【Introduction】If we want to argue whether the unconventional and irregular practices of using virtual currency exchanges as a cover for fund pools, directly embezzling user assets held by exchanges, or manipulating the exchanges to cause forced liquidations, etc., constitute criminal offenses in China, Lawyer Liu believes that they definitely do, and there is no defense for them. However, today I want to discuss the scenario of a virtual currency exchange that is registered overseas, obtained a financial regulatory license compliant with overseas regulations, and whose servers are located overseas, and explicitly rejects registration and access by mainland Chinese users.
Of course, in general, these legitimate exchanges have only three factors related to mainland Chinese users: first, the managers: the actual controllers or executives of the exchange are Chinese; second, the users: there are Chinese users on the exchange, who bypass the restrictions on Chinese mainland users by using VPNs to “climb the wall”, or by “tampering with mainland IPs”, or by “purchasing overseas disguises”; third, the place of operation: the exchange’s place of operation is wholly or partly in mainland China. These three factors have resulted in the impression that “overseas exchanges with purely foreign capital” can also fall within the jurisdiction of law enforcement agencies in mainland China.
In the following text, Lawyer Liu will discuss the application of Chinese law to the legal issues of this type of exchange model in mainland China, based on numerous relevant cases in judicial practice and the criminal offenses involved in the so-called “legitimate” virtual currency exchanges in mainland China.
1. Which public security organs have jurisdiction over exchange cases?
(1) Legal basis for criminal case jurisdiction
First, Article 19 of the Criminal Procedure Law:
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“The investigation of criminal cases shall be conducted by public security organs, except as otherwise provided by law.” The phrase “otherwise provided by law” refers to two situations: one is that although it is defined as a criminal case in substantive law, it does not require investigation under procedural law, and the people’s court can directly accept such criminal cases, which includes self-prosecution cases; the other is that criminal cases that should be investigated and filed by other organs or departments as prescribed by law.
Second, Article 25 of the Criminal Procedure Law:
Criminal cases shall be under the jurisdiction of the people’s court in the place where the crime was committed. If it is more appropriate for the people’s court in the place where the defendant resides to try the case, the people’s court in the place where the defendant resides may exercise jurisdiction.
Third, Article 2 of the Interpretation of the Supreme People’s Court on the Application of the Criminal Procedure Law of the People’s Republic of China:
The place where the crime was committed includes the place where the criminal act was committed and the place where the criminal result occurred. For crimes committed through or primarily utilizing computer networks, the place where the crime was committed includes the location of the server used for the commission of the criminal act, the location of the network service provider, the location of the information network system being violated and its administrator, the location of the information network system used by the defendant and the victim during the commission of the crime, as well as the location where the victim was located 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 household registration is the place of residence. If the place of habitual residence is different from the household registration, the place of habitual residence is considered the place of residence. The place of habitual residence refers to the place where the defendant has continuously resided for more than one year before being prosecuted, except for being hospitalized for medical treatment. If the defendant is a legal entity, the registered address is considered the place of residence. If the main place of business or the main office location is different from the registered address, the main place of business or the main office location is considered the place of residence.
(2) Judging based on legal basis: Which public security authorities have jurisdiction?
If the trading activities of the exchange occur on the Internet and are suspected of criminal offenses, the provisions of Article 25 of the Criminal Procedure Law, Articles 16 and 17 of the Regulations on the Handling of 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 be applied. Adhering to the basic principle of “the public security organ with jurisdiction over the place of the crime as the main authority and the public security organ with jurisdiction over the place of residence of the suspect as the auxiliary authority”, jurisdiction is determined within the scope of “the location of the website server, the location of network access, the location of the website builder and administrator, the location of the computer information system used by the suspect and the victim, the location where the victim was harmed, and the location where the victim’s property suffered loss”, based on the close connection between the facts and location of the disputed case.From the legal basis, it can be seen that:
First, the public security organ with jurisdiction over the place where the virtual currency trading platform’s criminal activities are committed has jurisdiction;
Because: In the view of the investigating unit, the operation of a virtual currency exchange belongs to “crimes committed using computer networks”. Therefore, the public security organ with jurisdiction includes the location of the server used for committing the crime, the location of the network service provider, the location of the information network system violated and its administrator, the location of the information network system used by the defendant and the victim during the criminal process, as well as the location where the victim was harmed and the location where the victim’s property suffered loss. This means that the following areas may obtain jurisdiction when handling cases related to virtual currency exchanges:
1. Location of the server: The servers of virtual currency exchanges are generally provided by Amazon and located overseas, so they are not considered. However, if “Alibaba Cloud” or “Huawei Cloud” is used, the public security organs in Hangzhou or Shenzhen would have jurisdiction because the servers are located there. Here, it is also worth reminding everyone of an issue: Due to considerations of transportation costs and labor costs, some internet giants may not host all servers at their headquarters but may choose other locations for deployment. For example, Huawei Cloud’s data center in Gui’an is the largest data center of Huawei Cloud globally, with a total land area of 1521 acres and a construction scale of over 1 million servers. It is also an important node for Huawei Cloud’s business in the southwest region. So, if a legal case stems from this location’s server, does the public security organ in Gui’an also have jurisdiction? From the current judicial practice, Liu believes it is worth discussing, but theoretically, Gui’an can obtain jurisdiction. Therefore, the jurisdiction of public security authorities for criminal offenses committed by the operation model of virtual currency exchanges has been expanded.
2. Location of network service provider: There are five main categories of network service providers: Internet Service Providers (ISPs), Network Service Providers (NSPs), Network Application Service Providers (ASPs), Network Infrastructure Service Providers (IaaS), and Network Security Service Providers (SaaS).
However, when referring to the location of the network service provider, it must correspond to the “main business of the exchange”. It must be the location of the network service provider that revolves around the main business of the exchange. Therefore, if a domestic institution is only a cooperative institution of the exchange or operates non-main business of the exchange, such as marketing and promotion, then the location of the network service provider cannot be simply applied. If the main business of the exchange is in the domestic market, or if the main operation team and research and development team of the exchange are in the domestic market, then the location of the network service provider is generally under the jurisdiction of the local public security where the exchange is located.
3. Location of the information network system being violated and its administrator. Since cryptocurrency exchanges do not have a pattern of network infringement and there is no information network system being violated, this clause does not apply to exchanges.
4. Location of the information network system used by the defendant and the victim during the criminal process, as well as the location where the victim was harmed and the location where the victim’s property suffered losses, etc.
Using this clause mainly refers to the existence of “victims” in the process of using the exchange. So, does a so-called “compliant cryptocurrency exchange” have victims? The investigating agency pointed out that any user who invests in virtual currencies on an exchange and incurs losses is considered a victim. However, Lawyer Liu believes that this viewpoint is problematic because even if the model of a cryptocurrency exchange may constitute a criminal offense in China, users who invest and incur losses on the exchange cannot be explained as victims of the exchange’s criminal offense. This is because even if the exchange constitutes a criminal offense, the infringed legal interests and the so-called interests of the users that result in losses are not related. Therefore, as long as there are users who make normal investment losses on the exchange, invoking the jurisdiction of the public security based on the “location of the victim” is a “relevance error”. This is also criticized widely in practice, where remote law enforcement agencies in many places handle cryptocurrency exchange cases based on the jurisdiction of the “location of the victim”. Lawyer Liu will provide specific arguments on this issue in the following text.
5. Residence of the defendant. In order to apply this clause, the law enforcement agency needs to provide reasons according to Article 25 of the Criminal Procedure Law: why “the court of the defendant’s residence is more appropriate for trial”?
Lawyer Liu believes that the jurisdiction of the court at the defendant’s residence can only be considered as an auxiliary principle for determining jurisdiction. The so-called residence of the defendant refers to the place of the defendant’s household registration or residence. However, what conditions are considered “more appropriate”? This generally refers to situations where it is difficult to determine the location of the crime or where there is significant public anger at the residence, demanding the defendant to be brought back for trial, etc. Therefore, when the case does not meet these special conditions, it cannot be simply and arbitrarily placed under the jurisdiction of the defendant’s residence without reasons. Instead, it is necessary to combine the specific circumstances of the case and conduct comprehensive analysis and judgment before placing it under the jurisdiction of the defendant’s residence.
2. If you lose money buying coins on an exchange, does the local law enforcement agency where the victim is located have jurisdiction?
To determine whether the local law enforcement agency where the victim is located has jurisdiction, it is necessary to first consider the specific charges involved. Taking the possible crimes of “illegal use of information networks” and “organizing and leading pyramid schemes” as examples:
First, regarding the crime of “illegal use of information networks,” according to Article 287 of the Criminal Law, this charge regulates three types of statutory acts involving the use of information networks and does not involve the victim or the loss of the victim’s property. The jurisdiction of the public security organ should be limited to the “location of the website server, location of network access, location of the website establishment and management personnel, and location of the computer system used by the suspect.” In other words, the appropriate jurisdiction can only be determined based on the location of the exchange’s servers, the location of the website’s creators and managers, and the location of research and promotion activities related to the above.
Second, regarding the crime of “organizing and leading pyramid schemes,” the jurisdiction can be considered based on the “location of the computer information system used by the victim,” the “location where the victim was harmed,” and the “location where the victim’s property suffered losses.” However, the premise is that the indictment states that there are individuals participating in pyramid schemes in a certain location and that there are property losses. If there is no evidence or materials indicating that victims from a certain location have reported the case or assisted in the investigation, and there is no evidence or materials indicating that there is an actual connection between that location and the case, then that location does not have jurisdiction over the “organizing and leading pyramid scheme” case.
In addition, the jurisdiction should be based on the location of the victim, and that location should have a strong connection to the case. Specifically:
First, for users who have failed investments on an exchange, the investigating agency should investigate whether the exchange has deceptive factors regarding the user and the investment amount, rather than simply intervening in all actions of the exchange. Here is a simple and easy-to-understand example: If a consumer reports to the local food safety department that a certain restaurant has food safety issues, then, the food safety department can only intervene in the restaurant based on its own authority, dealing with the food safety issue, and cannot investigate and deal with irrelevant issues such as fire safety, otherwise, it will inevitably lead to abuse and misallocation of power.
Second, due to the cross-regional and multi-party nature of cybercrime cases, and the fact that pyramid scheme cases involve significant forfeited income, when determining jurisdiction, factors such as facilitating the clarification of the facts, protecting the legitimate rights and interests of the victims, ensuring fair handling of the case, and achieving a balanced and unified outcome should be considered, and the appropriate public security organ should have jurisdiction. If it is a major case with significant impact nationwide, directly involving the interests of tens of thousands of people, if the case is handed over to grassroots public security for investigation, it directly involves confiscating the private property of tens of thousands of people and handing it over to the finances of a certain location, which is obviously imbalanced. In other words, criminal cases involving the substantial property rights and interests of tens of thousands of users across the country should not be under the jurisdiction based on the weak connection of a very small number of users. Instead, the jurisdiction should be determined based on the main location of the activities, the location of the main group of people involved, the actual location of the harmful results, or the main location of the impact.
In summary, regarding users who suffer losses from buying coins on exchanges, whether the local law enforcement agency in the jurisdiction of the victim’s location has jurisdiction depends on the specific charges and circumstances involved. It is necessary to fully consider the relevant factors to determine jurisdiction. If there is no corresponding legal and factual basis, initiating a case investigation without proper grounds would be a clear violation of the Criminal Procedure Law and should be corrected.
III. Can designated jurisdiction be applied to cases involving virtual currency exchanges?
According to Article 27 of the Criminal Procedure Law and Articles 18 to 21 of the 2021 Supreme People’s Court Interpretation of the Criminal Procedure Law, designated jurisdiction is only applicable in the following three situations: first, cases with unclear jurisdiction; second, cases that are more suitable for another court to hear; and third, cases that are transferred by a designated lower court to another court. According to Article 22 of the Provisions on Procedures for Handling Criminal Cases by Public Security Organs, for criminal cases with unclear or disputed jurisdiction, the relevant public security organs can negotiate and, if the negotiation fails, the jurisdiction can be designated by the common superior public security organ.
Lawyer Liu believes that cases involving virtual currency exchanges have similarities to complex cases involving securities and futures. According to Articles 13 and 14 of the Opinions on Strictly Cracking Down on Securities Violations Issued by the General Office of the Communist Party of China Central Committee and the General Office of the State Council in 2021, “Cracking down on securities violations should establish securities crime investigation and trial bases in some prefecture-level cities where securities trading venues, futures exchanges, etc. are located. Strengthen the allocation of major securities crime cases to the investigation and trial bases, and the corresponding procuratorate and court should respectively be responsible for initiating public prosecution and conducting trials. Properly concentrate jurisdiction over securities crime cases through criminal jurisdiction and designated jurisdiction, etc. Enhance local territorial responsibility. Strengthen information sharing and law enforcement cooperation between the China Securities Regulatory Commission, local governments, and relevant departments, study the establishment of an internal reporting system for major illegal activities in the capital market, effectively prevent and restrain local protection and interference that may be encountered during case handling, and promote efficient investigation and handling of cases. While adhering to the premise that financial management is mainly the responsibility of the central government, strengthen local risk disposal responsibility. Local governments should regulate various regional trading venues, crack down on various illegal securities and futures activities in accordance with the law, and do a good job in preventing and disposing of financial risks in the region to maintain social stability.”
Therefore, for cases involving virtual currency exchanges, the application of designated jurisdiction at different levels must comply with the provisions of Articles 21 and 22 of the Rules of Criminal Procedure of the People’s Procuratorates. If it is not a case with unclear jurisdiction and no court has already accepted the case, it does not meet the specific circumstances for designated jurisdiction, and therefore, premature designation of jurisdiction cannot be arbitrarily made. It should be reported to the Supreme People’s Procuratorate.
IV. For cases involving virtual currency exchanges that constitute criminal offenses, which law enforcement agency’s jurisdiction should they fall under?
Regarding cases involving criminal offenses related to virtual currency exchanges, the question of which law enforcement unit has jurisdiction should be determined based on the location of the exchange’s main business. Since most virtual currency exchanges operate in a decentralized manner, determining the location of the main business involves considering the location of the project’s ultimate controller and executives, as their location often represents the location of the company’s business. Additionally, the location of the exchange’s technical, operations, and research and development teams should also be taken into account. If the main business of the exchange is not conducted at a specific location, it should not be considered as the location of the exchange and cannot be included in the category of “location of network service providers”.
Secondly, the location of the servers used for the commission of criminal acts through the network services should be considered. The determination of the server’s location should primarily rely on the physical location. If, based on comprehensive assessment of the specific case, it is difficult to confirm the location where the crime was committed, the jurisdiction of the defendant’s place of residence may be selected if it is more appropriate. In addition, for users who suffer losses from buying coins on the exchange, whether the law enforcement unit located where the local victims are has jurisdiction should be determined by taking into account the specific charges and circumstances and considering the relevant factors of the case.
Finally, for cases involving virtual currency exchange types, the determination of jurisdiction should comply with the provisions of Articles 21 and 22 of the “Criminal Procedure Rules of the People’s Procuratorate” regarding jurisdiction assignments. If it is not a case of unclear jurisdiction and the court has not already accepted the case, and it does not clearly meet the specific circumstances for designated jurisdiction, the designation of jurisdiction should not be arbitrarily made in advance.
Section 5: Lawyers’ Opinions
We believe that law enforcement agencies should adopt a comprehensive and cautious approach when handling cases involving virtual currency exchanges. Cases should only be filed after thorough analysis and assessment. Otherwise, it will not only waste judicial resources but also contradict the essence of punishment, which is meant to educate rather than simply to penalize. In order to avoid legal risks, virtual currency exchanges need to proactively ensure compliance, including but not limited to: refusing registration and access from mainland China users’ IPs, using network servers located overseas, and conducting orderly withdrawals of domestic platform users. If necessary, professional lawyers can be hired to assist in designing compliance solutions based on specific operational circumstances in order to mitigate the risk of criminal offenses.
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