【Introduction】On July 18, 2023, the Public Security Bureau of Shayang County, Jingmen City, Hubei Province, sent the main suspect of a cross-border online gambling case to trial according to law. All transactions of the participants were settled using virtual currency, with a total involved amount of 400 billion yuan. During the case handling process, the special task force traced the source and successfully identified and froze virtual currency worth 160 million US dollars (over 1 billion yuan), and some of the frozen virtual currency was confiscated according to law. This case became the first case of “virtual currency confiscation” in the country through court judgment. This case has raised the issue of judicial disposal of virtual currency. Previously, most virtual currency cases focused on the nature of virtual currency and sentencing issues related to it. Little did they know that the post-judgment disposal of virtual currency is also crucial, as it determines the value orientation of the case. This article will systematically discuss the issue of judicial disposal of virtual currency, highlight the difficulties and key points of current judicial disposal, and propose solutions.
1. Problem Statement – Confiscation and Return of Virtual Currency
As a new product of the Internet, the nature of virtual currency is indeed difficult to determine. However, after criminal judgments related to virtual currency, the issue of its disposal always arises. Article 64 of the Criminal Law of China stipulates: “All property obtained illegally by criminals shall be confiscated or ordered to be returned; the legitimate property of the victims shall be returned promptly.” Therefore, virtual currency, as illegal gains of criminals, needs to go through measures such as sealing, seizure, and freezing, and finally be returned to the victims or handed over to the national treasury. In practice, the judicial disposal of virtual currency is mainly entrusted to private enterprises by the court for realization transactions and subsequent handover to the national treasury. However, this operation has also caused a lot of controversy. The controversies mainly involve two aspects. First, since virtual currency does not have legal tender status in China and the state has repeatedly issued announcements warning of its speculative risks, although the victims have suffered losses due to the defendant’s criminal activities, some argue that the victims’ losses should not be compensated, which has sparked controversy over whether the virtual currency should be returned to the victims after realization. Second, because virtual currency is illegal in China, there is currently no unified, formal, and legal virtual currency trading platform. After the judicial authorities confiscate virtual currency and entrust private enterprises to realize it, a series of risks such as illegal procedures, improper handling by entrusted companies, and devaluation of virtual currency value arise. Based on this, this article will combine the practice of judicial disposal of virtual currency, categorize and discuss the above-mentioned issues, and propose solutions.
2. Practical Controversies – Returning Virtual Currency to the Victims
Currently, there are various types of virtual currency-related crimes, mainly divided into fraud crimes that use virtual currency as a lure for investment and criminal offenses involving genuine virtual currency transactions. The former is fraud conducted under the guise of virtual currency, with the purpose of deceiving the victims and obtaining their property, so there is no dispute over the return of the victims’ property after the trial concludes. However, the latter can be further divided into many types of crimes, such as aiding and abetting, concealing, fraud, theft, and illegal acquisition of computer information system data. Crimes such as aiding and abetting and concealing mainly infringe upon national management order, and the virtual currency involved is mainly a criminal tool to evade judicial investigation, so confiscation is appropriate. However, in cases like virtual currency fraud and theft, where the victims have indeed transferred virtual currency that is personally owned, resulting in calculable economic losses, whether the virtual currency should be returned to the victims is a worthy topic of discussion.
Criminal offenses, the return of the legitimate property of the victim is a right granted to the victim by law. As stated in Article 300 of the Criminal Procedure Law: “After trial by the people’s court, for illegal gains and other properties involved in the case that have been verified, in addition to returning them to the victim according to law, they shall be confiscated; for properties that do not belong to those that should be recovered, the application should be rejected, and the measures of sealing, seizure, and freezing should be lifted.” The “Opinions on Further Regulating the Disposal of Criminal Procedure Related Property” and the “Several Provisions of the Supreme People’s Court on the Execution of Criminal Judgments Involving Property” both have relevant provisions. However, in practice, there have been judgments that confiscated the virtual currency obtained by the defendant from the victim, without choosing to return it to the victim, resulting in the inability to protect the legitimate property of the victim. An article titled “Recognition of the Property Nature of Virtual Currency and the Disposal of Related Property Issues” published in the “People’s Court Daily” on September 1, 2023, even states that the existence of transaction behavior by the victim is used to determine whether the victim’s property loss can be returned. If the victim does not have any behavior or intention to sell the virtual currency they hold, and the defendant illegally obtains the victim’s virtual currency key and steals the virtual currency, the loss to the victim should be compensated; if the defendant commits fraud, robbery, extortion, theft, and other virtual currency-related crimes by exploiting the victim’s transaction behavior, and the victim’s legitimate property is infringed upon during the process of engaging in behavior contrary to public order and good customs, the court can order the recovery of all illegal proceeds obtained by the defendant and confiscate them, without further ordering the defendant to compensate the victim.
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This viewpoint sets many preconditions for the victim to obtain the virtual currency lost due to the defendant’s criminal offense. Exploring the reasons behind this viewpoint, because virtual currency transactions are illegal domestically and the state does not encourage individuals to invest in speculative virtual currencies, it is believed that protecting this part of legal interests is not worth it, otherwise it would violate the spirit of national financial control. I do not agree with this differential treatment of the victim’s legitimate property viewpoint, and will provide detailed arguments in the following sections. However, it is clear that there is currently a debate on whether the victim’s virtual currency should be returned in practice, but this is precisely the issue that the victim is urgently concerned about in property crimes, therefore it is necessary to discuss.
III. Practical Controversy: Difficulties in Judicial Confiscation of Virtual Currency
In addition to being returned to the victim, virtual currency used as a criminal tool or as criminal proceeds should be confiscated according to law. Currently, there are difficulties in the confiscation of virtual currency in practice. On the one hand, virtual currency is a commodity under national control, and there are official documents that prohibit virtual currency transactions. Therefore, whether it is virtual currency used as a criminal tool or as criminal proceeds, judicial disposal is required in order to coordinate legal means with financial regulatory measures and maintain the stability of the financial market. On the other hand, virtual currencies have anonymity, privacy, and are difficult to regulate. It is more difficult to investigate the account operations of individuals involved, and because relevant documents in China prohibit virtual currency transactions, there is a lack of official trading platforms domestically, which may lead to procedural violations and unfairness in the conversion of virtual currency into real value. The following sections will describe in detail the existing difficulties in the official judicial disposal of virtual currency.
1. Whether virtual currency belongs to the property that can be confiscated in the sense of criminal law
In the provisions of Article 64 of the Criminal Law mentioned in the previous text, which deals with the handling of proceeds of crime, prohibited items, and items used for criminal purposes, it states that “all the property obtained by criminals through illegal means shall be confiscated or ordered to be returned.” The scope of illegal proceeds is property. According to systematic interpretation, looking at Article 92 of the Chinese Criminal Law, which defines the “scope of property,” property includes living materials, means of production, legal property, shares, stocks, bonds, and other property. The determination of property can be based on this. However, it is worth discussing that China adopts an absolute regulatory attitude towards virtual currency, and existing normative documents identify virtual currency as a specific virtual commodity, but do not directly affirm its status as property. Several experts, scholars, and practitioners have denied the property nature of virtual currency, believing that its essence belongs to data. Illegal acquisition of virtual currency should be regulated as computer crimes such as illegal acquisition of computer information system data, rather than punished as property crimes. Based on this, although confiscating virtual currency as proceeds of crime is necessary and can guarantee the stability of the financial market and restore order, on the one hand, denying the property nature of virtual currency in determining guilt and sentencing limits it to being classified as computer crimes related to electromagnetic data; on the other hand, in judicial confiscation, its property nature is acknowledged and it is confiscated as proceeds of crime. This differential treatment has led to conflicts and contradictions in the judicial disposal of virtual currency, resulting in arbitrariness in legal interpretation. The law is rigorous, and legal interpretation is systematic. If there is no unified consensus on whether virtual currency belongs to property, the criminal confiscation of virtual currency will also face the dilemma of lacking legal basis.
2. Difficulties in the measures taken by judicial authorities
Existing normative documents in China explicitly prohibit the exchange of legal tender with virtual currency, as well as exchange business between virtual currencies, and illegal financial activities such as providing information intermediary and pricing services for virtual currency transactions, token issuance financing, and trading of virtual currency derivatives. Therefore, the involved virtual currency cannot be disposed of through public sale or auction. Furthermore, according to Article 11, Article 144, Article 145, and other provisions of the Chinese Criminal Procedure Law, in the measures of sealing, seizure, and freezing as means of confiscation, sealing and seizure are limited to property and items, while freezing measures can only be taken for “property such as deposits, remittances, claims, stocks, and fund shares.” Therefore, the judicial disposal of virtual currency can only adopt freezing measures. However, currently, there is no authoritative institution that can freeze virtual currency, making it a major difficulty in the disposal of involved assets. In order to ensure that virtual currency is not transferred, some investigating agencies transfer the involved virtual currency to wallets under their control, while others convert the virtual currency into cash before taking freezing or other coercive measures. These measures lack clear legal basis and raise questions about their legality. Therefore, freezing measures for virtual currency are also a focal point that should be considered in the judicial disposal of virtual currency, as timely freezing of virtual currency is related to clarifying the facts of the crime and the post-judgment disposal of virtual currency.
3. Illegality of Virtual Currency Trading
Regarding the judicial disposal of virtual currency, the illegality of virtual currency trading is a long-standing issue. Virtual currency trading is not legal in China. Regulatory documents such as the “Notice on Preventing Bitcoin Risks” issued by five ministries in 2013 prohibit the cashing out of virtual currencies domestically. Therefore, virtual currencies are essentially prohibited goods and should not be disposed of for cash. Just like drugs are prohibited goods in China and must be destroyed after being confiscated, otherwise it would conflict with relevant prohibitive regulations. In judicial practice, it is common for judicial authorities to dispose of virtual currencies for cash. However, due to the lack of systematic regulations, there are different disposal methods, resulting in various problems. There is no officially recognized domestic trading market in China where virtual currencies can be sold and confiscated. Selling virtual currencies in foreign trading markets also involves various risks of cross-border transactions. Therefore, judicial authorities often entrust private enterprises to dispose of virtual currencies. The companies may sell the virtual currencies to upstream acceptors or downstream individual traders, and after deducting service fees, they give the proceeds to the judicial authorities. The problem here is that while the country does not encourage virtual currency trading, it uses trading and cashing-out methods in judicial recovery. On one hand, it punishes domestic virtual currency trading, and on the other hand, it uses public power to engage in virtual currency trading. This disposal method undoubtedly contradicts the spirit of justice. Moreover, because judicial recovery of virtual currencies is relatively unfamiliar in China, the disposal actions of entrusted enterprises may not be effectively regulated, resulting in a series of problems such as procedural violations, embezzlement and bribery, and devaluation of virtual currencies. A well-known case in the industry is that a person named Gao from a blockchain security company in Chengdu used various means to obtain clues to blockchain-related cases, instigated the police to solve the cases, and then entrusted the company to cash out the virtual currencies, turning the normal investigation and handling of virtual currencies into a tool for the company to profit.
Four, Solutions to the Judicial Disposal of Virtual Currencies
In summary of the issues raised regarding the judicial disposal of virtual currencies in the previous section, the first issue is whether the virtual currencies after cashing out should be returned to the victims, and the second issue is how to legally and compliantly dispose of the virtual currencies that should be confiscated. In fact, this issue has also attracted the attention of relevant authorities. In July 2023, the “Telecommunications Network Fraud Recovery and Compensation and Property Disposal” seminar was held in Yuhang District, Hangzhou. Representatives at the meeting conducted in-depth discussions on topics such as “the nature of virtual currencies and the judicial disposal of virtual currencies involved in cases” and “application of procedures for confiscating illegal gains and allocation of co-responsibility.” Professor Liu Daoqian of the China Criminal Police College proposed that for virtual currencies traded on centralized exchanges, the involved accounts could be frozen through the exchanges. For transactions using cold wallets, the wallets or keys could be seized through investigative measures. The author will also propose personal disposal suggestions.
(I) Return of Virtual Currency Belonging to the Victim’s Legal Property
The illegal gains of the defendant should be confiscated or ordered to be returned, and the part that belongs to the victim’s property should be returned to the victim in accordance with the law. First, virtual currencies stored in the defendant’s wallet that have not been converted into cash should be returned to the victim. Second, in some criminal cases, the funds obtained by the defendant from selling the victim’s virtual currency should be refunded to the victim as a loss, rather than being confiscated. Although the series of regulatory documents such as the “Announcement on the Prevention of Risks Associated with Token Offering Financing” clearly state that virtual currencies cannot be used as currency in the market, this provision mainly prohibits token issuance activities, not individual investment behavior. The “Announcement” only reminds investors to bear the risks of business failure and investment speculation, but does not expressly prohibit them from engaging in investment activities. Therefore, the virtual currencies obtained by the victims through investment have certain property value and their legitimate assets should be respected and returned to them in a timely manner. The article “Identification of the Property Nature of Virtual Currencies and the Disposal of Involved Properties” published by the People’s Court Daily recognizes the property nature of virtual currencies in the first half, but later states that virtual currencies with transactional losses suffered by the victims are not protected due to engaging in behavior that violates public order and good customs. This method of differentiation disregards the rights of victims’ legitimate property and contradicts the view that virtual currencies have property nature, as acknowledged in the previous part. The country has not prohibited individuals from holding currencies, and the punishment is only for platform trading activities. How can individual transactions violate public order and good customs? In practice, there are also civil arbitration cases that support the validity of entrusted investment agreements involving virtual currencies, which do not violate public order and good customs or legal prohibitions. Moreover, the necessary process for judicial authorities to dispose of virtual currencies is to convert them into cash and remit them to the national treasury. Why does the property after personal conversion no longer belong to the original holder of the virtual currency?
(II) Establishing a Dedicated Channel for the Disposal of Virtual Currencies
When discussing the judicial disposal of virtual currencies, the preliminary question to be answered is whether the property nature of virtual currencies is recognized. If the property nature of virtual currencies is denied, they should not be considered illegal gains within the scope of criminal law, and it may be considered to destroy the virtual currencies. If the property nature of virtual currencies is recognized, virtual currencies can be disposed of through conversion, but procedural regulations should be improved during the conversion process, and a specialized disposal mechanism that mutually constrains and supervises each other should be established.
1. Sending the involved virtual currency to a black hole address
I have previously written an article titled “Disposal of Involved Virtual Currency, Only by Doing This Can It Be Compliant” regarding the judicial disposal of virtual currency. In it, I believe that the realization and disposal of virtual currency is essentially the trading between virtual digital currency and legal tender, which still allows the circulation and operation of virtual digital currency, and still affirms the value attribute of virtual digital currency as “real money” deep inside. It is still a circumvention operation “wandering” within the domestic financial system. Moreover, in the specific disposal process, it is impossible to control the risks of virtual currency depreciation, illegal disposal procedures, and corruption by relevant personnel. Therefore, I propose that if virtual currency is not recognized as property in the sense of criminal law, virtual digital currency that should be returned to the victim should be returned in accordance with the law; virtual digital currency that needs to be confiscated in accordance with the law can be directly sent to a “black hole address”. The so-called black hole address (Eater Address) refers to addresses where the private key is lost or cannot be determined. These addresses are like black holes, where virtual digital currency can only be deposited and not withdrawn. Any virtual digital currency that is sent to a black hole address cannot be circulated again, essentially destroying the virtual digital currency. In this way, the disposal of the involved virtual currency not only complies with the prohibitive policy provisions of the country, but also truly prevents the circulation of the involved virtual digital currency, avoiding controversy over “double standards”. Most importantly, no other disposal action can demonstrate the determination of law enforcement agencies to “prohibit currency” like sending it to a black hole address.
2. Establishing a professional asset recovery and disposal team
In the aforementioned “Telecom Network Fraud Asset Recovery and Disposal” seminar that has just been held, Professor Che Hao from Peking University Law School proposed that the essential attribute of property lies in its transferability and has not been expressly prohibited by law. Although China prohibits the investment and trading of virtual currency, it has not completely banned individuals from holding and transferring it, and virtual currency still possesses the attributes of property. More and more experts, scholars, and practitioners in the judiciary support the recognition of the property attribute of virtual currency. Under the premise that the aforementioned preliminary issue is resolved, there is a legal basis for realizing and recovering virtual currency. As for the recovery and seizure of Bitcoin, the key lies in the control of the private key, wallet, and its carrier. First, relevant authorities should establish a mechanism for querying, freezing, and recovering the assets of involved virtual currency. Public security agencies should form recovery teams with professional technical capabilities. After discovering clues of involved virtual currency, they should immediately query the storage information of virtual currency, cooperate with overseas exchanges, and freeze the involved funds in a timely manner. Second, establish a mechanism for disposing of the assets of involved virtual currency. Legislative bodies should formulate detailed rules for the realization of involved virtual currency, judicial authorities should establish dedicated departments for realizing virtual currency, and victims and defense lawyers should participate in supervising the realization of virtual currency to prevent corruption risks in the process. Third, considering that the realization of virtual currency involves professionalism, it may be too costly for judicial authorities to establish dedicated realization departments. They can continue to entrust professional private companies to conduct realization transactions, but public security agencies and judicial authorities should participate in the entire realization transaction. Both parties should sign an agency contract to determine their respective rights and obligations, specify agency fees and risks, and realize the virtual currency at designated time points. The handling unit should supervise the entire disposal and realization process and convert the real risks of virtual currency transactions into realization. This can be achieved by requiring the agent to pay a certain proportion of the deposit as security, and gradually transferring the involved virtual currency to the agent for realization within the range of the deposit. By restraining and supervising power, controlling the risks of realization, it is a powerful measure to ensure the implementation of national confiscation actions and achieve the purpose of confiscation.
Conclusion
In a previous article, the author mentioned the phrase “never has there been something as perplexing to the law as virtual currency,” and this statement is greatly confirmed in this article. The legal issues related to virtual currency, from conviction and sentencing to the judicial disposal of assets involved, have been troubling numerous experts, scholars, and practitioners in the field of law. However, the purpose of the law is to respond to practical needs, clarify the nature of virtual currency, establish comprehensive and rigorous judicial measures tailored to its nature, and have a counteractive effect on economic development. This is the mission of legal professionals. Therefore, this article analyzes the existing judicial disposal methods and challenges regarding virtual currency and proposes some personal suggestions. It is believed that the path of judicial disposal of virtual currency will become clearer and more understandable.
References: 1. Wang Zhongyi and Yang Conghui: “Identification of the Property Nature of Virtual Currency and Issues of Judicial Disposal of Assets Involved,” People’s Court Daily, September 1, 2023, 6th Edition. 2. Zhao Guannan: “On the Criminal Confiscation of Bitcoin,” Journal of China People’s Public Security University (Social Sciences Edition), 2022, 4th Issue, pp. 96-105. 3. Yu Tao: “Difficulties and Solutions in Handling Crimes Involving Virtual Currency,” China Procuratorate, 2022, 3rd Issue, pp. 27-30. 4. Di Kechun and Wang Guanglei: “Discussion on Criminal Recovery Measures for Virtual Currency,” China Criminal Police, 2021, 3rd Issue, pp. 25-27.
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