For a long time, a thorny issue has plagued China's law enforcement agencies: how to handle the large amount of seized and confiscated cryptocurrencies involved in crimes such as money laundering and fraud, which have become increasingly rampant. Under the strict prohibition of virtual currency trading in mainland China, these digital assets seem to have become 'hot potatoes' that cannot be legally, publicly, and transparently liquidated domestically.
However, this dilemma has now encountered a breakthrough solution. Recently, the Beijing Municipal Public Security Bureau announced the launch of a new mechanism for the disposal of virtual currencies involved in cases—collaborating with the Beijing Property Exchange to innovatively 'borrow' compliant licensed exchanges in Hong Kong to publicly liquidate the virtual currencies involved in cases and ultimately submit the funds to the treasury. The establishment of this 'Beijing model' not only provides a benchmark for law enforcement agencies nationwide but also cleverly utilizes the unique advantages of 'one country, two systems,' highlighting Hong Kong's indispensable bridging role in the global Web3 landscape.
'Borrowing through Hong Kong' model
Before discussing the new model, it is essential to understand the old predicament. In the past, public security agencies across China seized a large number of cryptocurrencies such as Bitcoin, Ethereum, and Tether (USDT) after solving various cases. However, how to handle these assets faced two major challenges:
Unable to liquidate directly domestically: Due to the notice issued by the People's Bank of China and ten other ministries in 2021 regarding further preventing and handling the risks of virtual currency trading speculation, virtual currency-related business activities have been clearly defined as illegal financial activities, leading to the closure of all virtual currency exchanges domestically. As a result, law enforcement agencies cannot auction or sell seized property (such as real estate and vehicles) through domestic public platforms as they would with traditional seized assets.
High risks in cross-border disposal, lack of legal sources: If attempting to dispose of assets through overseas platforms or over-the-counter (OTC) transactions, one faces extremely high risks. First, there is a lack of clear legal basis and supervision, making the process opaque and prone to corruption or loss of state-owned assets. Secondly, the price of virtual currencies is highly volatile, and during the long and uncertain cross-border disposal process, the asset value may shrink significantly. Additionally, there are counterparty risks, difficulties in fund repatriation, and potential triggers for secondary money laundering.
These difficulties severely affect the effectiveness of asset recovery in cases, making it challenging to break through the 'last mile' of crime fighting. The seized virtual currencies often can only be stored long-term in cold wallets, unable to be converted into real national fiscal revenue. To solve this problem, the Beijing Municipal Public Security Bureau's Legal Affairs Team conducted in-depth research and exploration, ultimately collaborating with the Beijing Property Exchange (referred to as 'Beijing Exchange') to jointly sign a cooperation framework agreement for the disposal of virtual currencies involved in cases, establishing an entirely new disposal model.
The core of this model is to include the virtual currencies involved in the case in the category of 'physical submission,' and to design a complete and compliant disposal process:
Step 1: Commissioning by public security authorities. The public security authorities will formally entrust the seized and confiscated virtual currencies involved in the case to the Beijing Property Exchange, which has the qualifications for state-owned asset disposal, in physical form.
Step 2: Technical processing by professional institutions. The Beijing Exchange selects reliable third-party professional service institutions based on its professional capabilities to technically inspect, receive, and safely transfer the virtual currencies involved in the case. This step ensures the technical safety and traceability of the assets.
Step 3: Public liquidation through Hong Kong. This is the most critical part of the entire process. The received virtual currencies will be publicly marketed and sold through Hong Kong's compliant licensed virtual asset trading platforms (VATP). Choosing licensed exchanges in Hong Kong ensures the legality, compliance, and transparency of the entire liquidation process, maximizing asset value at fair market prices.
Step 4: Fund settlement and submission. After liquidation, the funds obtained (usually in US dollars or Hong Kong dollars) will be legally and compliantly converted into RMB after approval by the State Administration of Foreign Exchange of China and transferred to a special account for the public security authorities involved in the case. Ultimately, this amount will be officially submitted to the Chinese treasury as confiscated income, completing the entire disposal loop.
It is reported that this innovative model has been successfully applied in a case investigated by the Shunyi Public Security Bureau in Beijing, fully demonstrating the security, compliance, and feasibility of this mechanism. Of course, its significance goes far beyond solving a law enforcement operational challenge; it brings far-reaching impacts in multiple aspects:
Enhancing the deterrent effect against crime: Establishing smooth asset disposal channels means that illegal proceeds transferred and concealed through virtual currencies by criminals can be effectively recovered and deprived, greatly enhancing the crackdown on related criminal activities.
Ensuring the safety of state-owned assets: Disposing of virtual currencies involved in cases through open and transparent market-oriented methods maximizes the value of state-owned assets, avoiding potential value loss and integrity risks that may arise during opaque disposal processes.
Significant benefits for Hong Kong's Web3 center: This initiative undoubtedly represents a tremendous vote of confidence from mainland official agencies in Hong Kong's licensed exchanges. It indicates that Hong Kong's compliant platforms may undertake substantial asset disposal business from mainland authorities, greatly enhancing the liquidity, market credibility, and international status of these platforms, marking a milestone event in Hong Kong's journey to becoming a global virtual asset center.
A subtle shift in official attitudes: Although this does not mean that mainland China will relax its ban on private virtual currency trading, it indicates that the Chinese government is taking a more pragmatic and mature approach to the objective existence of virtual currencies as an asset category. From a simple 'one-size-fits-all' ban to establishing dedicated, compliant channels to manage and dispose of related assets, this itself is a significant progress and can be seen as a 'de facto recognition' of the asset attributes of virtual currencies in specific areas (law enforcement and state-owned asset disposal).
'One country, two systems' advantages
It is worth noting that the success of this new model in China is primarily attributed to the effective utilization of Hong Kong's unique institutional advantages within the 'one country, two systems' framework.
Firstly, Hong Kong has established a clear and continuously improving regulatory framework for virtual assets. The Hong Kong Securities and Futures Commission (SFC) issues licenses to qualified virtual asset trading platforms and strictly supervises their operations. This provides a legal and safe 'liquidation outlet' for assets involved in cases from the mainland.
Secondly, as an international financial center, Hong Kong has an independent customs area and financial system that allows for the legal trading of virtual currencies. This effectively complements the strict prohibitive policies of the mainland. The mainland's 'ban' and Hong Kong's 'regulation' create a clever synergistic effect.
Therefore, Hong Kong plays a dual role as a 'super connector' and 'firewall' in this model. It connects the global liquidity for assets that the mainland cannot dispose of, while its regulatory system ensures compliance and safety throughout the process, preventing risk spillover.
In summary, this new model of 'borrowing through Hong Kong' pioneered by the Beijing police is a highly intelligent institutional innovation. It not only efficiently resolves long-standing challenges in law enforcement but also represents a perfect collaboration between the mainland and Hong Kong under the grand framework of 'one country, two systems.'
In the future, as this model may be promoted nationwide, Hong Kong will further solidify its key gateway position between China and the global virtual asset market. This also indicates that, under China's strict regulatory policies, a unique, Hong Kong-centric, globally integrated 'Chinese characteristic' virtual asset management path is gradually taking shape.