Why are criminal cases involving virtual currencies often classified as pyramid schemes by the police?

In recent years, there have been frequent criminal cases involving virtual currencies, and one pattern is that many cases involving currency are often filed by public security agencies as crimes of organizing and leading pyramid schemes. As the saying goes, there must be something unusual behind unusual things. Is it that practitioners in the cryptocurrency industry like to play pyramid schemes, or is there another hidden situation? In this article, Lawyer Liu will discuss this topic with everyone.

According to our team’s years of practical experience, the reason why criminal cases involving virtual currencies are often classified as pyramid schemes is mostly due to the following two reasons:

01. It is difficult to handle criminal cases involving currency

The difference between criminal cases involving currency and traditional criminal cases lies in their “simplicity” and “complexity”:

“Simplicity” refers to the fact that before the “9.24 Notice” (“Notice on Further Preventing and Dealing with Risks of Virtual Currency Trading Speculation”), regulators did not have a strong regulatory force on the cryptocurrency industry. There were entrepreneurs who were serious about their work and speculators who pursued hot money. The cryptocurrency industry was bustling and growing rapidly. At this time, cases involving currency, especially criminal cases, had not yet reached a boiling point. Even if there were crimes, they were generally cases with clearly evident criminal elements (such as theft and fraud), and the handling of cases by the prosecution, defense, and trial parties generally followed the traditional thinking model for criminal cases.

“Complexity” refers to the situation after the “9.24 Notice”, when the country launched a comprehensive attack from the perspectives of market/financial/insurance/foreign exchange regulation, network security, judicial policies, etc. It was like a singer throwing a “divine decree” or “snow paper” to the cryptocurrency industry. After the noise of the cryptocurrency industry subsided, civil disputes and criminal crackdowns broke out. At this time, the behavior structure and operating models in cases involving virtual currencies have also evolved and iterated over several years, resulting in complex trading models that are difficult to directly and clearly qualify under criminal law (such as NFT, DAO, etc.).

For civil litigation involving disputes over currency, they can be relatively easily resolved. However, for criminal cases involving currency, there is much controversy over how to apply current criminal laws and regulations. The main controversies are as follows:

First, it is difficult to determine the value of virtual currencies involved in criminal cases. Because the conviction and sentencing of many criminal cases require the specific amount of money involved to be determined. However, virtual currencies have been deemed by our regulators to have no monetary attributes and only have the attributes of virtual goods. The value of virtual goods is crucial and makes a significant difference in determining guilt or innocence and in distinguishing between different crimes. In traditional criminal cases, judicial authorities can fix the evidence and the amount of money involved through price determination by competent departments, judicial audits, judicial appraisals, etc. However, in criminal cases involving virtual currencies, none of the aforementioned methods can be used. In current practice, judicial authorities allow or even participate in the criminal suspect/defendant entrusting a third-party disposal company (which is generally recommended by judicial authorities) to dispose of virtual currencies, which also carries significant legal risks. At the very least, it indicates that judicial authorities allow or even participate in the criminal suspect/defendant’s conduct of bulk transactions of virtual currencies through third-party disposal companies, which is explicitly prohibited by ten ministries of the state.

Second, the criminal cases involving virtual currencies are more complex. In most virtual currency criminal cases, there are many people involved, especially in cases where project parties are involved in criminal activities due to issuing currencies. From the perspective of judicial authorities, criminal cases involving the issuance of currencies that come with promises of income, public promotion, public issuance, and hierarchical organizations and rebates are very easy to be classified as organizing and leading pyramid schemes.

The above is based on the characteristics of criminal cases involving virtual currencies. The reason why the public security organs easily classify them as pyramid schemes is because there are no victims in pyramid schemes and the assets involved in the cases belong to the state.

02. No victims in pyramid schemes, assets involved in the case belong to the state

An analysis of the criminal elements of organizing and leading pyramid schemes sheds light on why this crime is widely used in cases involving virtual currencies:

First, there is a high degree of conformity between the elements of this crime and the models of criminal cases involving virtual currencies, and there are more connections with pyramid schemes in cases involving virtual currencies with a large number of participants. As long as there is currency issuance, it will inevitably involve promotion and advertising, and it will generally involve profit or reward mechanisms, which easily leads to the formation of hierarchical relationships. Based on their established thinking patterns, investigative authorities first consider pyramid scheme crimes. Lawyer Liu has encountered cases where the public security organs initially filed charges of organizing and leading pyramid schemes, but later the procuratorate changed the charges in the prosecution opinions submitted after approving the arrest or receiving the case from the public security organs. This demonstrates that organizing and leading pyramid schemes are favored by public security organs.

Second, there are no victims in organizing and leading pyramid schemes, and there is no procedure for returning the assets involved in the case. In principle, the assets involved in the case are confiscated and handed over to the state treasury. Although the Criminal Law uses the term “deception of property” in the provisions on organizing and leading pyramid schemes, in the eyes of the legislators, the participants in pyramid schemes who were deceived of their property are not “victims” under the Criminal Law. Those who participate in pyramid schemes have a certain profit-seeking mentality, so there is no concept of returning the property in pyramid scheme cases. This also validates why investigative authorities have the motivation to investigate pyramid scheme cases, especially those involving “wealthy” pyramid schemes.

In fact, in recent years, the trend of profit-oriented law enforcement in criminal cases involving virtual currencies, especially in cases involving virtual currency pyramid schemes, has been the main reason why the parties involved in the cases, defense lawyers, cryptocurrency practitioners, and even some ordinary people have lost trust in investigative authorities. For example, in some cities in Jiangsu Province, the contribution of criminal cases involving virtual currencies to the income from financial penalties in the past two years has increased by more than 50% compared to previous years.

03. Recommendations from Lawyer Mankun

Facing the increasingly tightened (even reaching the ceiling) virtual currency regulatory policies in China, based on his experience in handling various criminal cases, Lawyer Liu offers the following suggestions to entrepreneurs:

First, when your project can issue coins or not, be cautious about issuing coins. If you do issue coins, you can choose to develop compliantly overseas for the time being, but do not conduct business and promotion targeting Chinese citizens within China;

Second, if you issue coins and promote them to Chinese users, it is recommended to isolate the business according to the type of business (business conducted within China must comply with current laws, regulations, departmental rules, and regulatory policies). Avoid engaging in operations such as recruiting people for commission or spreading fission, which could be easily identified as pyramid schemes;

Third, once you are involved in criminal charges or the commencement of criminal proceedings, seek professional legal advice at the first opportunity, to avoid passively facing the situation of blindly pursuing new business models while ignoring strict regulatory supervision. Remember not to blindly rely on so-called “acquaintances” or “experts” to handle criminal cases, which could affect the timing of lawyer involvement during the investigation stage and make it difficult to proceed with the case in accordance with the law.

The world of Web3.0 is actually very vast, and there are many things that can be done. However, you must be aware of the risks of issuing virtual currencies within China, only in this way can you sail steadily in the world of Web3.0.

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