considered the location of the exchange and should not be included in the category of “location of the network service provider.”

Secondly, the location of the servers used by the network services for committing criminal acts should be considered. The determination of the server’s location is mainly based on the physical location. If, based on comprehensive assessment of the specific circumstances of the case, it is difficult to determine the location of the crime, the jurisdiction of the defendant’s place of residence may be more appropriate. In addition, for users who suffer losses from buying coins on the exchange, whether the law enforcement agency in the jurisdiction of the local victim has jurisdiction should be determined based on the specific charges and circumstances, taking into full consideration the relevant factors.

Finally, for cases involving virtual currency exchanges, the designation of jurisdiction should comply with Articles 21 and 22 of the “Criminal Procedure Rules of the People’s Procuratorate.” If it is not a case with unclear jurisdiction and the court has not already accepted the case, and it clearly does not meet the specific circumstances for designating jurisdiction, the designation of jurisdiction should not be made arbitrarily in advance.

Section 5: Lawyers’ Opinion

We believe that law enforcement agencies should adopt a comprehensive evaluation and cautious approach when handling cases involving virtual currency exchanges. Only after careful analysis and judgment should they file a case; otherwise, it will not only result in the waste of judicial resources but also contradict the essence of punishment, which is education rather than retribution. In order to avoid legal risks, virtual currency exchanges need to proactively establish compliance measures, including but not limited to: refusing registration and access from mainland Chinese users’ IP addresses, using network servers located overseas, and conducting orderly withdrawals of domestic users from the platform. When necessary, professional lawyers can be hired to assist in designing compliance programs based on specific operational circumstances in order to mitigate criminal risks.

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