Author: Lawyer Liu Yang
On August 25, 2023, the Shandong Provincial Department of Finance and 17 other departments issued the “Notice on the Work Procedures for the Disposal of Confiscated Goods in Shandong Province (Trial)” (hereinafter referred to as the “Notice”). From a legal perspective, the “Notice” belongs to local government regulations. Local government regulations are formulated by the people’s governments of provinces, autonomous regions, municipalities directly under the central government, prefecture-level cities, and autonomous prefectures based on laws, administrative regulations, and local regulations of provinces, autonomous regions, and municipalities directly under the central government.
Lawyer Liu Yang separately lists and analyzes the parts involving virtual currencies.
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Article 36 of the “Notice” clearly states: “The law enforcement agencies can negotiate with the merchants who issue prepaid cards and virtual currencies that have been confiscated according to law, and the merchants shall make an offer for repurchase, and the repurchase price shall be agreed upon by both parties, and in principle, it shall not be lower than 80% of the face value or balance of the virtual currency or prepaid card. Both parties shall sign a repurchase agreement.”
The lawyer believes that the “Notice” does not explicitly state whether “virtual currencies” include virtual digital currencies represented by Bitcoin, Ethereum, and Tether. If the aforementioned virtual digital currencies are included, the provision has the following regulatory significance: First, it can only negotiate with the issuers of virtual digital currencies, so Bitcoin and Ethereum can find the corresponding foundations, and Tether can find Tether Limited. The “Notice” does not allow selling to third-party companies. Second, it must be repurchased by the issuer and not lower than 80% in substance. The lawyer believes that if virtual digital currencies are included, this provision is difficult to implement in practical disposal. First, does the issuer have the intention to repurchase? If the issuer is unwilling to repurchase, how should it be disposed of? Even if the issuer is willing to repurchase, is it feasible for the judicial authority to sign a contract directly with foreign entities? How should legal disputes arising from relevant repurchase agreements be handled?
The lawyer is more inclined to believe that the virtual currencies mentioned in the “Notice” are still centralized virtual currencies with domestic issuers represented by Q coins and Dou coins.
What should we do if the virtual currencies mentioned in the “Notice” do not include the virtual digital currencies we commonly refer to? Article 40 of the “Notice” stipulates: “If the above disposal methods are not applicable to confiscated goods, the law enforcement agencies shall study and propose disposal suggestions based on the nature and classification of the confiscated goods, consult with the financial departments at the same level, and submit the disposal plan to the higher-level financial department for filing.” Then the disposal of virtual digital currencies returns to an embarrassing situation where there is no legal basis.
Under what circumstances can preliminary disposal be carried out before determining that it is confiscated goods? Article 45 of the “Notice” clearly states: “…(3) Financial assets such as bonds, stocks, and fund shares with significant market fluctuations…”. Does virtual digital currencies such as Bitcoin fall into this category? The lawyer believes that according to existing laws and regulations in China, virtual digital currencies such as Bitcoin do not fall into the category of financial assets, so they do not meet the conditions for preliminary disposal.
However, in practice, judicial authorities often dispose of virtual digital currencies before the effective judgment, and their legal basis and reasons mainly rely on the “voluntary” of the suspect (defendant, party). Article 46 of the “Notice” clearly states that “the pre-disposal of goods must be agreed upon by the rights holder or submitted in writing by the rights holder, and approved by the head of the law enforcement agency, before it can be disposed of in accordance with the law.” That is, if the rights holder does not agree to the pre-disposal of virtual digital currencies, the judicial authorities have no right to dispose of them before the judgment becomes effective. Moreover, virtual digital currency prices are highly volatile, and once disposed of, it is difficult to restore them to their original state. Therefore, lawyers recommend that rights holders fully consider the relevant legal risks when agreeing to the pre-disposal of virtual digital currencies.
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