The first criminal case involving the issuance of virtual currency has caused controversy: Does the withdrawal of liquidity and the resulting losses in cryptocurrency speculation constitute fraud?
Yang Qichao, a college student born in the 2000s, issued a virtual currency called BFF on an overseas public chain, and was jailed for withdrawing liquidity. The procuratorate accused him of issuing fake virtual currency, and after others were misled to recharge 50,000 USDT coins, Yang Qichao quickly "withdrew funds", causing others to lose 50,000 USDT coins, and his behavior constituted fraud. On February 20, 2024, the People's Court of Nanyang High-tech Industrial Development Zone, Henan Province, found Yang Qichao guilty of fraud at first instance and sentenced him to 4 years and 6 months in prison and a fine of 30,000 yuan.
On May 20, 2024, the case was heard at the second instance at the Nanyang Intermediate People's Court. It is learned that in the second instance, Yang Qichao's defense lawyer still defended his innocence.
The defense believes that the virtual currency issued by the defendant Yang Qichao in this case has a unique and unalterable contract address, and there is no so-called "fake currency". The defendant and the reporter are both senior players in the currency circle. They have been engaged in virtual currency trading for a long time and have a clear understanding of the risks of speculating in virtual currency. In addition, the platform allows liquidity to be added or withdrawn at any time, and the defendant's behavior does not violate the platform rules. The BFF coins held by the victim appreciated due to increased liquidity after the incident. If the transaction can be exchanged for more USDT coins than before, the victim will not suffer any losses.
Relevant lawyers introduced that at a time when my country's laws and policies have not yet recognized the legality of virtual currency and that "investment in virtual currency is at one's own risk", this is the first case in China where the issuance of virtual currency and the withdrawal of liquidity have been brought to court as a criminal case.
The case was heard in the second instance by the Nanyang Intermediate Court.
Fraud cases caused by "withdrawal of liquidity"
Yang Qichao was born in 2000 and was a senior student at a Zhejiang university who was about to graduate. Out of hobby, he got involved in virtual currency during his college years.
In early May 2022, he noticed a DAO community autonomous organization called Blockchain Future Force (BFF), which was promoting and warming up for the issuance of decentralized virtual tokens. The issuance date was scheduled for May 2 of that year.
At 4:41:46 pm (Beijing time) that day, Yang Qichao, out of curiosity, created a digital virtual currency called "Blockchain Future Force" (BFF) on the Binance Chain, which has the same English name as Blockchain Future. At 4:57:25 pm, Yang Qichao added 300,000 BSC-USD and 630,000 BFF liquidity to the virtual currency he issued.
In decentralized virtual currency transactions, the "liquidity pool" is a key factor. First, the liquidity provider (user) needs to deposit the "token pair" (the token pair in this case is two virtual currencies, BFF and BSC-USD) into the smart contract to create a liquidity pool, and set the token pair ratio according to the mathematical function through the automatic market maker (AMM). The two tokens are exchanged to change the token pair ratio, and then the ratio is changed, and investors look for arbitrage space.
At the same second when Yang Qichao added liquidity, Luo spent 50,000 BSC-USD to exchange for 85,316.72 BFF coins. Just 24 seconds later, Yang Qichao withdrew the liquidity in the BFF coins and obtained 353,488.115 BSC-USD and 508,069.878 BFF coins. The operation of withdrawing liquidity caused the BFF coins in the liquidity pool to depreciate significantly. Luo used 81,043 BFF coins to exchange for only 21.6 BSC-USD.
This act of withdrawing liquidity is referred to as "withdrawal of capital" in the indictment. According to several cryptocurrency players, withdrawing liquidity is a common arbitrage method in virtual currency transactions. In the absence of sufficient liquidity, it can lead to large fluctuations in the exchange price of virtual currencies, earning ten or a hundred times the profit. Correspondingly, the virtual currencies held by the losers may depreciate significantly. Therefore, if the issuer withdraws the funds within a short period of time after adding liquidity, it will be regarded as "unkind." Yang Qichao said, "I just took back the points that the big brother cut from me. I have been cut a lot."
However, there are no rules or restrictions on whether or not to withdraw virtual currency on a public chain, or how long it takes to withdraw. Whether investors choose to exit at a loss or wait for new liquidity to come in and exchange after appreciation depends on personal judgment and choice.
Luo chose to seek compensation from the other party for his losses.
The issuance and trading of virtual currencies are anonymous, and it is usually difficult to find the counterparty. Coincidentally, when Luo was tracing the source, he found Yang Qichao through a common WeChat friend. Luo asked Yang Qichao to refund his losses, but was rejected.
On May 3, 2022, Luo reported to the Nanyang Public Security Bureau High-tech Industrial Development Zone Public Security Bureau, claiming that he was defrauded of more than 300,000 yuan (converted to 50,000 USDT coins) by investing in virtual currency. Soon, the police filed a criminal case on suspicion of fraud and arrested Yang Qichao in Hangzhou, Zhejiang in November of that year.
Pancakeswap platform rules allow liquidity to be removed at any time.
The dispute over being cheated and the "god-level" speculators
The crime of fraud refers to the act of using deceptive methods to defraud a large amount of public or private property for the purpose of illegal possession. During the trial, the prosecution and the defense had different views on whether the virtual currency issued by Yang Qichao was real or fake and whether Luo had fallen into a wrong cognition.
The People's Procuratorate of Nanyang High-tech Industrial Development Zone alleged that the defendant Yang Qichao created a fake BFF coin with the same name and promotional materials as the virtual currency issued by Qudong Future, and recharged 300,000 USDT coins himself as bait. After inducing the victim Luo to recharge 50,000 USDT coins, Yang Qichao withdrew a total of more than 350,000 USDT together with the 300,000 USDT he recharged, defrauding Luo of RMB 330,000.
In the defense lawyer's opinion, first of all, although the virtual currency issued by Yang Qichao has the same English name as District Future, this does not mean that it is a fake BFF coin, because the BFF coin issued by Yang Qichao has a unique and unalterable contract address and can be exchanged normally. On the virtual currency platform, there are many coins with the same name. In this case, before Yang Qichao issued the BFF coin, relevant entities had already issued multiple BFF coins with the same name. In fact, District Future did not issue BFF coins, but BFFT and BFFA coins.
"When buying virtual currency, you must first check the contract address. The contract address is a bit like a URL. It is a key composed of a string of letters and numbers. It is unique and cannot be tampered with. It is also the most core element for identifying different virtual currencies." A blockchain financial expert who declined to be named said, "With the development of virtual currency today, the issuance threshold is already extremely low. Anyone can issue coins at any time, because the codes are open source and can be issued by copying the code. For example, there are many virtual currencies that copy Bitcoin. Virtual currencies with the same name, copycat coins, and imitation coins are even more common." The expert also introduced that in 2021, due to Musk's endorsement, Dogecoin became popular, and thousands of virtual currencies named after various animals were issued on the platform, and currency speculation became a trend.
Did Luo's behavior of recharging 50,000 USDT coins to exchange for BFF coins fall into a wrong perception?
In the defense lawyer's opinion, Luo is a veteran player who should have a clear understanding of the gambling nature and risks of virtual currency transactions. He said in the transcript: "Generally, when new coins are issued, whoever buys them first will increase the value of my coins if others buy them later." "The disadvantage is that there is no supervision, and anyone can issue virtual coins on the platform, which poses investment risks."
Transaction records show that Luo bought BFF coins at the same second that Yang Qichao added liquidity. "This could not have been achieved through manual operation. Instead, it was done automatically through a script and did not involve any human verification or identification process," said the defense lawyer.
However, Luo denied that he had written a script in advance to buy automatically.
Case materials show that when Luo reported the case, he said that he bought the virtual currency on his mobile phone through the PancakeSwap virtual currency trading platform in the parking lot of a supermarket in Nanyang High-tech Zone. "If I can buy the virtual currency in the first batch, and then as more people buy the currency, the price will increase, and there is a lot of room for appreciation after selling it." However, the legal opinion issued by Luo's lawyer stated that Luo operated it on a computer.
A senior person in the cryptocurrency circle who wishes to remain anonymous analyzed that virtual currency can only be traded after the issuer adds liquidity. To manually purchase virtual currency, one must connect the wallet, enter the currency name, exchange quantity, choose which currency to exchange with, enter the contract address, etc. This requires at least five or six steps and cannot be completed within one second.
According to the person in the cryptocurrency circle, there is a way to play in the cryptocurrency circle, called "buying local coins". "Local coins" mostly refer to investing in virtual coins that are usually not officially promoted and do not have white papers on decentralized public chains. Those who rush in first may get ten or a hundred times the return, but if they withdraw too late, they may suffer a huge loss due to insufficient liquidity. In fact, there is a kind of people called "cryptocurrency snipers". They write program scripts in advance, buy the newly issued virtual coins first, and withdraw quickly when they appreciate. This kind of people are also called "money-pulling", which means "cutting leeks".
After checking Luo's operation records, the above-mentioned people in the cryptocurrency circle found that many of his transactions were bought and sold within an extremely short time of 6 seconds, 9 seconds, 12 seconds, and 18 seconds. The fastest one was held for 6 seconds and then sold out, making a lot of profit. "This operation is extremely professional and belongs to the god-level in the cryptocurrency circle."
BFFA virtual currency issued by District Future
Failure to protect virtual currency and criminal prosecution
During the trial, another focus of controversy was whether the lost virtual currency was property that should be protected by criminal law.
As early as the beginning of the case, the public security organs also informed Luo that due to the prohibitive provisions of national laws, there was no institution in China that could identify the value of the USDT currency involved in the case. The first instance court also stated that since it is currently impossible to conduct price appraisals on virtual currencies such as Tether in China, it is impossible to determine the specific amount of this type of fraud crime.
Luo's loss was 50,000 USDT coins. USDT, also known as Tether in Chinese, is a virtual currency anchored to the US dollar and can generally be exchanged with the US dollar at a 1:1 ratio. However, since USDT cannot be used directly on the Binance chain, it can only be exchanged for BSC-USD coins commonly used on the Binance chain using the USDT cross-chain bridge, and then BSC-USD can be used to exchange for other virtual currencies on the chain. After multiple exchanges and conversions between BSC-USD and USDT, USDT and US dollars, and US dollars and RMB, the prosecutors accused Yang Qichao of defrauding Luo of RMB 330,000.
The first-instance court held that "according to relevant policies of our country, this virtual currency does not have monetary attributes, but in real life, based on its stability, it can be traded on many international trading platforms and bring economic benefits. Its property attributes are undeniable." Therefore, it recognized the conversion of the 50,000 USDT coins involved in the case into RMB value as a sentencing factor.
The defense lawyer believes that according to the current laws and regulations of my country, virtual currency investment is not protected by law, both parties are illegal financial activities, and investors should not be protected by law even if they suffer losses. The first instance court's determination is a "disguised support for the redemption transaction between virtual currency and legal currency", which runs counter to national laws.
As early as December 3, 2013, the People's Bank of China, the Ministry of Industry and Information Technology, and the three major regulatory commissions of China Banking, Securities, and Insurance have issued a "Notice on Preventing Bitcoin Risks", which clearly stated that "Bitcoin does not have the same legal status as currency, and cannot and should not be circulated and used as currency in the market." On September 4, 2017, the People's Bank of China and seven other ministries and commissions issued the "Notice on Preventing the Risks of Token Issuance and Financing", which clearly stated that "token issuance and financing is essentially an act of illegal public financing without approval" and "token issuance and financing and trading involve multiple risks, including the risk of false assets, the risk of business failure, the risk of investment speculation, etc. Investors must bear the investment risks themselves."
On September 15, 2021, the People's Bank of China, the Supreme People's Court, the Supreme People's Procuratorate and ten other departments issued the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation", which clearly stated that "any legal person, non-legal person organization or natural person who invests in virtual currency and related derivatives violates public order and good morals, and the relevant civil legal acts are invalid, and the losses caused by this shall be borne by themselves; if it is suspected of disrupting financial order and endangering financial security, the relevant departments shall investigate and deal with it in accordance with the law."
In addition, in the “Guiding Case No. 199” issued by the Supreme People’s Court on December 27, 2022, the Supreme People’s Court confirmed that “the arbitration award in this case ordered the respondent to compensate the US dollars equivalent to the value of Bitcoin, and then converted the US dollars into RMB, which was a disguised support for the redemption transaction between Bitcoin and legal tender, which violated the state’s regulations on virtual currency financial supervision and violated the public interest. The people’s court should rule to revoke the arbitration award.”
It was found that a civil case published on the official website of the Nanyang Intermediate People's Court in Henan Province also mentioned that "the USDT digital currency involved in this case is a virtual currency similar to Bitcoin. According to the notices and announcements issued by the People's Bank of China and other departments, virtual currency is not issued by the monetary authority, does not have monetary attributes such as legal compensation and compulsion, is not a real currency, does not have the same legal status as currency, cannot and should not be circulated and used as currency in the market, and citizens' investment and trading in virtual currency are not protected by law."
Related controversial topics have also caused controversy in the academic community. On May 16, 2024, the People's Court Daily published a theoretical article entitled "Analysis of the 'Criminal Law Property Theory' of Virtual Currency". The author of the article, Ye Zhusheng, an associate professor at the School of Law of South China University of Technology, believes that "recognizing virtual currency as criminal property violates the principle of unity of legal order". The reason is: "Neither our country's civil laws nor financial policies protect activities related to virtual currencies, do not encourage or even crack down on virtual currency-related activities, and civil law generally identifies virtual currency activities as invalid civil legal acts that violate public order and good morals. If the criminal law protects virtual currency as property, it will in disguise guarantee the security of virtual currency transactions and indirectly promote activities such as virtual currency transactions, which is contrary to the goals of civil law and financial policies."
In addition, the defense lawyer pointed out that the transaction records showed that Luo redeemed 21.6 BSC-USD coins within 7 minutes, and then "bottomed out" the BFF coins issued by Yang Qichao three times, but then Luo reported to the public security organs that he was cheated. As of the trial, the BFF coins issued by the defendant had appreciated significantly due to increased liquidity. Luo's wallet with the last number 3A22 still held 72381.7198 BFF coins, which could be exchanged for 64065.7134 USDT coins. "Regardless of whether virtual currency is property or not, Luo Jiayuan has not suffered any loss in terms of the increase in the number of USDT."
The first-instance judgment stated, "As to whether the victim later bought and sold the BFF coin, whether the coin still has value according to the trading rules of the BoBian platform, and how much value it has, none of these affect the fact that Yang Qichao has committed a completed fraud crime." During the first-instance trial, the judge explicitly required that Luo could not buy or sell before the judgment came into effect.
In the second trial, the defense lawyer said, "The essence of this case is the investment behavior of virtual currency, not the criminal behavior. Similar to stock speculation, investing in virtual currency is a process. In this process, the price of virtual currency goes up and down with the amount of liquidity. Whether it is profitable or not depends on the time of buying and selling. Now it seems that in the whole process of investing in BFF coins, Luo did not lose "money", but made "money". The starting point of the logic of this case is the loss of transaction. If the victim can obviously trade back more virtual currency, how can this be called fraud?"
There are risks in cryptocurrency trading, so be cautious when entering the market!
Disclaimer: This article is for informational purposes only and does not constitute any investment advice! Always do your own research and consult a professional before making any financial decisions.
Planning and production
Source: The Paper
Compiled by: 9iMxxx | Published by: NFT Gamer
Follow us
