Recently, a blogger on Weibo (possibly a KOL in the currency circle) announced that he was investigated by the Pingjiang County Police Department in Hunan Province for allegedly participating in the BKEX exchange online gambling case, and is currently on bail pending trial.
The blogger reminded that "high leverage in perpetual contracts is currently defined as online gambling. If you participate in the transaction, you will be suspected of gambling and will be criminally detained. All commission rebate agents, including individuals, who develop offline are casino accomplices and will be sentenced to fixed-term imprisonment." The above punishments..."
Source: "PANews"
In fact, what this blogger said was not very accurate, but it caused a bit of a stir. Several netizens in the WeChat group talked about it and were quite shocked. From a legal practice perspective, Lawyer Liu analyzed the relationship between contract gaming, leverage trading and gambling crimes in virtual currency exchanges, as well as the possibility that the virtual currency exchange itself constitutes the crime of opening a casino.
1. BKEX
According to information published on the Internet, BKEX was established in June 2018 by Ji Moumou, Yuan Moumou and others. Since its establishment, especially since 2020, a large amount of negative information can be found on the Internet, such as the launch of multiple air currency projects, malicious freezing and deduction of customer funds, etc. Lawyer Liu even saw a user in Chengdu High-tech Zone Oriental Hope Sky Photos of banners held in Xiang Plaza (said to be Bike’s actual operating address) to protect rights. The authenticity of these contents is unknown, but we have not seen any official statement from Bike. Bike’s official website also shows a DNS error and cannot be opened. According to an article on the "Yuanverse NEWS" public account on November 5, 2021, Bike still publicly solicited domestic customer transactions after the "9.24 Notice", which is indeed a type of operation that is playing with fire.
There is also a post on Zhihu (posted on May 31, 2023) saying that Biike Exchange was "taken out of control" by the police. Of course, as lawyers, when we do not see the specific information about the case against Bike (such as the case filing notice issued by the public security agency to the victim, the detention/arrest notice to the family, the police information report from the public security agency, etc.) , cannot guarantee that the above information is 100% authentic. But what is certain is that many of Bike’s operations do carry great criminal legal risks.
2. What is a perpetual contract?
In the aforementioned screenshot, the Weibo blogger claimed that perpetual contracts and high-leverage transactions have been classified 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 high leverage) meaning).
Many gameplays in the currency circle today are derived from traditional securities and futures markets. Perpetual contracts are one type. However, Perpetual Futures (or PERP) is a unique investment model in the currency circle. It was developed by Arthur Hayes, the founder of BitMEX. A crypto futures derivative product invented in 2016. Unlike futures contracts, perpetual contracts have no expiration date (delivery date), which means that you can hold a certain contract permanently and freely choose the settlement date without liquidating your position.
Overall, the perpetual contract has the following characteristics: First, it can go long and short, which is a basic operation for both traditional futures contracts and virtual currency contracts; second, it has a high leverage ratio, compared with traditional futures contracts. The maximum leverage is 20 times. If the virtual currency exchange is running at full capacity, the leverage can be increased to more than 100 times. It is not too exciting. The third is the margin mechanism and funding rate. Friends who are interested in these two knowledge points can learn about it on their own. As a legal practitioner, Lawyer Liu does not specialize in the financial field.
Leveraged trading differs from contract trading in transaction details. For example, in the source of funds, the funds for leveraged trading are borrowed from the platform. The leverage ratio of leveraged trading depends on the amount of funds borrowed by the trader; in addition, the forced liquidation of leveraged trading The price is different from that of contract trading, and there are also differences in transaction fees (handling fees); but in essence, contract trading and leverage trading are both "using small to gain big" risk games.
3. Is it a gambling crime to play contracts with leverage on an exchange?
Our country's criminal law provisions or judicial interpretations do not explain in detail what gambling is. According to academic explanations, the so-called "gambling" refers to the act of gambling or gambling with property based on accidental winning or losing (Zhang Mingkai). Accidental winning or losing requires that the result of gambling cannot be foreseen in advance, which is "lucky shooting behavior".
In practice, not all gambling constitutes a criminal offence. There are two main categories of gambling in my country’s criminal law: one is gathering people to gamble; the other is gambling as a profession. According to the judicial interpretation, the so-called gathering gambling must be: for the purpose of profit, "organizing more than 3 people to gamble, and the cumulative amount of gambling profits reaches more than 5,000 yuan; or organizing more than 3 people to gamble, and the cumulative amount of gambling money reaches more than 50,000 yuan; or "Organizing gambling for more than 3 people, and the total number of gambling participants reaches more than 20 people" and other conditions. In addition, anyone who knowingly provides funds, computer network, communication, payment and settlement and other assistance to others to commit gambling crimes constitutes an accomplice in the crime of gambling. If you do not meet the above conditions, you may be punished by administrative security.
So, does playing contracts on an exchange constitute a gambling crime?
In fact, regardless of contract or leverage, we analyzed their basic model in the first point of this article, which is to use small to gain big. However, the crime of gambling in criminal law does not only look at using small to gain big, but to see whether the model conforms to the following closed loop. : Property investment - gambling gameplay (accidental results, speculation, luck) - property output. According to the adjudication regulations of the Supreme Court Guiding Case No. 146 of 2020 "Chen Qinghao, Chen Shujuan, and Zhao Yanhai Opening a Casino Case": In the name of "binary options" trading (that is, only buying up or down), on the statutory futures exchange They use the Internet to recruit investors externally, and use the price trend of foreign exchange varieties in the future as the trading object, and determine profits and losses according to "buy up" and "buy down". The "investors" who buy in the right direction of the rise or fall will benefit, and the principal of the wrong purchase will be profited. It is owned by the website (bookmaker) and the profit and loss results are not linked to the actual price increase or decrease. The essence is "betting on big or small, betting on winning or losing", which is a gambling crime.
From this we can conclude that if we talk about contract transactions on a virtual currency exchange, no matter how high the leverage is, if the "binary options" trading model is not used, the future profit and loss results of the contract and the real market fluctuations (increases) of the virtual currency will Lawyer Liu believes that it is not enough to constitute a gambling crime if it corresponds to not only simple and crude losses or profits, but also the functions of stop-profit and stop-loss in the transaction settings, and the ability to choose to close positions by oneself. As for whether it constitutes illegal business crimes and other crimes, please refer to the analysis below.
4. Does opening 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 contract transactions in virtual currency exchanges are not enough to constitute a gambling crime, then naturally it does not constitute a crime of opening a casino for virtual currency exchanges.
However, it must be mentioned that in practice, many exchanges have indeed been found guilty of opening casinos due to contracts and high-leverage transactions. There are two possibilities here: First, the contracts opened by the convicted virtual currency exchanges are fake contracts; Common "pin insertion" operations in the virtual currency market today (even some so-called leading exchanges did this in the early days), exchanges cutting leeks, or the "binary options" gambling model in the aforementioned case No. 146 etc., if it does constitute a crime, even the crime of opening a casino is considered a light one, and some of them also meet the constitution of the crime of fraud (with heavier penalties); secondly, exchange contracts that are completely in line with the mainstream gameplay of the market are wrongly characterized as gambling, and then The exchange was wrongly characterized as guilty of opening a casino. This situation is not uncommon. Some grassroots judicial organs cannot understand emerging things well due to their lack of knowledge about virtual currencies, exchange operating models, and even traditional securities and futures, which ultimately leads to mischaracterization.
However, for defense lawyers, Lawyer Liu’s suggestion is that if you think that the client’s behavior does not constitute the crime of opening a casino, don’t rush to plead guilty first. You must consider whether opening a virtual currency exchange and providing contract services will constitute illegality. Business crime? In particular, it is in violation of regulatory regulations to open a virtual currency exchange (violating the provisions of the "9.24 Notice") and operate a virtual currency contract business that is very similar to futures contracts. Although virtual currency exchanges are not equivalent to futures exchanges, and virtual currency contracts are not strictly futures contracts, in a judicial context where the crime of illegal business operations is easily expanded, once it is determined to be an illegal business crime, The fine and penalty are significantly higher than the crime of opening a casino. Under the premise that the main penalties are not much different, the crime of illegal operation is detrimental to the parties involved.
5. Conclusion
The essence of many criminal cases in the currency 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 virtual currency exchanges on their own (whether domestic or overseas). For domestic citizens (or other legal entities), even if they provide marketing, payment and settlement, technical support and other services to overseas virtual currency exchanges, they are illegal financial activities and will be held legally responsible.
As a lawyer who specializes in providing legal services in web3, blockchain, virtual currency and other fields, Liu Lu has seen too many joys and sorrows in the currency circle. Regarding the contract issues discussed in this article, there is a clichéd suggestion at the end: Cherish life and stay away from contracts. This is not only for ordinary currency players, but also for entrepreneurs in the currency industry, because players may lose property, and entrepreneurs may lose freedom.
This article is reproduced with permission from: "PA News"
Original author: Lawyer Liu Zhengyao, Shanghai Mankiw Law Firm
