Author: Liu Yang | Nakamoto Law

Original link: https://mp.weixin.qq.com/s/j6NgIB7MXlWXdOqyJTFEGQ

Statement: This article is a reprint. Readers can obtain more information through the original link. If the author has any objections to the reprint format, please contact us, and we will make modifications according to the author's requirements. Reprinting is only for information sharing and does not constitute any investment advice, nor does it represent Wu's views and stance.

On November 27, 2020, a criminal judgment was leaked online, igniting not only the cryptocurrency community but also attracting significant attention from many traditional legal professionals, even drawing the attention of those outside the legal industry. Yes, it is the PlusToken case, possibly one of the largest pyramid scheme cases in terms of value to date.

To what extent? The second-instance criminal ruling in the PlusToken case shows that "The PlusToken platform collected a total of 314,211 bitcoins, 9,174,201 ethers, 928,280,240 ripples, 117,450 bitcoins cash, 96,023 dash coins, 11,060,162,640 dogecoins, 1,847,674 litecoins, and 51,363,309 eos coins from members." According to the Price Identification Center of the Yancheng City Price Bureau, based on the lowest price from May 1, 2018, to June 27, 2019, these 8 types of digital currencies are equivalent to 148××××8037.50 yuan. These "××××" make the case value ambiguous.

According to the market value at the time of writing, the value of the bitcoins involved in the case is 3.7 billion US dollars, and the combined value of dogecoin and ripple is nearly 5 billion US dollars (this is not even the highest market value).

Back to the main topic, the second-instance criminal ruling in the PlusToken case mentions: "The issue of disposing of the confiscated property. Upon investigation, evidence in the case confirms that Chen Bo applied to the Yancheng City Public Security Bureau to authorize Beijing Zhifan Technology Co., Ltd. to sell and realize the digital currency seized by the public security authorities, with all funds being regarded as his restitution funds." This is the core point that attracted widespread attention to this case. At that time, people in the cryptocurrency community were worried about whether the massive virtual currencies would 'crash' the market, legal professionals were concerned about the legality of such disposal, while those outside the legal industry sniffed out opportunities for wealth, bringing the issue of disposing of the involved virtual currencies into the public eye for the first time.

As the author has been engaged in the defense of cryptocurrency criminal cases, I had encountered the disposal of involved virtual currencies even before the PlusToken case. At that time, there were no established rules for the disposal of involved virtual currencies. Some law enforcement units brought the suspects out and allowed them to sell the coins themselves on trading platforms, others had the suspects' relatives sell on behalf of the suspects, and some allowed suspects to entrust third-party companies to realize the currency. After the PlusToken case, entrusting third-party companies for disposal became mainstream. Regardless of the method, the voluntariness of the suspects was heavily questioned.

Let’s tentatively call this stage the Third-Party Company Disposal 1.0 stage. In the 1.0 stage, the method of third-party company disposal was to find large OTC traders, who would absorb the virtual currencies and then seek buyers in the market, with the OTC traders profiting from the exchange rate differences while the third-party companies earned service fees.

The service fee of third-party companies is earned as follows: for example, if the agreed disposal service fee is 15%, and the third-party company obtains 100 yuan of involved virtual currency from the judicial authorities, after dealing with the OTC traders, they only need to return 85 yuan to the judicial authorities, meaning that the third-party company can realize profits in real time during the disposal process, and the profits are considerable. As for why the service fee is so high, the third-party companies explain it as due to currency price fluctuations, trading wear and tear, etc.

Whether allowing the suspect to dispose of it themselves, allowing family members to dispose of it, or having third-party companies find OTC traders to dispose of it, is there any legal basis for this? It cannot be said that there is none. On September 4, 2017, the central bank and seven other departments issued a (Notice on Preventing Risks of Token Issuance and Financing). The third paragraph of this notice strengthens the management of token financing trading platforms, specifying that from the date of this notice, any so-called token financing trading platform must not engage in the exchange of legal currency and tokens, or 'virtual currency', must not buy or sell or act as a central counterparty for buying and selling tokens or 'virtual currency', and must not provide pricing, information intermediary, and other services for tokens or 'virtual currency'.

Upon closer inspection, the 94 (notice) regulates token financing trading platforms, not individuals, so ultimately allowing OTC traders to realize it is not a big problem.

However, there are still issues. Since the disposal of involved virtual currencies is still a niche business and has excessive profits, this has also fostered some illegal problems, such as issues of power and money trading, law enforcement personnel embezzling virtual currencies, third-party companies losing all their assets by holding the temporarily seized virtual currencies from judicial authorities in the market, OTC traders intentionally collecting dirty money in the market and transferring it to the special accounts involved (after all, special accounts are not afraid of being seized or frozen), and many OTC traders have been targeted by law enforcement in other jurisdictions for involving dirty money, etc. In short, it is very lively.

In 2021, as the judicial authorities increased their crackdown on the cryptocurrency sector, various disposal companies sprang up like mushrooms after rain. I once described it in an article as follows:

There are more sickles than leeks.

In September 2021, a significant event occurred that changed the landscape of disposing of involved virtual currencies. On September 15, the central bank and ten departments issued a (Notice on Further Preventing and Disposing of Risks of Virtual Currency Trading Speculation), historically known as '924 (notice)'. It stated that activities related to virtual currency are considered illegal financial activities. Conducting exchange business between legal currency and virtual currency, exchange business between virtual currencies, buying and selling virtual currencies as a central counterparty, providing information intermediary and pricing services for virtual currency trading, token issuance financing, and trading of virtual currency derivatives are all strictly prohibited and must be resolutely banned.

Compared to the 94 (notice), the prohibitive subject in the aforementioned behaviors has disappeared. The 94 (notice) regulated token financing trading platforms, while the 924 (notice) did not specify a subject, regulating 'everything'. Companies cannot do it, platforms cannot do it, and individuals cannot do it.

The previous method of organizing a group of OTC traders by third-party companies to realize disposal is no longer feasible.

If it cannot be done domestically, then let’s take the business abroad; the Third-Party Company Disposal 2.0 stage has emerged. In the 2.0 stage, all disposal companies’ PPT presentations invariably highlight 'overseas disposal' as the core selling point of the company, but is it really overseas disposal? Not necessarily.

In reality, the vast majority of virtual currency disposal during this period was still completed through domestic matching; however, the money entering the judicial authorities' accounts came from overseas, but this money is not the same as that money. It needs to be explained that the money exchanged back did not require a one-to-one correspondence with the money from virtual currency disposal, meaning it is impossible to verify whether the returned money is indeed from the virtual currency disposed of overseas.

I say this based on evidence: First, there are several prominent individuals in a certain southern province who have been investigated by law enforcement in other jurisdictions, and the case reason is 'illegal disposal'. Second, some disposal companies consulted me on how to dispose of virtual currencies legally, frankly stating, 'After those people were arrested, all disposal activities came to a halt.' Third, whether it is indeed overseas disposal, judicial authorities only recognize the exchange settlement slips. And those people are the ones who can get the exchange settlement slips.

In the Third-Party Company Disposal 2.0 stage, there are also a few changes: First, disposal service fees have significantly decreased. As the number of virtual currencies waiting for disposal has increased across the country, disposal business has become more transparent, coupled with competition among disposal companies, the service fees have gradually decreased to below 10%, and I have even heard of cases as low as 4%. Second, some local governments have intervened in the virtual currency disposal work, publicly bidding for asset packages awaiting disposal, with the disposal site supervised by related departments such as the Discipline Inspection Commission, Political and Legal Committee, and the Finance Bureau, among others, outside of the judicial authorities. Third, the service fee implements a dual line of fiscal revenue and expenditure. In the past, the third-party company would take 100 yuan of cryptocurrency and return 85 yuan, but now the third-party company takes 100 yuan of cryptocurrency, has to return 100 yuan to the treasury, and then pays the pre-agreed service fee to the third-party company through the treasury expenditure.

At this stage, some well-established third-party disposal (assisting investigation) companies that made significant profits in earlier years no longer personally engage in specific disposal activities. Instead, they often subcontract the assets awaiting disposal to multiple teams for handling, partly to set up firewalls and partly to facilitate better work.

Finally, in 2024, the Supreme People's Court took action, making 'Research on the Disposal Issues of Involved Virtual Currencies' a major judicial research project for 2024. The research team includes universities and judicial authorities from Beijing, Chongqing, and Shenzhen. I was also fortunate to participate in some research activities in Beijing and Chongqing. The details of what I learned in the meetings cannot be disclosed, so I will discuss the Third-Party Company Disposal 3.0 stage based solely on publicly available news releases online.

Before the Third-Party Company Disposal 3.0 stage, there was a period when the disposal work was stalled because various places were unsure how to proceed. It was widely rumored online that the market value of involved virtual currencies awaiting disposal by judicial authorities across the country is an extremely exaggerated figure. The emergence of Hong Kong has provided a compliant path for the disposal of involved virtual currencies.

For example, recently, Beijing took the lead in announcing its successful experience of disposing of involved virtual currencies through the Beijing Property Exchange with the help of Hong Kong. From what I understand, other regions are also exploring compliance disposal through Hong Kong. Based on my analysis, although the practices vary, they all adhere to the same principles, potentially containing a 'universal formula'.

First, compliant disposal of involved virtual currencies cannot be separated from the State Administration of Foreign Exchange and domestic banks. The inflow of foreign exchange must be reported to the foreign exchange administration for filing and returned through bank channels. Since it comes back through bank channels, Hong Kong's banking institutions are also indispensable. Second, according to Hong Kong's banking regulations and the requirements of licensed trading platforms in Hong Kong, Hong Kong banks cannot act as entities opening trading accounts, which means a local Hong Kong institution that can open trading accounts is needed. Third, after disposing of the involved virtual currencies on the trading platform, the funds are transferred to a Hong Kong bank, where the entity files with the foreign exchange administration, and the settled funds are transferred from the Hong Kong bank to domestic banks.

As for the institutions outside this formula, they can be freely replaced—whether companies or exchanges, they are not essential.

Thus, I offer the following suggestions: first, the disposal entity of involved virtual digital currencies should be provincial-level judicial authorities; second, it is recommended that higher-level departments take the lead to establish a 'green channel' between provincial-level judicial authorities and state-owned banks, where judicial authorities open special accounts for disposing of involved virtual currencies and entrust state-owned banks to dispose of them; third, state-owned banks should fully utilize Hong Kong or other legally compliant overseas branches to complete the legal disposal of involved virtual currencies abroad.

In summary, reduce unnecessary circulation links, return disposal profits to the state, and maximize disposal efficiency.

Recently, the (People's Court Daily) published an article titled (Disposal of Criminal Involved Virtual Currencies: Challenges, Innovations, and Judicial Responsibilities), stating that 'it is possible to explore entrusting qualified third-party institutions to conduct disposal in overseas jurisdictions where virtual currencies are legal, such as Hong Kong, through compliant licensed trading platforms, converting virtual currencies into legal tender at market prices, and after realizing these overseas, handling it in accordance with the regulations of the State Administration of Foreign Exchange (regarding the opening of foreign exchange accounts and handling related foreign exchange income and expenditure issues in foreign-related judicial activities by people’s courts).'

I hope that the Supreme People's Court, as the superior unit of the (People's Court Daily), can produce normative guidance documents as soon as possible based on thorough research of practical experiences and investigations in various regions.

Finally, I would like to reiterate a phrase I often mention:

"No other entity has ever caused the law to be as entangled as Bitcoin."

#BTC #XRP #ETH #DOGE