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

Recently, there was a highly watched "cross-border online gambling case" in Jingmen City, Hubei Province, in which the people involved used virtual currency for settlement. The task force connected with the virtual currency issuer and froze the relevant virtual currency accounts involved in the case, preventing the virtual currency involved in the account worth US$160 million (approximately RMB 1 billion) from flowing into the hands of the suspect gang. In October 2022, the People's Court of Shayang County made a judgment to confiscate some of the frozen virtual currencies in accordance with the law. This case became the first "virtual currency first case" in the country to be confiscated by court judgment.

So, people can't help but ask, how is the "confiscation of virtual currency" actually carried out? How does the enforcement agency convert these virtual currencies into cash? Will these methods of conversion violate the law? This article will explain the judicial enforcement of virtual currency.

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

01. Traditional methods of executing property involved in a case

The general criminal procedure process is divided into three stages: public security investigation - prosecution by the procuratorate - court trial. The way to deal with the property involved in the case is generally that the investigative agency (public security) will first take compulsory measures such as sealing, seizure, freezing, recovery, and confiscation of the property involved after approval. After the police investigation, the case will be transferred to the procuratorate, which will initiate a public prosecution and put forward opinions on the handling of the property involved. Subsequently, the case is transferred to the court, and the court shall make a judgment in accordance with the law and deal with the property involved. If the property involved in the case is found to be illegal gains or should be recovered according to law after review, it shall be ordered to return it to the victim, or be confiscated and turned over to the state treasury. The above process is shown in the figure below:

02. The implementation dilemma of virtual currency

Due to the special nature of virtual currency, it is difficult for case officers to handle the property involved in the case according to the above routine procedures. There are three main difficulties in the enforcement of virtual currency:

1. Difficulty in implementing detention measures

Unlike general property, if the investigative agency wants to seize virtual currency, the first thing it needs to do is to get the suspect to hand over the key (private key mnemonic, etc.). The suspect agrees to transfer the virtual currency in the electronic wallet to the public security, and the public security will keep the key and electronic wallet. Then, if the suspect does not cooperate, the public security will not be able to seize these virtual properties.

2. It is difficult to keep virtual currency

Most of the public security organs or judicial organs in my country are not proficient in blockchain technology, nor do they have dedicated accounts and professional depository institutions to store virtual currencies. Therefore, it is easy for depository personnel to lose confiscated virtual currencies. In addition, these confiscated virtual currencies may also be attacked by criminals or hackers, making them unrecoverable and causing huge losses.

3. The processing method may be illegal

At present, my country has completely banned all types of transaction services related to virtual currencies, and does not allow such activities to be carried out in the domestic market. So, the question that follows is, how should the judicial authorities deal with the virtual currencies seized in the case? If the judicial authorities convert these virtual currencies into cash, they will also face the risk of violating the law. Although the judicial enforcement agency has the right to auction and sell the property involved in the case, the fact that the judicial authorities have confiscated virtual currencies and then converted them into cash is essentially a virtual currency transaction behavior or an act of tacitly approving virtual currency transactions, which is inconsistent with my country's current policy of preventing and combating virtual currency speculation.

03. Current status of domestic virtual currency implementation

Since my country does not have clear regulations on the execution of confiscation of virtual currency, in practice, various judicial organs have different ways of handling the virtual currency involved. The differences in their handling methods are mainly in the following aspects:

1. Whether to “cash out”

The first point of disagreement among local authorities in handling virtual currencies is whether to “cash out” virtual currencies. Some local authorities will cash out virtual currencies and turn the proceeds over to the state treasury; some local authorities will only confiscate these virtual currencies and not cash them out.

However, most of the virtual currencies obtained by illegal fund-raising, pyramid schemes and other crimes are obtained by first obtaining funds from ordinary people and then converting these funds into virtual currencies. Therefore, if the seized virtual currencies are directly confiscated and not converted into current circulating currencies, the interests of these victims will suffer huge losses, which is also a huge waste of social resources.

In addition, if virtual currency is directly paid into the national treasury and then invested in public fiscal expenditure, this is, in a sense, equivalent to implicitly recognizing that virtual currency has the same status as legal tender, which is contrary to my country's policy attitude towards the supervision of virtual currency.

"Cashing out" seems to have become something that judicial authorities have to do after confiscating the virtual currency involved in the case.

2. Who will “monetize”

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

In my country's judicial practice, the common practice is for the public security organs to dispose of virtual currencies in the investigation stage. Because the general financial departments cannot handle these virtual currencies, the judicial organs are also required to cash them out, and most judicial organs will find the public security departments to cash them out. After many twists and turns, the public security organs will "cash out" in the end.

3. How to “monetize”

In the process of handling cases, there are three common methods of converting virtual currency into cash:

Relevant departments sell directly Entrust a third party to sell Ask suspects to entrust a third party to sell

The current mainstream practice is to persuade criminal suspects to plead guilty and accept punishment, cooperate with public security organs to entrust a third party to sell the virtual currency involved, and refund or turn over the proceeds to the state treasury.

04. Legal risks in the process of "monetization"

Originally, third-party monetization was the main path for judicial organs to solve virtual currency enforcement issues. However, with the release of the "Notice on Further Preventing and Dealing with Virtual Currency Trading Speculation Risks" (hereinafter referred to as the "Notice") 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 and clearing and settlement for virtual currency-related business activities, shall not include virtual currency in the scope of collateral, shall not carry out insurance business related to virtual currency or include virtual currency in the scope of insurance liability, and shall promptly report any clues of illegal and irregular problems to the relevant departments.”

“Internet companies are not allowed to provide online business premises, commercial displays, marketing promotions, paid traffic diversion and other services for virtual currency-related business activities. If they find any clues of illegal or irregular problems, they should report them to the relevant departments in a timely manner and provide technical support and assistance for related investigations and investigative work. The Internet information and telecommunications authorities shall promptly close websites, mobile applications, mini-programs and other Internet applications that carry out virtual currency-related business activities in accordance with the law based on the clues of problems transferred by the financial management departments.”

According to the Notice, the "third party" generally selected by the enforcement agency is suspected of engaging in illegal financial activities, which makes the enforcement of our judicial organs "even more difficult". Even if it can be realized through a third party, the third-party agency will charge a certain percentage of fees, and the amount involved in most virtual currency-related cases is very large, the fees are not small, and the judicial cost is extremely high. In addition, the flow of funds after the third party realizes the funds is not clear, and it is unknown whether the realization behavior will encourage illegal financial activities such as "speculating on cryptocurrencies".

Therefore, it is not a good idea to cash out the seized virtual currency through a third party.

05. Conclusion

In fact, the difficulty of judicial execution of virtual currency is fundamentally due to the lack of legislation in my country. The "cashing" of virtual currency is contradictory and conflicting with the existing legal provisions in my country. In addition, the unclear procedural provisions make it easy for various agencies to shirk responsibility and shirk responsibility when handling virtual currency cases. Virtual currency has become the "spear" of crime, and it is urgent to forge a "shield" for justice. The road is long and arduous. With the birth and circulation of more and more digital assets in the Web3.0 era, there is still a long way to go to improve the relevant institutional regulations on the execution of virtual currency.

references:

Han Hongxing and Wang Ran: "On the Construction of Procedures for Dealing with Virtual Currency in Criminal Cases", "Criminal Research" No. 3, 2023.

Zhao Guannan: "On the Criminal Confiscation of Bitcoin", Journal of China People's Public Security University (Social Sciences Edition), No. 4, 2022.