Written by: Mankiw Blockchain Legal Services
Case Summary
On June 6, a fraud case involving virtual currency published by The Paper attracted widespread attention in China. The protagonist is a young "post-00" college student Yang Qichao, who issued a virtual currency called BFF on an overseas public chain and quickly withdrew liquidity, causing investor Luo to lose 50,000 USDT coins. The first instance sentenced Yang Qichao to 4 years and 6 months in prison and a fine of 30,000 yuan for fraud. However, in the second instance, Yang Qichao's defense lawyer proposed a not guilty defense, arguing that Yang Qichao's behavior complied with the platform rules and that Luo should have a full understanding of the risks of virtual currency investment.
As the first criminal case involving the issuance of virtual currency, this case not only caused heated debate at the legal level, but also triggered extensive discussion in society. The high risk of the virtual currency market and the uncertainty of supervision have once again become the focus of public attention.
Although no conclusion has been reached yet, the arguments of all parties in this case also represent the views and attitudes of the current society and the law/regulatory system towards participation in virtual currency projects.
Prosecution and Defense Views
Based on news reports, Lawyer Honglin sorted out the core content of this case and the main views of all parties.
The prosecution's view: A carefully planned scam
The prosecution insisted that Yang Qichao had essentially defrauded Luo's funds by creating a fake BFF coin with the same name as the District Future virtual currency, inducing Luo to recharge 50,000 USDT coins and then quickly withdraw the funds. Although virtual currencies are not considered legal tender in China, their transactions and economic benefits on international trading platforms show property attributes, and the prosecution believes that they can be converted into RMB for sentencing.
Defense Argument: Legal Arbitrage
The defense lawyer said that the virtual currency issued by Yang Qichao has a unique and unalterable contract address, which complies with the technical specifications of virtual currency transactions and does not constitute counterfeit currency. At the same time, Yang Qichao's withdrawal of liquidity after issuing virtual currency is a legal arbitrage behavior and does not violate the platform rules. The defense also pointed out that as a senior player, Luo should have a clear understanding of the risks of virtual currency transactions. He is involved in high-risk speculative behavior and should be responsible for his investment decisions. In addition, the defense emphasized that according to current laws and regulations, virtual currency investment behavior is not protected by law, and the transactions of both parties are illegal financial activities, and the losses should not be protected by law.
Victims’ perspective: innocent investors
Luo insisted that he was deceived. He bought BFF coins at the same second that Yang Qichao added liquidity, but because Yang Qichao quickly withdrew his funds, the virtual currency he held depreciated significantly. He reported that he had lost 50,000 USDT coins (equivalent to more than 300,000 yuan), and believed that Yang Qichao had defrauded his funds through false propaganda and rapid withdrawal of funds. He stated in court that he bought BFF coins through a mobile trading platform in a supermarket parking lot in Nanyang High-tech Zone, and expected to gain returns through early investment. At the same time, he denied using a script to automatically buy BFF coins, claiming that he bought them manually, emphasizing that he was a victim.
Speculation and arbitrage of virtual currency
The cryptocurrency market has always been full of opportunities for speculation and arbitrage. From the early days of Bitcoin to the present, various forms of cryptocurrency have emerged, attracting a large number of investors and speculators. The high volatility and relative lack of regulation of cryptocurrency have made the market full of various arbitrage activities and potential scams.
The controversy caused by Yang Qichao's case actually reflects a common phenomenon in the virtual currency market - rapid arbitrage. Although his defense lawyer tried to explain his behavior as a legal arbitrage operation, for most ordinary investors, this rapid withdrawal of funds is more like a "pump and dump" scam.
In the virtual currency trading market, there are many different arbitrage behaviors, some of which are legal market operations, while others are in the gray area of law and morality. The following are some common virtual currency arbitrage methods:
Arbitrage: Take advantage of the price difference between different exchanges to buy low and sell high. For example, buy Bitcoin on exchange A, then sell it on exchange B where the price is higher, and earn profit from the price difference.
Triangular arbitrage: arbitrage by taking advantage of the price differences between different trading pairs on the same exchange. For example, taking advantage of the price differences between BTC/ETH, ETH/USDT, and BTC/USDT to achieve risk-free returns through fast transactions.
Liquidity mining: Providing funds to the liquidity pool of decentralized exchanges (such as Uniswap, SushiSwap) to earn transaction fees and platform rewards. This method is usually accompanied by high returns and high risks.
Lending arbitrage: Lending virtual currency at a low interest rate on one platform, and depositing or pledging at a high interest rate on another platform to earn the interest rate difference.
Arbitrage between spot and futures markets: arbitrage by taking advantage of the price difference between the spot market and the futures market. For example, buying spot Bitcoin and shorting the same amount of Bitcoin in the futures market at the same time, locking in risk-free returns.
Arbitrage robots: Use automated programs to perform high-frequency trading at the millisecond level to capture tiny price differences in the market. This method requires high technical and financial thresholds.
Liquidity withdrawal arbitrage: Adding liquidity to a decentralized exchange and then quickly withdrawing it, and making profits by manipulating the token ratio changes in the liquidity pool. This behavior is sometimes called "rug pull" and is controversial both morally and legally.
In such a market environment, how can investors protect themselves from such behavior? At the same time, how to define the boundary between legal arbitrage and illegal fraud? These questions are not only related to the final judgment of Yang Qichao's case, but also to the future development of the virtual currency market.
Mankiw's Attorney's View
At present, the legal status of virtual currency in many countries and regions is not yet clear. Different countries and regions have different regulatory policies. Some countries have already formulated a relatively clear legal framework, while others are still exploring. For example, the United States and the European Union have strict supervision over virtual currency, requiring virtual currency exchanges and related companies to comply with laws and regulations such as anti-money laundering and anti-terrorist financing. In 2019, the US SEC sued the project initiated by Telegram, and ultimately ruled that its ICO was illegal and required it to return investors' funds. In China, virtual currency transactions and ICO (initial coin offering) are completely banned. At the same time, the Chinese government has issued notices and announcements many times, clarifying that virtual currency does not have the status of legal tender, and investment and trading behaviors are not protected by law.
In addition, new ways of playing and innovations continue to emerge in the virtual currency market, from decentralized finance (DeFi) to non-fungible tokens (NFTs), which are attracting a lot of funds and investors' attention. However, these emerging fields are also accompanied by huge risks and uncertainties. For example, the frequent hacker attacks and smart contract vulnerability exploits in DeFi projects, as well as the price bubbles and hype in the NFT market, all show the high complexity and volatility of the virtual currency market.
The high risk of the virtual currency market is not only reflected in market fluctuations and technical loopholes, but also in the large number of frauds and illegal fundraising activities. Despite repeated warnings from the government and regulatory agencies, the high returns of the virtual currency market still attract a large number of investors who are unaware of the truth.
In mainland China, criminal cases involving virtual currency are gradually increasing, showing the legal and investment risks of the virtual currency market. For example, in 2018, the Shenzhen Public Security Bureau cracked a virtual currency "cloud mining" fraud case involving hundreds of millions of yuan. Criminals used the high-yield gimmick of virtual currency to attract investors to buy so-called "mining machines", but in fact they were defrauding in the form of a Ponzi scheme. In the same year, the Hangzhou police also cracked a case of illegal fundraising using virtual currency, involving more than 1 billion yuan and thousands of investors.
However, when handling such cases, the courts often do not have a clear and unified adjudication rule, which has caused great trouble for grassroots judicial staff and parties involved in the case in terms of judicial certainty. For example, the Supreme People's Court once clearly stated in a guiding case that it does not support the redemption of virtual currency and legal tender, but in the Yang Qichao case, the first instance court recognized the property attributes of virtual currency, which shows that there is inconsistency in judicial practice.
As a legal practitioner in the Web3 industry, I personally find the most ridiculous part of this case to be this: if one makes money by investing in the virtual currency market, that is due to the investor’s own ability and vision; but if one suffers a loss, using state power to call the police to try to recover the loss is somewhat outrageous.
The high risk and volatility of the virtual currency market determine that investors must have sufficient knowledge and judgment, rather than blaming others or seeking state protection for their investment decision-making errors. Therefore, improving investor education and risk awareness is the fundamental way to avoid similar disputes and losses.
As a new type of financial instrument, virtual currency has great potential, but it also needs to operate within the legal framework to truly realize its value. We call on relevant departments to issue clearer virtual currency transaction supervision policies and clearer court judgment rules as soon as possible to protect the interests of investors while promoting the healthy development of the industry.
