With a transaction volume of 400 billion RMB involved, how will law enforcement agencies handle the confiscated cryptocurrency?

Virtual currency is no longer far away from our daily lives, and more and more people are learning about it and using it through various channels. Due to the characteristics of virtual currency such as virtuality, decentralization, and anonymity, it has become a “secret weapon” for many crimes such as money laundering and illegal fundraising.

Recently, there was a high-profile “cross-border online gambling case” in Jingmen City, Hubei Province, where the suspects used virtual currency for settlement. The special task force coordinated with the virtual currency issuing institution, froze the relevant virtual currency accounts involved in the case, and prevented the flow of virtual currency worth 160 million US dollars (about 1 billion yuan) into the hands of the suspect group. In October 2022, the People’s Court of Shayang County made a judgment to confiscate some of the frozen virtual currency in accordance with the law. This case became the first case of “confiscation of virtual currency through judicial judgment” in China.

So, people can’t help but wonder, how is the “confiscation of virtual currency” actually implemented? How does the executing authority liquidate these virtual currencies? Will these liquidation methods violate the law? This article will explain the judicial execution of virtual currency for everyone.

Risk Warning: This article only represents the personal views of Lawyer Honglin and is for communication and discussion purposes only. It does not constitute legal advice on specific matters and commercial projects. If you need consultation on specific matters, you can add the author’s WeChat at the end of the article.

01. Traditional Execution Methods for Involved Assets

The general criminal litigation process consists of three stages: police investigation, procuratorate prosecution, and court trial. The handling of involved assets is generally carried out through compulsory measures such as sealing, seizure, freezing, recovery, and confiscation, which are approved by the investigating authority (police). After the police investigation is completed, the case will be transferred to the procuratorate, which will initiate public prosecution and propose handling opinions on the involved assets. Subsequently, the case will be transferred to the court, which shall make a judgment in accordance with the law and handle the involved assets. If the involved assets are found to be illegal gains or should be recovered in accordance with the law, they should be returned to the victim or confiscated and handed over to the state treasury. The above process is shown in the following diagram:

02. Challenges in the Execution of Virtual Currency

Due to the uniqueness of virtual currency, it is difficult for law enforcement personnel to handle the involved assets in accordance with the above conventional process. The main challenges in the execution of virtual currency are as follows:

1. Difficulty in implementing seizure measures

Unlike regular assets, in order for law enforcement agencies to seize virtual currencies, they first need to obtain the keys (private key, mnemonic phrase, etc.) from the suspects. The suspects agree to transfer the virtual currencies in their electronic wallets to the police, who then safeguard the keys and wallets. Therefore, if the suspects do not cooperate, the police cannot seize these virtual assets.

2. Difficulty in Safeguarding Virtual Currencies

Most of China’s law enforcement or judicial agencies do not have proficient knowledge of blockchain technology, nor do they have dedicated accounts or professional custody institutions to store virtual currencies. Therefore, custodians can easily lose or misplace confiscated virtual currencies. In addition, these confiscated virtual currencies may also be subject to attacks by criminals or hackers, making them irrecoverable and causing significant losses.

3. Potential Illegal Handling

Currently, all types of transaction services related to virtual currencies are completely prohibited in China, and such activities are not allowed in the domestic market. As a result, the question arises: how should judicial agencies handle the virtual currencies seized in cases? If judicial agencies convert these virtual currencies into cash, they also face the risk of breaking the law. Although judicial enforcement agencies have the right to auction or sell confiscated assets, converting the confiscated virtual currencies into cash is essentially a virtual currency transaction or tacit approval of virtual currency transactions, which contradicts the current policies in China aimed at preventing and cracking down on virtual currency speculation.

03. Current Situation of Domestic Virtual Currency Enforcement

Due to the lack of clear regulations in China regarding the execution of seized virtual currencies, different judicial agencies have different approaches to handling virtual currencies in practice. The main differences in their handling methods are as follows:

1. Whether to “Convert into Cash”

The first point of contention among local agencies in handling virtual currencies is whether to “convert them into cash.” In some places, agencies convert virtual currencies into cash and submit the proceeds to the national treasury, while in other places, agencies only confiscate these virtual currencies without converting them.

However, most of the virtual currencies obtained through illegal fundraising, pyramid schemes, and other crimes are initially obtained from ordinary people, and then these funds are converted into virtual currencies. Therefore, directly confiscating and not converting the seized virtual currencies into circulating legal tender would result in significant losses for the victims and a waste of social resources.

Furthermore, if the virtual currencies are directly submitted to the national treasury and then invested in public fiscal expenditures, it would, to some extent, be tantamount to implicitly recognizing that virtual currencies have the same status as legal tender, which contradicts China’s regulatory attitude towards virtual currencies.

“Monetization” seems to be something that judicial authorities have to do after confiscating virtual currencies involved in a case.

2. Who “Monetizes”

There are currently two main ways to handle confiscated virtual currencies: one is for the public security organs to handle them first, and the other is for the court to confiscate them and then hand them over to the local finance department.

In China’s judicial practice, the usual practice is for the public security organs to dispose of the virtual currency during the investigation stage. Because the general financial department cannot handle these virtual currencies, they also need the judicial authorities to monetize them, and most of the judicial authorities will find the public security organs to monetize them in the end.

3. How to “Monetize”

There are three common practices for monetizing virtual currencies during the handling of cases:

  • Direct sale by relevant departments
  • Sale entrusted to a third party
  • Requesting the suspect to entrust a third party to sell

The current mainstream practice is to persuade the suspect to confess and cooperate with the public security organs to entrust a third party to sell the virtual currencies involved in the case, and the proceeds obtained are used for refund or handed over to the national treasury.

04. Legal Risks in the “Monetization” Process

Originally, relying on third parties to monetize was the main path for judicial authorities to solve the problem of executing virtual currencies. However, with the release of the “Notice on Further Preventing and Dealing with Risks Associated with Virtual Currency Trading Speculation” by ten ministries and commissions in 2021, this path seems to have been “blocked” again:

“Financial institutions and non-bank payment institutions shall not provide services for virtual currency-related business activities. Financial institutions and non-bank payment institutions shall not provide services such as account opening, fund transfer, clearing and settlement for virtual currency-related business activities, shall not include virtual currency in the scope of collateral, shall not engage in insurance business related to virtual currency or include virtual currency in the scope of insurance liability, and shall promptly report clues to illegal and irregular activities to relevant departments.”

“Internet companies shall not provide network operation places, commercial displays, marketing and promotion, or paid traffic for virtual currency-related business activities. They shall promptly report clues to illegal and irregular activities to relevant departments and provide technical support and assistance for related investigations and investigations. The Internet applications such as websites, mobile applications, and mini-programs that engage in virtual currency-related business activities shall be closed in a timely manner in accordance with the problem clues transferred by the telecommunications and Internet supervision departments to the financial management departments.”

According to the “Notice,” it can be seen that the “third parties” chosen by the executing authorities are suspected of engaging in illegal financial activities, which makes the path of execution for our judicial authorities even more difficult. Even if it is possible to monetize through a third party, the third-party institution will charge a certain percentage of fees, and the amounts involved in virtual currency-related cases are mostly huge, so the fees are not insignificant and the judicial costs are extremely high. In addition, the flow of funds after monetization by third parties is unclear, and it is also unknown whether monetization will contribute to illegal financial activities such as “speculating on currencies.”

Therefore, it is not a good idea to realize the seized virtual currency through third parties.

05. Conclusion

In fact, the fundamental problem of the “difficulty” in judicial enforcement of virtual currency lies in the lack of legislation in our country. The “realization” of virtual currency is contradictory and conflicting with the existing laws and regulations in our country. In addition, the procedural provisions are not clear, which makes it easy for various authorities to pass the buck and shirk responsibility when dealing with virtual currency cases. Virtual currency has become the “spear” of crime, and forging the “shield” of justice is also imminent. The road ahead is long and far, with the birth and circulation of more and more digital assets in the Web3.0 era, and it is a heavy responsibility to improve the relevant institutional provisions for the execution of virtual currency issues.

References:

Han Hongxing, Wang Ran: “Construction of the Disposal Procedure of Criminal Virtual Currency”, Journal of Crime Research, 2023, Issue 3.

Zhao Guannan: “On the Criminal Confiscation of Bitcoin”, Journal of China People’s Public Security University (Social Sciences Edition), 2022, Issue 4.

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