Discussion on Jurisdiction over Cryptocurrency Cases: Which domestic public security authorities can intervene in exchange cases?

[Preface] If we want to prove whether exchanges that operate under the guise of virtual currency exchanges and operate as Ponzi schemes, or directly embezzle the custodial assets of exchange users, or use the exchange to conduct targeted liquidation, etc., have committed criminal offenses in China, Lawyer Liu believes that they must have committed criminal offenses and there is nothing to defend. However, the scenario that I want to discuss today is: virtual currency exchanges that are registered overseas, have obtained exchange financial regulatory licenses in compliance with regulations overseas, use servers overseas, and explicitly refuse registration and access by users with IP addresses from mainland China.

Of course, there are generally only three factors that are related to users from mainland China for such formal exchanges: First, managers: the actual controllers or senior executives of the exchange are Chinese; second, users: the users on the exchange include Chinese people in China, who use VPNs to "climb over the wall", or "tamper with mainland IP addresses", or "buy overseas vest identities" to circumvent the restrictions of the exchange that refuses mainland Chinese users to use; third, place of operation: the place of operation of the exchange is entirely or partially within China. The above three factors have led to the fact that the "purely foreign-owned overseas exchanges" in people's impressions can also fall under the jurisdiction of the domestic case-handling agencies in China.

In the following, Lawyer Liu will discuss his thoughts on the legal applicability of this type of exchange model in China, combining many relevant cases in judicial practice and the criminal offenses involving the so-called "formal" virtual currency exchanges in China.

1. Which local public security organs have jurisdiction over exchange cases? (I) Legal basis for jurisdiction over criminal cases

First, Article 19 of the Criminal Procedure Law:

"The investigation of criminal cases shall be conducted by the public security organs, except as otherwise provided by law." The "otherwise provided by law" refers to criminal cases that are listed as criminal cases under substantive law but do not require investigation under procedural law and can be directly accepted by the people's court. Private prosecution cases fall into this category. Second, it refers to criminal cases that the law stipulates should be filed for investigation by other organs or departments.

2. Article 25 of the Criminal Procedure Law:

Criminal cases shall be under the jurisdiction of the people's court where the crime was committed. If it is more appropriate for the people's court at the defendant's place of residence to try the case, the people's court at the defendant's place of residence may have jurisdiction.

Third, [Interpretation of the Supreme People's Court on the Application of the Criminal Procedure Law of the People's Republic of China] Article 2:

The crime location includes the location of the crime and the location of the crime results. For crimes that are committed against or mainly through computer networks, the crime location includes the location of the server used for the network services used to commit the crime, the location of the network service provider, the location of the violated information network system and its manager, the location of the information network system used by the defendant and the victim during the crime, as well as the location of the victim when the violation occurred and the location where the victim's property suffered losses, etc.

Fourth, [Interpretation of the Supreme People's Court on the Application of the Criminal Procedure Law of the People's Republic of China] Article 3:

The defendant's registered place of residence shall be his/her place of residence. If the usual place of residence is inconsistent with the registered place of residence, the usual place of residence shall be his/her place of residence. The usual place of residence shall be the place where the defendant has lived continuously for more than one year before being prosecuted, except for hospitalization for medical treatment. The registered place of residence of the defendant's unit shall be his/her place of residence. If the main place of business or the location of the main office is inconsistent with the registered place of residence, the main place of business or the location of the main office shall be his/her place of residence.

(II) Based on the legal basis: Which local public security authorities have jurisdiction?

The trading activities of the exchange take place on the Internet. If they are suspected of criminal offenses, Article 25 of the Criminal Procedure Law, Article 16 and Article 17 of the Provisions on the Procedures for Handling Criminal Cases by Public Security Organs of the Ministry of Public Security, and Article 2 of the Opinions of the Supreme People's Court, the Supreme People's Procuratorate, and the Ministry of Public Security on Several Issues Concerning the Application of Criminal Procedure in Handling Cybercrime Cases shall apply. The basic principle of territorial jurisdiction, which is "the jurisdiction of the public security organs at the place where the crime was committed is the primary jurisdiction, and the jurisdiction of the public security organs at the place where the suspect resides is the secondary jurisdiction", shall be followed. According to the close connection between the facts of the disputed case and the location, the jurisdiction shall be determined within the scope of "the location of the website server, the location of the network access, the location of the website creator and administrator, the location of the computer information system used by the suspect and the victim, the location of the victim when he was violated, and the location where the victim's property suffered losses". It can be seen from the legal basis that:

First, if the operation model of a virtual currency exchange constitutes a crime, the public security in the crime site has jurisdiction;

Since: virtual currency exchanges are considered "crimes committed using computer networks" by the case-handling units, the following areas have jurisdiction: the location of the server used by the network service that committed the crime, the location of the network service provider, the location of the compromised information network system and its manager, the location of the information network system used by the defendant and the victim during the crime, and the location of the victim when the victim was violated and the location where the victim's property suffered losses. This means that the following areas may obtain jurisdiction when handling virtual currency exchange cases:

1. Location of the server: The servers of virtual currency exchanges are generally provided by Amazon, which are located abroad, so they are not considered. However, if "Alibaba Cloud" or "Huawei Cloud" is used, the public security in Hangzhou or Shenzhen obtains the corresponding jurisdiction because it is the location of the server. Here, we should also remind everyone to pay attention to one issue: some large Internet companies, due to considerations of freight, labor and other costs, do not necessarily set up all servers at their headquarters, and may also make other choices in the location of the server. For example, the Gui'an Huawei Cloud Data Center is the largest data center of Huawei Cloud in the world. The total land area of ​​the data center is 1,521 acres, with a construction scale of more than 1 million servers. It is also an important carrier node for Huawei Cloud's business in the southwest region. So, if the legal case is extended from the server in this place, does the case handling agency in Gui'an also have jurisdiction? Regarding this issue, from the current judicial practice, Lawyer Liu believes that it is worth pondering, but in theory, Gui'an can obtain jurisdiction, so the scope of the public security in the crime place where the virtual currency exchange business model constitutes a crime is wider.

2. Location of network service provider: There are five main types of network service providers: Internet service providers (ISP), network service providers (NSP), network application service providers (ASP), network infrastructure service providers (IaaS), and network security service providers (SaaS).

However: if the location of the network service provider is to be applied, it must correspond to the "main business under the scope of the exchange", and must be the location of the network service provider that revolves around the main business of the exchange; therefore, if the domestic institution is only a cooperative institution of the exchange, or the business it operates is a non-main business of the exchange, such as a company responsible for marketing and other non-main business, then the location of the network service provider cannot be applied mechanically; if the main business of the exchange is in the country, or the main operating team and R&D team of the exchange are in the country, then the location of the network service provider is generally the location of the exchange in the country where the public security has jurisdiction;

3. The location of the infringed information network system and its administrator. Since virtual currency exchanges do not have a model of network infringement and there is no infringed information network system, this clause does not apply to exchanges;

4. The location of the information network system used by the defendant and the victim during the crime; as well as the location where the victim was violated and the location where the victim’s property suffered losses, etc.

Use this clause: It mainly refers to the existence of "victims" in the process of using the exchange. So, are there victims in the so-called "compliant virtual currency exchanges"? Some case-handling units pointed out that users who invest in virtual currencies on exchanges are victims as long as they suffer losses. However, Lawyer Liu believes that this view is very problematic: the reason is that even if the model of virtual currency exchanges may constitute a criminal offense in China, users who suffer normal investment losses on exchanges cannot be interpreted as victims of criminal offenses committed by exchanges. Because even if the exchange constitutes a criminal offense, the legal interests it infringes on have nothing to do with the so-called infringement of the interests of users, causing losses to users. Therefore, as long as there are users who suffer normal investment losses on the exchange, invoking the jurisdiction of the public security of the "victim's location" is a "correlation error". This is also the point in practice that many case-handling units in remote areas handle virtual currency exchange cases based on the jurisdiction of the "victim's location", which is widely criticized. In response to this issue, Lawyer Liu will make specific arguments below.

5. The defendant’s place of residence. To use this clause for jurisdiction, the case-handling unit needs to give reasons. According to Article 25 of the Criminal Procedure Law: Why is it more appropriate for “the people’s court at the defendant’s place of residence to conduct the trial”?

Lawyer Liu believes that the jurisdiction of the court where the defendant resides can only be used as an auxiliary principle for determining the jurisdiction. The so-called place of residence of the defendant refers to the defendant's registered residence or residence. However, what situation is "more appropriate"? This generally refers to: the crime location is difficult to determine; or there is great public outrage in the place of residence, and demands for the case to be brought back for trial. Then, when the case does not meet the above special conditions, the relevant case cannot be simply and crudely placed in the defendant's place of residence for jurisdiction without reason; instead, it must be combined with the specific case, and after comprehensive research and analysis, it can be placed in the defendant's place of residence.

2. If you suffer losses when buying cryptocurrencies on an exchange, does the law enforcement agency in the victim’s area have jurisdiction?

To determine whether the case-handling unit in the victim's location has jurisdiction, we must first determine the specific crimes involved. Take the exchange's suspected criminal offenses, the most likely crimes of "illegal use of information networks" and "organizing and leading pyramid selling activities" as an example:

First, regarding the crime of "illegal use of information networks", according to Article 287 of the Criminal Law, this crime regulates the use of information networks to carry out three types of statutory acts, which do not involve victims and their property losses. The public security organs with jurisdiction should be limited to "the location of the website server, the network access location, the location of the website builder and manager, and the location of the computer system used by the criminal suspect." In other words, the appropriate jurisdiction can only be determined from the location of the exchange server related to the above, the location of the website builder and manager, and the location of the research and development and promotion activities.

Secondly, for the crime of "organizing and leading pyramid selling activities", the jurisdictions such as "the location of the computer information system used by the victim", "the location of the victim when he was violated", and "the location where the victim's property suffered losses" can be considered. However, the premise is that the prosecution opinion determines that there are people participating in pyramid selling activities in a certain place and property losses have occurred. If there is no evidence in the case to show that users in the victim's location have reported the case or assisted in the investigation, and there is no evidence to show that a certain place has an actual connection with the case. Then, the place does not have jurisdiction over the "organizing and leading pyramid selling activities case".

In addition, the place where the victim is located should be the jurisdiction, and the place should also have a strong relevance to the case. Specifically:

First, for users who have failed to invest in an exchange, the investigating agency should investigate factors such as whether the exchange has deceived the user and the investment, rather than intervening in all the actions of the exchange based on this alone. To give an easy-to-understand example: if a consumer reports to the local food safety department that a restaurant has food safety issues, then the food safety department can only intervene in the restaurant based on its own authority and cannot investigate and deal with issues such as fire protection that are completely unrelated to its own authority. Otherwise, it will inevitably lead to abuse and mismatch of power.

Second, since cybercrime cases are cross-regional and involve the public, and pyramid schemes are typical cases with huge fines and confiscations, when determining jurisdiction, we should consider factors that are conducive to ascertaining the facts of the case, protecting the legitimate rights and interests of the victims, ensuring fair handling of the case, and ensuring a balanced and unified case handling result, and the case should be under the jurisdiction of the appropriate public security organs. If it is a major case with a major impact nationwide and directly involving the property interests of more than 10,000 people, if the case is handed over to the grassroots public security for investigation, it will directly involve the private property of more than 10,000 people being handed over to the local finance, which is obviously unbalanced. In other words, criminal cases involving huge property rights of tens of thousands of users across the country should not be governed by the weak connection of a very small number of users. Instead, the jurisdiction should be determined by considering the main place where the activity occurs, the location of the main group of people, and the actual impact of the harmful results or the main impact area.

In summary, for users who have lost money by buying coins on exchanges, whether the local case-handling unit where the victim is located has jurisdiction should be determined in combination with the specific crime and case, and with full consideration of the relevance factors. If a case is filed for investigation without the corresponding legal and factual basis, it is an obvious violation of the Criminal Procedure Law and should be corrected.

3. Can designated jurisdiction be applied to virtual currency exchange cases?

According to Article 27 of the Criminal Procedure Law and Articles 18 to 21 of the 2021 Supreme Court Interpretation on Criminal Procedure, designated jurisdiction only applies to the following three situations: first, cases with unclear jurisdiction; second, cases that are more appropriate for other courts to hear; and third, cases where a lower court is designated to transfer accepted cases to other courts for trial. According to Article 22 of the Provisions on the Procedures for Handling Criminal Cases by Public Security Organs, for criminal cases with unclear or disputed jurisdiction, the relevant public security organs may negotiate. If no agreement is reached, the common superior public security organ shall designate jurisdiction.

Lawyer Liu believes that virtual currency exchange cases are similar to difficult and complicated cases involving securities and futures. In 2021, the General Office of the CPC Central Committee and the General Office of the State Council issued the "Opinions on Strictly Cracking Down on Securities Illegal Activities in Accordance with the Law", Articles 13 and 14 of which stipulate that "to combat securities illegal activities, public security organs, procuratorates, and judicial organs in some cities and prefectures such as securities trading venues and futures exchanges should set up securities crime case handling and trial bases. Strengthen the placement of cases in securities crime case handling bases, and the corresponding procuratorates and courts shall be responsible for initiating public prosecutions and trials respectively, and appropriately centralize the jurisdiction of securities crime cases in accordance with the law through jurisdiction at the crime site or designated jurisdiction. Strengthen local territorial responsibilities. Strengthen information exchange and law enforcement cooperation between the China Securities Regulatory Commission and local governments and relevant departments, study the establishment of an internal reporting system for major illegal cases in the capital market, effectively prevent and restrain resistance and interference such as local protectionism that may be encountered in case handling, and promote efficient investigation and handling of cases. Under the premise of insisting that financial management is mainly a central matter, strengthen the responsibility for local risk management. Local governments should regulate various regional trading venues, crack down on various illegal securities and futures activities in accordance with the law, do a good job in preventing and handling financial risks in the region, and maintain social stability."

Therefore, for cases involving virtual currency exchanges, the designated jurisdiction must comply with Articles 21 and 22 of the People's Procuratorate Criminal Procedure Rules. If the case is not a case of unclear jurisdiction and no court has accepted the case, it obviously does not meet the specific circumstances of designated jurisdiction, and the designated jurisdiction cannot be arbitrarily made in advance, but must be reported to the Supreme People's Procuratorate.

4. In cases where virtual currency exchanges constitute criminal offenses, which local law enforcement agency should have jurisdiction over them?

Regarding the issue of which local case-handling unit should be under the jurisdiction of cases involving virtual currency exchanges that constitute criminal offenses, the first thing to consider is the location of the exchange's main business. Since most virtual currency exchanges adopt a decentralized office model, the question of how to determine the main business is: the main reference is the location of the actual controller and senior executives of the exchange project, which often represents the location of the company's business; in addition, it also includes the location of the exchange's technology, operation and maintenance, and R&D team; if it is not the main business of the exchange, even if there is a specific business location, it should not be counted as the location of the exchange, and it cannot be included in the category of "location of the network service provider".

Secondly, we need to consider whether the server used by the network service that committed the crime is located in my country. The location of the server is mainly determined by the physical location. If the specific case is judged comprehensively and it is indeed difficult to identify the crime location and the defendant's place of residence is more appropriate, the defendant's place of residence can be selected for jurisdiction. In addition, for users who lose money by buying coins on exchanges, whether the case handling unit in the victim's place of residence has jurisdiction should be determined by combining the specific crime and case involved and fully considering the relevance factors.

Finally, for cases involving virtual currency exchanges, the designated jurisdiction must comply with Articles 21 and 22 of the People's Procuratorate Criminal Procedure Rules. If the case is not a case of unclear jurisdiction and no court has accepted the case, it obviously does not meet the specific circumstances of designated jurisdiction and cannot be arbitrarily designated in advance.

5. What the lawyers say

We believe that when handling virtual currency exchange cases, the investigating authorities should adopt a comprehensive assessment and cautious intervention attitude, and only file a case after fully analyzing and judging the case. Otherwise, it will not only lead to a waste of judicial resources, but also violate the original intention of criminal punishment, which is education rather than punishment. For virtual currency exchanges, if you want to avoid legal risks, you need to do compliance work in advance, including but not limited to: refusing registration and access by users from mainland China IP, using network servers set up abroad, and orderly clearing out domestic users on the platform. If necessary, you can hire a professional lawyer to intervene and help design a compliance plan based on the specific operating situation to avoid the risk of criminal offenses.