introduction:

When it comes to criminal cases involving currency, the judicial disposal of virtual currency is an unavoidable topic.

Recently, there have been numerous reports and developments on the disposal of virtual currencies involved in the case. On August 23, 2024, the Supreme People's Court issued the "2024 Judicial Research Major Project Bidding Notice", on August 29, the Xuhui District Procuratorate and the Xuhui District Public Security Bureau jointly signed the "Guidelines for the Disposal of Virtual Currency Involved in Criminal Litigation", and on September 3, the People's Court Daily published the "Judicial Disposal of Virtual Currency Must Be Standardized". These signs indicate that my country's judicial organs are gradually increasing their attention and attention to the compliance of judicial disposal of virtual currencies.

However, in judicial practice, before a final judgment is made in a criminal case, the public security organs usually make preliminary disposal of the virtual currency involved in the case during the investigation stage. During the investigation stage of a criminal case, is there any law to follow for the public security organs to make preliminary disposal of the seized virtual currency? What problems may the preliminary disposal behavior bring? This article discusses this issue.

Author: Shao Shiwei, Bao Jie

01. Common scenarios

The following are common scenes of criminal cases in the cryptocurrency world. Any similarities are purely coincidental:

One day, A was suddenly knocked on the door by the police and was told that he might be involved in a criminal case. The police asked A to cooperate with the investigation, and A's mobile phone, computer, cold wallet, U card, etc. were also taken away by the technical staff accompanying the police. After A was taken to the police station/detention center, the police asked A to provide his digital wallet key and fill out a letter of authorization, agreeing that the public security organs would entrust a third-party company to dispose of his virtual currency. Shortly after A signed (perhaps A was still detained in the detention center at this time), the police informed him that his virtual currency had been sold by the disposal company at a discount of RMB xx yuan.

02. Explore

1. Is there any law to deal with virtual currency first?

The seizure, detention and disposal of the property involved in the case are mainly reflected in the following legal provisions. From this we can know:

For deposits, remittances, bonds, stocks, fund shares and other properties, only freezing measures can be taken (therefore, the judicial disposal of virtual currency can only be done by freezing measures).

The public security organs can only take freezing measures for seized property involved in the case and cannot embezzle or deal with it on their own before the court makes an effective judgment. However, two exceptions are also provided:

1. Except for those who should be returned to the victim according to law or are proven to be irrelevant to the case, they may be dealt with before the end of the litigation;

2. For perishable, depreciating, or highly volatile property, it may be disposed of first with the approval of the principal person in charge of the judicial organ at or above the county level. However, there is also a prerequisite: the consent or application of the right holder.

【Extended thinking】

• “Should be returned to the victim according to law or it is found to be irrelevant to the case” obviously means that the money and property involved in the case should be returned to the victim or the virtual currency irrelevant to the case should be returned to the suspect. However, in judicial practice, the virtual currency that the public security organs deal with first may not be a criminal case with a victim (such as pyramid schemes and gambling cases). So in such cases, is there any law for the public security organs to deal with the virtual currency first?

• Does virtual currency fall under the category of property with “highly volatile value”?

• During the period of criminal detention, did the rights holder really “voluntarily” agree or apply for a third-party company to dispose of his virtual currency? If not, what adverse effects might the prior disposal have on the rights holder?

Criminal Procedure Law

Article 245 The public security organs, the people's procuratorates and the people's courts shall properly keep the sealed, seized and frozen property and its proceeds of the criminal suspects and defendants for verification, and make a list and transfer it with the case. No unit or individual may misappropriate or deal with it on their own. The lawful property of the victim shall be returned in a timely manner. Contraband or items that are not suitable for long-term storage shall be handled in accordance with relevant national regulations; the judgment made by the people's court shall deal with the sealed, seized and frozen property and its proceeds; after the judgment made by the people's court takes effect, the relevant organs shall deal with the sealed, seized and frozen property and its proceeds in accordance with the judgment. All the stolen money, stolen property and their proceeds that are sealed, seized and frozen, except for those returned to the victims in accordance with the law, shall be turned over to the state treasury.

Provisions on the Application of Seizure and Freezing Measures by Public Security Organs in Handling Criminal Cases

Article 3, Paragraph 3: Unless the seized or frozen property involved in the case must be returned to the victim according to law or is proven to be irrelevant to the case, it shall not be disposed of before the end of the litigation procedure, unless otherwise provided by laws and relevant regulations.

"Opinions on Further Standardizing the Disposal of Property Involved in Criminal Litigation"

7. Improve the procedures for the prior disposal of property involved in the case. Items that are easy to damage, lose, or deteriorate and are not suitable for long-term storage, items such as cars and boats that are easy to depreciate, or properties such as bonds, stocks, and fund shares with large market price fluctuations, bills of exchange, promissory notes, checks, etc. that are about to expire, can be sold, converted into cash, or sold or auctioned in advance in accordance with the law with the consent or application of the right holder and the approval of the principal person in charge of the public security organs, state security organs, people's procuratorates, or people's courts at or above the county level. The proceeds shall be uniformly deposited into the only compliant account of each unit. The prior disposal of property involved in the case should be open and fair.

2. Issues that may arise from the prior disposal of virtual currency

• What impact will preliminary disposal have on criminal cases?

Because before the case is transferred to the procuratorate for review and prosecution, the lawyer has not seen the criminal file. Without a complete and comprehensive analysis of the facts of the case, the parties cannot clearly understand that their behavior does constitute a criminal offense. If it is a crime, is there relevant evidence to prove it? Is the amount of money involved in the case charged by the judicial authorities accurate? Have some legal income, property irrelevant to the case, or property of third parties been excluded? Even at the procuratorate stage, for some controversial cases, there is a possibility that the procuratorate will not prosecute and the public security will withdraw the case. In this case, if the public security has already disposed of the virtual currency involved in the case in advance during the investigation stage, or even spent it, how should the case be pushed? Maybe it can only be pushed hard - transferred to the court (this can only be understood, it is inconvenient to expand).

Before the case is transferred to the court for trial, the specific amount of illegal gains that should be returned to the victim or recovered and confiscated has not yet been finalized, and there may be other legal rights holders of the virtual currency involved in the case. In this case, the public security organs' behavior of taking preliminary measures during the investigation stage is obviously in violation of the aforementioned procedural provisions.

• What “consequences” will arise from taking action first?

Of course, if the suspect voluntarily surrenders the property involved in the case and applies to have it disposed of by the public security organ or a third-party disposal company, a certain degree of procedural compliance can be met. However, based on my practical experience in handling currency-related cases, this is only procedural "compliance" on the surface, but in the future, it may cause "endless trouble."

Because the suspect "voluntarily signed" the agreement authorizing a third-party disposal company to dispose of his virtual currency during the period of criminal detention/bail, under the huge psychological pressure of anxiety, fear, and worrying about how many years he would be sentenced every day. The real reason for the "voluntary consent" at this time is the desire for freedom. The desire to get out of the current "difficulties" as soon as possible, rather than the "voluntary consent" under the final result that the court finds that the facts of the case are clear, the evidence is indeed sufficient, and the criminal judgment is made, and the defendant no longer appeals and accepts the judgment and stops the lawsuit.

Therefore, the "aftermath" for the public security organs is that they may face the parties' subsequent petitions, applications for retrial, and administrative lawsuits to demand compensation from the public security organs for their own losses caused by inappropriate sales prices, etc.

• Will the prior disposal of virtual currency increase the criminal risk of the parties involved?

Third-party disposal companies are usually companies that cooperate with public security organs, and in practice, they will agree on a disposal fee ranging from 15% to 30%. For the parties, they only have the right to sign and authorize, but they do not have the ability to choose a disposal company, negotiate prices, and amend the contract terms to protect their own legal rights and interests.

In practice, the risks of buying and selling virtual currencies are actually very high. At the very least, the card will be frozen, and at the worst, it may involve criminal offenses. In addition, the amount of virtual currencies to be disposed of and liquidated in criminal cases is often not low. It is normal to have tens of millions or hundreds of millions. How can there be so many OTC merchants in China with such a large amount of funds on a daily basis? Those who can take out a large amount of cash in a short period of time are most likely related to underground banks. In addition, in practice, the disposal company that cooperates with the public security will also "legally" transport money back from abroad by fictitious export trade and then through the State Administration of Foreign Exchange to settle foreign exchange.

Therefore, the parties may also face the risk that if the RMB liquidated by the disposal company contains stolen money or illegally exchanged currency, who will bear this risk? Will the parties themselves be "more guilty" and have additional charges of aiding and abetting, concealing, illegal business operations, etc. on top of the original charges?

03. Viewpoint: Before the court makes an effective judgment, the public security organs should not deal with the virtual currency involved in the case in advance

Public security organs deal with virtual currency in advance during the investigation stage, usually considering several factors: the price of virtual currency fluctuates greatly with the market, the case value of virtual currency needs to be clarified before the court makes a judgment, the virtual currency in the case may be transferred by a third party, and for security reasons, there is a need for prior disposal, etc. We discuss these issues as follows:

1. Does virtual currency fall under the category of property with “large value fluctuations”?

In practice, public security organs will consider disposing of virtual currencies in advance during the investigation stage, as the value of virtual currencies is greatly affected by market fluctuations. However, this view does not seem to be completely tenable in terms of logic.

If it is Bitcoin, Ethereum, meme coin, etc., its market value is indeed greatly affected by market fluctuations. The public security organs deal with it on the grounds that the market price of the property involved fluctuates greatly, and there is still relevant legal basis.

However, most of the cases involving currency actually deal with USDT, a stable currency issued by Tether Limited, whose value is pegged to the US dollar. Is it appropriate to deal with it first on the grounds of large price fluctuations? This is debatable.

2. Will the failure to take prior action affect the court’s decision?

There is another view in practice: the amount involved in a criminal case is the standard for the court to convict and sentence the parties involved, and the defendant's illegal gains need to be handed over to the state treasury. The amount of recovery and fines must be clearly stated in the judgment. Therefore, it is necessary for the public security organs to deal with virtual currency in the investigation stage. We do not agree with this.

At present, the announcements or notices related to virtual currencies issued by my country all stipulate that "no organization or individual may provide pricing services for virtual currencies". Therefore, no matter which pricing method is used, it is against my country's regulatory policy. However, as a virtual commodity, its property attributes are recognized by my country, and in criminal cases, the amount involved is also one of the considerations for judicial organs to convict and sentence the perpetrator. Therefore, in some currency-related cases, the value of virtual currency needs to be determined before the court's judgment.

Lawyer Shao mentioned in his previous article "How to determine the price of the currency involved in a virtual currency theft case?" that the methods commonly used in judicial practice to determine the price of virtual currency are:

1. The price determination agency and judicial appraisal agency issue a report; 2. The price paid for the purchase of virtual currency; 3. The price of virtual currency liquidation; 4. Reference to the prices of mainstream virtual currency exchanges; 5. The value is not calculated and is determined by the court at its discretion.

Not all cases involving currency require a determination of the price of virtual currency. For example, in the theft case (2020) Yue 0304 Xingchu No. 2, the court only vaguely stated in its judgment that the circumstances related to the number of virtual currencies stolen by the perpetrator should be considered at its discretion.

If the virtual currency involved in the case is a stablecoin such as Tether, the above methods 1, 2, and 4 can be used as a reference for the amount involved in the case, and there is no reason to dispose of and convert it into cash during the investigation stage.

In addition, although the court judgment requires the recovery and confiscation of the property involved in the case, in practice, a large number of judgment descriptions are very broad, such as: "The illegal gains shall be confiscated", "Continue to recover the illegal gains", and even in the case of (2023) Min 0524 Criminal First Instance No. 1300 for the crime of aiding and abetting trust, the judgment was directly described as "confiscation of xx seized USDT coins".

From this we can conclude that whether the public security organs deal with virtual currency first will not affect the subsequent court judgment.

3. If no prior treatment is taken, there will definitely be safety hazards?

The security issue of virtual currency is also one of the factors that public security organs consider when dealing with the virtual currency involved in the case.

If you have the private key and mnemonic phrase corresponding to the digital wallet, you have the right to dispose of the virtual currency. Therefore, if someone other than the suspect also has the private key and mnemonic phrase of the wallet, the virtual currency involved in the case may be transferred.

However, if the public security organs already have the private key and other information of the suspect, it must be told by the suspect. Then, if the public security organs themselves can control the suspect's digital wallet and exchange account, the investigators can directly transfer the money to the cryptocurrency wallet account controlled by the public security (although there may be no legal basis for the procedure, it is indeed done in practice. We believe that even if it is temporarily stored in the personal wallet account of relevant personnel of the public security organs, it is always more compliant than disposing of the virtual currency directly by selling it first). As for the issue of security, the public security organs can use multi-signature wallets to prevent internal personnel from stealing.

04. Dealing with virtual currency first may breed rent-seeking and judicial corruption

From the relevant legal provisions listed at the beginning of this article, it can be seen that before the end of the litigation process, the public security organs only have the right to take freezing measures against the property involved in the case, and "freezing is the principle, and prior processing is the exception."

The main responsibility of the public security organs should be to investigate crimes, not to directly deal with the property involved in the case. The handling of the property involved in the case needs to be within the legal framework. After the judgment takes effect, the court's execution bureau will dispose of it through judicial procedures. Let's look at the following two vivid examples to better understand that only a handling method that complies with the process can guarantee the fairness and legality of criminal proceedings.

Case 1: Rent-seeking by police officers handling cases

The Nanjing People's Procuratorate published a case in May 2024. Hai worked as a staff member of a public security bureau. His main responsibilities were to grasp the dynamics of computer information network crimes and investigate network crimes. The defendant Hai used the convenience of his position to obtain the electronic data involved in the case containing Bitcoin information through his subordinate Wu, and sent the data to his friend Ji (the person in charge and technician of a certain network technology company). Later, Ji cracked the above Bitcoin key and stole some Bitcoins, and Hai acquiesced to the behavior. Later, the defendant Hai did not report the investigation in time, but asked Ji for cash and Bitcoin many times. After the incident, the case-handling unit cashed in the Bitcoin and received more than RMB 48.2272 million.

Case 2: Security company embezzled virtual currency involved in the case

In April 2021, according to media reports, the CMO of a blockchain security company in Chengdu misappropriated digital currency assets temporarily stored by the police in the company to short Bitcoin, resulting in a loss of up to 300 million yuan. The incident began in November 2020 when the Token Better digital currency exchange was investigated by the Economic Investigation Bureau for pyramid selling, and the main person in charge, Xiong Mou, was criminally detained. Illegal digital assets worth nearly 300 million yuan were seized, and due to their special properties, they were temporarily stored by the police in a blockchain security company in Chengdu. Recently, when the Economic Investigation Bureau went to the company to settle accounts, it was found that nearly 300 million digital assets were missing. After investigation, the funds were illegally misappropriated by the company's CMO Gao Mou using his position. According to reports, Gao Mou misappropriated digital assets to open leveraged high-risk contracts to short Bitcoin and all positions were liquidated.

Due to the lack of explicit guidance in the law, the judicial disposal of virtual currencies has been in a state of wild growth in practice. There are compliance issues that need to be resolved in the identification of ownership, value assessment, and monetization of virtual currencies. However, countless investigation companies, disposal companies, and scalpers are eyeing this piece of fat meat with extremely high profits (for example, the famous plus token case, the largest case in the currency circle, a disposal company made more than 10 billion yuan in revenue from one order), so there are too many people in the market who want to eat this piece of fat meat, and of course, there are even more scammers.

If the public security organs are still able to deal with suspects with just a piece of authorization, this judicial chaos will cause more legal problems. In March 2024, the Chengdu Public Security Bureau issued the following police reminder information, which also mentioned that "some criminals and intermediary agencies claim to have connections to obtain authorization from the public security organs, or even forge the signatures of the heads of public security organs, forge false disposal contracts for the virtual currency involved in the case, and deceive third-party companies or individuals into paying deposits, "activity funds" and other property for fraud. In addition, the Chengdu Public Security Bureau also reminded that "the virtual currency seized by the public security organs in handling criminal cases... will eventually be judged and disposed of by the people's court in accordance with the law."

(Police reminder: Be vigilant against criminals using the public security organs’ disposal of virtual currencies as an excuse to carry out illegal and criminal activities)

05. Final words

As the judicial disposal of virtual currency is an emerging field, my country's regulatory authorities have not yet issued clear guidance. Therefore, when handling related cases, investigators have to explore feasible solutions on their own in practice, which leads to a series of potential legal issues that may arise from this.

As emphasized in the article "The Judicial Disposal of Virtual Currency Must Be Standardized" published by the People's Court Daily, the current disposal of virtual currency faces multiple challenges such as ownership identification, value assessment and legal realization. Therefore, it is necessary and urgent to issue comprehensive guidance opinions on the judicial disposal of virtual currency as soon as possible. Only by making the disposal behavior legally based can we ensure that the litigation work of the judicial organs is based on the law and effectively protect the legitimate rights and interests of the parties from the source.