Written by: Liu Zhengyao
Introduction
Recently, I encountered two consultations regarding practitioners in the cryptocurrency industry who may be suspected of embezzlement crimes, so it is necessary to write a short article specifically analyzing this issue, in order to provide reference for ordinary employees or executives and leaders among cryptocurrency industry practitioners, clarifying legal red lines and jointly building a positive web3.
I. Analyzing the Criminal Composition of Embezzlement
From the perspective of our country's (Criminal Law) provisions on the crime of embezzlement, it is not actually complicated—staff of companies, enterprises, or other units (subject identity), using their position's convenience to illegally possess the property of their unit in large amounts (objective behavior). There are three levels of sentences for embezzlement: for general circumstances, a fixed-term imprisonment of up to three years; for particularly large amounts, a fixed-term imprisonment of three to ten years; and for particularly large amounts, a fixed-term imprisonment of ten years or more or life imprisonment (behavioral consequences).
According to relevant judicial interpretations, the case filing standard for the crime of embezzlement is 30,000 yuan, which is still a low threshold.
II. The Specificity of the Cryptocurrency Industry
Since the '9.4 Announcement' (Announcement on Preventing the Risk of Token Issuance and Financing) in 2017, all projects for issuing virtual currency financing (raising coins) in the mainland have been suspended, and some virtual currency exchanges operating in the mainland have relocated out of China; after the '9.24 Notice' (Notice on Further Preventing and Dealing with Virtual Currency Trading and Speculation Risks) in 2021, all business activities related to virtual currencies in the mainland have been classified as 'illegal financial activities,' and virtual currency exchanges have completely lost their legal basis for compliance operations in mainland China, all relocating overseas.
For other business activities involving virtual currencies, such as the exchange of virtual currencies for fiat currencies, the exchange of virtual currencies among themselves, buying and selling virtual currencies as a central counterparty, providing pricing and information intermediary services for virtual currency trading, etc., are also prohibited in the mainland.
Currently, relatively safe cryptocurrency ventures in the domestic market generally involve blockchain projects (not involving token issuance), virtual currency wallet companies, etc.
Although the '9.24 Notice' prohibits overseas virtual currency exchanges from providing services to mainland residents via the Internet, the number of mainland users in virtual currency exchanges established by Chinese backgrounds still accounts for more than half; in mainland cities like Shenzhen, Hangzhou, and Shanghai, there are also technical teams and customer service teams from some overseas virtual currency exchanges.
Such a scenario is rare in other industries—where national policies announce a certain business as illegal, but in fact, that business still exists 'stably' in the mainland, and even now judicial authorities may engage in some form of judicial 'cooperation' with companies engaged in illegal financial activities abroad. For example, domestic judicial authorities may request testimony from overseas virtual currency exchanges and use the relevant evidence as evidence to accuse criminal suspects of committing crimes.
III. Can Employees in the Cryptocurrency Circle Constitute the Subject of Embezzlement?
As mentioned above, the criminal subject of the crime of embezzlement must be 'staff of companies, enterprises, or other units'. If it is an overseas company engaged in 'illegal financial activities' (such as a virtual currency exchange), or its domestic branches or controlled companies, can they be considered 'companies, enterprises, or other units' in the context of embezzlement?
This brings us to the viewpoint in the article of the official account of the Beijing High Court (Is it Legal to 'Obtain' Virtual Currency by Using Position? Court: Criminal!): In response to the defense lawyer's argument that the victim (the company)'s project involved virtual currency and should bear the risk, thus not receiving legal protection, the court believes that the risks of virtual currency trading and the nature of the company's (victim's) project do not affect the legal evaluation of the defendant's (suspected criminal) behavior based on established facts and relevant legal provisions.
In simple terms, in the business scenario of virtual currency exchanges, if employees of the exchange engage in embezzlement or other criminal acts, it will not be overlooked just because the exchange's own business is legal or illegal in the mainland.
Another question is how to prove that Zhang San or Li Si is an employee of a virtual currency exchange or other companies in the cryptocurrency industry? On the surface, it can be judged based on whether labor contracts are signed or whether social insurance is paid, but more importantly, it is necessary to see whether the company has management and control functions over the employee's labor remuneration.
For virtual currency exchanges or other companies in the cryptocurrency industry, in practical operations, they generally do not directly hire employees in the mainland under their own name. They may use labor service companies or other controlled companies (which do not operate cryptocurrency-related businesses in the mainland) as the main entity for labor employment; of course, there are also more 'carefree' web3 employment models—no labor contracts are signed, and salaries are paid directly in USDT or other tokens. At this point, how to determine the identity of the victim in the crime of embezzlement is highly controversial in practice. Both the prosecution and the defense can 'show their skills' to protect their legal rights.
The last question is, if the funds or assets involved in the case are virtual currencies, do they constitute corresponding crimes? Taking embezzlement as an example, if someone uses their position to embezzle the company's USDT, ETH, BTC, and other virtual currencies, there may not be much controversy in practice, as these mainstream virtual currencies have the property attribute, which has become a consensus in judicial theory and practice; however, what if the embezzled assets are tokens issued by the company itself? Or does embezzling some future expected benefits (such as tokens that have not yet been unlocked or listed) constitute the crime of embezzlement? These are all highly controversial areas where professional web3 lawyers (whether defending or prosecuting) can play a significant role.
IV. The Application of the Crime of Accepting Bribes as Non-State Staff in the Cryptocurrency Industry
For some cryptocurrency practitioners, there may be a legal scenario where they could simultaneously involve the crime of embezzlement and the crime of accepting bribes as non-state staff. For example, in the article published by the Supreme Court (The Supreme People's Court Releases Typical Criminal Cases Promoting the Development of the Private Economy), the case of 'Shi Mouyu's Accepting Bribes as a Non-State Staff and Embezzlement' is mentioned.
Summary of the case: Shi Mouyu used his position's convenience to illegally accept property worth a total of 6.08 million yuan from other companies in the cooperation business (virtual currency rewards) introduced by other companies and his own company; at the same time, using his position's convenience, in the virtual currency business carried out by the aforementioned two companies, he converted virtual currencies through multiple accounts of his company and transferred them into his personal bank account under his control, illegally possessing a total of 3.66 million yuan of his company's property.
Ultimately, Shi Mouyu was sentenced by the Haidian District Court of Beijing to concurrently constitute the crime of accepting bribes as a non-state staff member and the crime of embezzlement, with multiple sentences, serving a fixed-term imprisonment of 12 years.
Conclusion
In December last year, it was reported that some virtual currency exchanges represented by Binance began to rigorously investigate internal corruption issues. The mouse warehouse incident involving Binance employees that broke out in March this year is actually just the 'tip of the iceberg' in the cryptocurrency industry; since centralized institutions in the cryptocurrency industry cannot be strictly regulated like traditional financial and securities institutions, incidents of insider trading, collusion with market makers and project parties, etc., do occur frequently. However, the illegal costs of these incidents are low, and the difficulty of investigation is high (unless some low-level mistakes are made); from the perspective of defense lawyers, there is relatively more room for defense in cases of embezzlement crimes involving cryptocurrencies or non-public bribery crimes.
However, from the actions of some major exchanges like Binance and Ouyi, the future crackdown on internal corruption will only become more intense. Coupled with the increasingly strict compliance regulations for the web3 industry in countries and regions like Singapore and Hong Kong, Lawyer Liu believes that the internal compliance development of virtual currency exchanges or other cryptocurrency industries will increasingly converge with or even evolve into that of traditional Internet companies.