From Wild Growth to Orderly Compliance: The Past and Present of Disposing Involved Virtual Coins

Author: Liu Yang | Nakamoto Law

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On November 27, 2020, a criminal judgment was leaked online, igniting the cryptocurrency community and drawing significant attention from traditional legal professionals, even making people outside the legal industry take notice. Yes, it's the Plus Token case, possibly one of the largest Ponzi schemes in terms of case value to date.

How big is it exactly? The second-instance criminal judgment of the PlusToken case shows that "The PlusToken platform collected a total of 314,211 Bitcoins, 9,174,201 Ethereum, 928,280,240 Ripple, 117,450 Bitcoin Cash, 96,023 Dash, 11,060,162,640 Dogecoin, 1,847,674 Litecoin, and 51,363,309 EOS from members." "According to the pricing identification center of the Yancheng Price Bureau, based on the lowest price from May 1, 2018, to June 27, 2019, the aforementioned 8 types of cryptocurrencies are equivalent to 148××××8037.50 RMB." These several "××××" make the case value confusing.

According to the market value at the time of writing, the value of Bitcoin involved in the case is 37 billion USD, while the combined value of Dogecoin and Ripple is almost 5 billion USD (this is not even during the peak market value).

Back to the point, the second-instance criminal ruling in the Plustoken case mentions: "The disposal of confiscated illegal gains. Upon investigation, evidence in the case confirms that Chen Bo applied to the Yancheng Public Security Bureau to authorize Beijing Zhifan Technology Co., Ltd. to sell and liquidate the digital currency seized by the public security authorities, with all funds being used as return of the stolen goods." This is the core issue that has attracted widespread attention in this case. At that time, people in the cryptocurrency community were worried about whether the massive amounts of virtual currency would 'crash' the market, legal professionals were concerned about the legality of such disposal, while those outside the legal sector sensed a business opportunity for quick wealth, bringing the issue of disposing of the involved virtual currency into the public eye for the first time.

Due to the author's long-term involvement in the defense of virtual currency criminal cases, they had previously dealt with the disposal of virtual currencies involved in cases even before the Plus Token case. At that time, there were no fixed rules for the disposal of the virtual currencies involved; some law enforcement agencies brought the suspects in and had them sell the coins on trading platforms themselves, while others allowed the suspects' family members to sell the coins on their behalf on trading platforms, and some had the suspects entrust third-party companies to liquidate the assets. After the Plus Token case emerged, entrusting third-party companies for disposal became mainstream. Regardless of the method, the voluntariness of the suspects has been heavily questioned.

We can tentatively call this phase the Third-Party Company Disposal 1.0 Phase. In the 1.0 phase, the method of disposal by third-party companies is to find large OTC traders, who will absorb the virtual currency and then find buyers in the market separately. The OTC traders earn the difference in exchange rates, while the third-party companies earn service fees.

The service fee of third-party companies is earned in this way. For example, if it is agreed that the disposal service fee is 15%, after the third-party company obtains 100 yuan of virtual currency involved in the case from the judicial authority and processes it with an OTC merchant, it only needs to return 85 yuan to the judicial authority. This means that the third-party company can obtain real-time profits during the disposal process, and the profits are quite substantial. As for why the handling fee is so high, the explanation provided by the third-party company is: price fluctuations, transaction wear and tear, etc.

Whether it is the suspect themselves handling the situation, their family handling it, or a third-party company seeking OTC services, is there any legal basis for this? It cannot be said that there is none. On September 4, 2017, the People's Bank of China and seven other departments issued the "Notice on Preventing Risks of Token Issuance and Financing." The third paragraph of this notice emphasizes strengthening the management of token financing trading platforms. The specific content includes that from the date of this notice, any so-called token financing trading platform is prohibited from engaging in the exchange business of legal currency with tokens and "virtual currencies," from buying or selling tokens or "virtual currencies" as a central counterparty, and from providing pricing, information intermediary, and other services for tokens or "virtual currencies."

Upon closer inspection, Notice 94 regulates token financing trading platforms and does not regulate individuals, so ultimately it is up to OTC merchants to realize the value, which is not a big issue.

But there are still some problems. Since the disposal of the involved virtual currency is still a niche business and has excessive profits, it has also given rise to some illegal issues, such as the problem of power-for-money exchanges, case handlers embezzling virtual currency, third-party companies taking the virtual currency temporarily stored by judicial authorities to the market and losing it all, OTC dealers intentionally laundering money in the market to deposit into the case-specific accounts (after all, the special accounts are not afraid of being sealed or frozen), and many OTC dealers being targeted by judicial authorities in different regions due to involvement in money laundering, etc. In short, it is quite lively.

In 2021, as judicial authorities intensified their crackdown on the crypto sphere, numerous disposal companies sprang up like mushrooms after rain. I once described it this way in an article:

There are more scythes than leeks.

In September 2021, a significant event occurred that changed the landscape of virtual currency disposal. On September 15, the central bank and ten other departments issued the "Notice on Further Preventing and Disposing of Risks Related to Virtual Currency Trading and Speculation," known as the "924 Notice." It stated that activities related to virtual currencies are considered illegal financial activities. Engaging in the exchange of legal tender for virtual currencies, the exchange 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 in virtual currency derivatives, among other virtual currency-related activities, is suspected of illegally issuing token vouchers, unauthorized public issuance of securities, illegal futures operations, illegal fundraising, and other illegal financial activities, all of which are strictly prohibited and will be resolutely banned in accordance with the law.

Compared to Announcement 94, the "subject" before the prohibition of the above behaviors is gone. Announcement 94 regulates token financing trading platforms, while Notice 924 does not specify a subject and regulates "everything." Companies cannot do it, platforms cannot do it, and individuals cannot do it.

The previous method of having a group of OTC merchants organized by a third-party company for liquidation is no longer feasible.

If it doesn't work domestically, then let's take the business abroad, which led to the emergence of third-party companies in the 2.0 phase. In the 2.0 phase, without exception, all disposal companies' PPT presentations highlight "overseas disposal" as their core selling point, but is it really overseas disposal? Not necessarily.

In fact, the vast majority of virtual currency transactions here are still completed through domestic matching, except that the money entering the accounts of judicial authorities comes from overseas, but this money is not the same as that money. It needs to be explained that the money exchanged back at that time does not need to correspond one-to-one with the money from virtual currency transactions, which means that it is impossible to verify whether the money that came back is indeed from overseas virtual currency transactions.

The author has reasons for saying this. First, in a certain province in the south, there are a few prominent individuals who are under investigation by law enforcement agencies from other regions, with the case reason being "illegal disposal." Second, a disposal company consulted the author on how to dispose of virtual currencies in compliance, and candidly stated, "After those few people were arrested, all disposal operations have come to a halt." Third, whether or not it is overseas disposal, the judicial authorities only recognize the settlement receipts. And those few individuals are the ones who can obtain the settlement receipts.

In the third-party company disposal phase 2.0, there are several changes: First, disposal fees have significantly decreased. As more and more virtual currencies await disposal across the country, the disposal business has become increasingly transparent. Additionally, with competition among disposal companies, disposal fees have gradually dropped to below 10%. I have even heard of cases where it is as low as 4%. Second, some local governments have intervened in the virtual currency disposal work, publicly bidding for the asset packages awaiting disposal, with relevant departments supervising the disposal site beyond the judicial organs such as the discipline inspection commission, political and legal committee, and finance bureau. Third, the handling fees are managed through two lines of fiscal revenue and expenditure. In the past, a third-party company would take 100 yuan worth of coins and return 85 yuan. Now, a third-party company takes 100 yuan worth of coins and must return 100 yuan to the finance department, which then pays the pre-agreed handling fee to the third-party company through fiscal expenditure.

At this stage, some well-known third-party disposal (matching investigation) companies that made a lot of money in the early years no longer personally engage in specific disposal operations. Instead, they often subcontract the assets to be disposed of to multiple teams for handling, partly to set up a firewall in between and partly to facilitate better workflow.

Finally, in 2024, the Supreme People's Court will take action and designate "Research on the Disposal of Virtual Currencies Involved in Cases" as a major judicial research topic for the year 2024. The research group will include universities and judicial agencies from Beijing, Chongqing, and Shenzhen. I was fortunate to participate in some research activities in Beijing and Chongqing, and the information I learned during the meetings cannot be disclosed. Instead, I will discuss the disposal of phase 3.0 by third-party companies based only on publicly accessible news releases online.

Before the disposal of the third-party companies in phase 3.0, there was a period of time during which the methods of disposal varied across regions, causing the disposal work to be halted for a while. It is widely rumored online that the market value of the virtual currencies involved in cases pending 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 the virtual currencies involved in cases.

For example, recently, Beijing took the lead in announcing the successful experience of disposing of involved virtual currencies through the Beijing Equity Exchange by leveraging Hong Kong. According to my understanding, other regions are also exploring compliant disposal through Hong Kong. Based on my analysis, although the approaches vary, they fundamentally adhere to the same principles, and there may exist a "universal formula."

First, the disposal of compliant virtual currencies involved in the case cannot do without the State Administration of Foreign Exchange (SAFE) and domestic banks. The inflow of foreign exchange must be reported to SAFE for record-keeping and must return to the country through bank channels. Since it returns to the country through bank channels, Hong Kong's banking institutions are also indispensable. Second, according to the regulations of the banking industry in Hong Kong and the requirements of licensed trading platforms in Hong Kong, banks in Hong Kong cannot act as the main entity for opening trading accounts, so a local entity in Hong Kong that can open trading accounts is needed. Third, after the institution disposes of the involved virtual currencies on the trading platform, it will transfer the funds to a Hong Kong bank, which will be reported to SAFE for record-keeping, and the exchanged funds will be transferred from the Hong Kong bank to a domestic bank.

As for the institutions outside this formula, they can be replaced at will, whether it is a company or an exchange, they are not an indispensable part.

Therefore, the author provides the following suggestions: First, the disposal entity of the virtual digital currency involved in the case should be the provincial-level judicial authority. Second, it is recommended that the higher-level department take the lead in establishing a "green channel" between the provincial-level judicial authority and the head office of state-owned banks, allowing the judicial authority to open a special account for the disposal of the involved virtual currency at the bank, entrusting the head office of state-owned banks to handle the disposal on their behalf. Third, the head office of state-owned banks should fully utilize overseas branches in Hong Kong or other places where legal disposal can be conducted to complete the legal disposal of the involved virtual currency abroad.

In summary, reduce unnecessary circulation links, bring disposal profits into state ownership, and maximize disposal efficiency.

Recently, the "People's Court Daily" published an article titled "Disposal of Virtual Currency Involved in Criminal Cases: Challenges, Innovations, and Judicial Responsibility." The article pointed out that "it is possible to explore the registration and supervision under the People's Bank, foreign exchange management and other departments, entrusting qualified third-party institutions to exchange virtual currencies for legal tender at market prices through compliant licensed trading platforms in overseas jurisdictions where virtual currency is legal, such as Hong Kong. After cashing out abroad, it should be handled in accordance with the provisions of the State Administration of Foreign Exchange's letter regarding the opening of foreign exchange accounts and handling foreign exchange receipts and payments in foreign-related judicial activities by the people's courts."

It is hoped that the Supreme People's Court, the superior unit of the People's Court Daily, will soon issue normative guiding documents based on thorough research of practical experiences in various regions and the investigations conducted by various research groups, to completely standardize the handling of virtual currency involved in cases.

In the end, it's still the phrase that I often mention:

"Nothing has ever been as legally entangled as Bitcoin."