Author: Lawyer Liu Zhengyao from Shanghai Mankiw Law Firm Recently, a blogger (possibly a KOL in the cryptocurrency circle) posted a message on Weibo saying that he was under investigation by the Pingjiang County Police in Hunan Province for his suspected involvement in the BKEX (Bitcoin Exchange) online gambling case and is now on bail pending trial.

The blogger reminded that "perpetual contracts with high leverage are currently defined as online gambling. Participating in transactions will be suspected of gambling and will be subject to criminal detention. All commission rebate agents, including individuals, will be considered accomplices of the casino as long as they develop downlines and will be sentenced to fixed-term imprisonment or above..."In fact, the blogger's statement is not very accurate, but it has caused a little ripple. Several netizens in the WeChat group talked about this matter and were quite shocked. Lawyer Liu analyzed the relationship between playing contracts, leveraged trading and gambling crimes in virtual currency exchanges from the perspective of legal practice, as well as the possibility that virtual currency exchanges themselves constitute the crime of opening a casino. 1. Exposing BKEX According to public information on the Internet, BKEX was established in June 2018 by Ji Moumou, Yuan Moumou and others. Since its establishment, especially since 2020, a lot of negative information can be found on the Internet, such as launching multiple air coin projects, maliciously freezing and deducting customer funds, etc. Lawyer Liu even saw photos of users holding banners to defend their rights in Chengdu Hi-tech Zone Oriental Hope Tianxiang Plaza (said to be the actual operating address of BKEX). The authenticity of these contents is unknown, but no official statement from BKEX has been seen. BKEX's official website also shows a DNS error and cannot be opened. According to an article published on November 5, 2021 by the “Metaverse NEWS” public account, Biker still publicly solicited customers for transactions in China after the “9.24 Notice”, which is indeed a play with fire operation. There is also a post on Zhihu (posted on May 31, 2023) saying that the Biker exchange was “taken down” by the police. Of course, as lawyers, we cannot guarantee that the above information is 100% true when we do not see the specific information of Biker’s case filing (such as the case filing notice issued by the public security organs to the victims, the detention/arrest notice to the family members, the police report of the public security organs, etc.). But what is certain is that many of Biker’s operations do have great criminal legal risks. 2. What is a perpetual contract? In the above screenshot, the Weibo blogger said that perpetual contracts and high-leverage transactions have been characterized as gambling. If you want to know whether this statement is correct, you must know what a perpetual contract is (if you understand perpetual contracts, you will naturally understand the meaning of high leverage). Nowadays, many ways of playing in the cryptocurrency world are derived from traditional securities and futures markets. Perpetual contracts are one of them. However, Perpetual Futures (or PERP) is an investment model unique to the cryptocurrency world. It is a crypto futures derivative invented by Arthur Hayes, the founder of BitMEX, in 2016.Unlike futures contracts, perpetual contracts have no expiration date (delivery date), which means that you can hold a contract permanently without liquidation and freely choose the settlement date. In general, perpetual contracts have the following characteristics: First, you can go long or short, which is a basic operation for both traditional futures contracts and virtual currency contracts; second, high leverage. Compared with the maximum 20 times leverage of traditional futures contracts, the leverage of virtual currency exchanges can be increased to more than 100 times if it is fully utilized, which is simply too exciting; third, margin mechanism and funding rate. Friends who are interested in these two knowledge points can learn about them by themselves. As a legal practitioner, Lawyer Liu will not teach you about finance. Leveraged trading is different from contract trading in terms of transaction details. For example, in terms of funding sources, the funds for leveraged trading are borrowed from the platform, and the leverage rate of leveraged trading depends on the amount of funds borrowed by the trader; in addition, the forced liquidation price of leveraged trading is different from that of contract trading, and there are also differences in transaction fees (handling fees); but in essence, contract trading and leveraged trading are both risky games of "small bets for big gains". 3. Is playing contracts with leverage in the exchange a gambling crime?   my country's criminal law or judicial interpretation does not explain in detail what gambling is. According to academic interpretation, the so-called "gambling" refers to the act of gambling or gambling with money with accidental wins or losses (Zhang Mingkai). Accidental wins and losses require that the results of gambling cannot be foreseen in advance, that is, "speculative behavior".   In practice, not all gambling behaviors constitute criminal offenses. There are two main types of gambling in my country's criminal law: one is gathering to gamble; the other is gambling as a profession. According to judicial interpretation, the so-called gathering to gamble must be for the purpose of profit, "organizing more than 3 people to gamble, and the amount of rake and profit reaches more than 5,000 yuan; or organizing more than 3 people to gamble, and the amount of gambling funds reaches more than 50,000 yuan; or organizing more than 3 people to gamble, and the number of gamblers reaches more than 20 people" and other conditions. In addition, knowing that others are committing gambling crimes and providing them with funds, computer networks, communications, payment settlements, etc., constitutes an accomplice to the crime of gambling.If the above conditions are not met, you may be punished by the administrative police. So, does playing contracts in the exchange constitute a gambling crime? In fact, whether it is a contract or a leverage, we analyzed in the first point of this article that their basic model is to win big with a small investment, but the crime of gambling in the criminal law does not only look at winning big with a small investment, but whether its model conforms to the following closed loop: property investment-gambling gameplay (contingency, speculation, and luck)-property output. According to the ruling regulations of the Supreme People's Court's Guiding Case No. 146 in 2020, "The Case of Chen Qinghao, Chen Shujuan, and Zhao Yanhai Opening a Casino": In the name of "binary option" trading (that is, only buying up or buying down), outside the legal futures exchange, investors are recruited through the Internet, and the price trend of foreign exchange products in the future period is used as the trading object. The profit and loss are determined according to "buy up" and "buy down". The "investor" who buys the right direction of rise and fall will profit, and the principal of the wrong purchase belongs to the website (dealer). The profit and loss results are not linked to the actual price increase or decrease. The essence is "betting on size and betting on winning or losing", which is a gambling crime. From this we can conclude that if the contract transactions conducted on the virtual currency exchange, even if the leverage ratio is high, if the "binary option" trading model is not adopted, the future profit and loss results of the contract correspond to the real market fluctuations (rise and fall) of the virtual currency, and there are not only simple and crude losses or profits, but there are stop-profit and stop-loss functions in the transaction settings, and you can choose to close the position by yourself, etc., then Lawyer Liu believes that it is not enough to constitute the crime of gambling. As for whether it constitutes other crimes such as illegal business operations, see the analysis below.   4. Does the opening of a contract on a virtual currency exchange constitute the crime of opening a casino?   According to the analysis in the third point of the article, if the contract transactions in the virtual currency exchange do not constitute the crime of gambling, then it naturally does not constitute the crime of opening a casino for the virtual currency exchange. However, it must be mentioned that in practice, many exchanges have been identified as opening casinos because of contracts and high-leverage transactions. There are two possibilities: First, the contracts opened by the convicted virtual currency exchanges are fake contracts. The common "pin-in" operations in the virtual currency market today (even some so-called head exchanges did this in the early days), the exchange's position as a banker to cut leeks, or the "binary option" betting model in the aforementioned Case No. 146, etc., do constitute a crime. Even the crime of opening a casino is considered light, and some also meet the composition of the crime of fraud (with heavier penalties);Second, the exchange contracts that fully conform to the mainstream market gameplay are wrongly characterized as gambling, and then the exchange is wrongly characterized as the crime of opening a casino. This situation is not uncommon. Some grassroots judicial organs cannot understand emerging things well due to their lack of knowledge of virtual currency, exchange operation model, and even traditional securities and futures, which ultimately leads to wrong characterization. However, for defense lawyers, Lawyer Liu's suggestion is that if it is believed that the party's behavior does not constitute the crime of opening a casino, don't rush to make a not guilty defense. It is necessary to consider whether opening a virtual currency exchange and providing contract services will constitute the crime of illegal business operation? Especially in the premise of violating regulatory regulations to open a virtual currency exchange (violating the provisions of the "9.24 Notice") and operating a virtual currency contract business that is very similar to a futures contract. Although virtual currency exchanges are not equivalent to futures exchanges, and virtual currency contracts are not futures contracts in the strict sense, in the judicial context where the crime of illegal business operation is easily expanded, once it is identified as the crime of illegal business operation, its fine is significantly higher than the crime of opening a casino. Under the premise that the main sentence is not much different, the crime of illegal business operation is actually disadvantageous to the parties. 5. Conclusion The essence of many criminal cases in the cryptocurrency circle today lies in the country's cautious and strict attitude towards virtual currencies. The policy regulations are represented by the "9.24 Notice", not to mention opening a virtual currency exchange on your own (whether domestically or overseas). For domestic citizens (or other legal entities), even if they provide marketing, payment settlement, technical support and other services to overseas virtual currency exchanges, they are all illegal financial activities and must be held accountable.   As a lawyer who specializes in providing legal services in the fields of web3, blockchain, virtual currency, etc., Liu has seen too many joys and sorrows in the cryptocurrency circle. Regarding the contract issues discussed in this article, I can't help but mention a clichéd suggestion: cherish life and stay away from contracts. This is not only for ordinary cryptocurrency players, but also for entrepreneurs in the cryptocurrency circle, because players may lose property, while entrepreneurs may also lose freedom.