Peace of mind with private keys? Sorting out the chaos and legal risks of China's cryptocurrency judicial disposal

Primer

In a certain place in a certain year and a certain month, the police brought Zhang San, an old player in the currency circle, from the south to the north late at night.

Looking back on the sudden entry by the police that night, Zhang San still had lingering fears, and even felt a little magical. Accompanying the police to arrest people at home is said to be technicians from a certain security company. With the assistance of professionals, the police took away Zhang’s mobile phone, computer, cold wallet, and foreign currency bank cards.

After arriving at the police station, the public security personnel worked overtime to interrogate Zhang San. During the period, the police asked Zhang San to sign a power of attorney. The general content was to fight crime and avoid the victim’s property loss. The virtual currency in the exchange account is subject to judicial disposal.

Although Zhang San felt that something was wrong, after all, the matter had not been investigated clearly. However, considering that it is necessary to cooperate with the police investigation, after all, this is the obligation of citizens, Zhang San cooperated with the police to sign the authorization letter and provided his account number and password on the virtual currency exchange. Subsequently, Zhang San's virtual currency in the cold wallet and the virtual currency in the exchange were resold by the security company.

A few days later, Zhang San met with the lawyer. After many communications between the lawyer and the police, Zhang San was released on bail pending further investigation. After Zhang San came out, he asked his friends in the circle, and learned that the company that assisted the local police in disposing of virtual currency assets earned millions in service fees from his orders.

It should be noted that the above story is fictitious, but the plot of this story is true. Plots like this may happen every day among virtual currency players. **

01. The secret that the blockchain industry cannot tell

In September 2021, ten national departments jointly issued the "Notice on Further Preventing and Dealing with the Risk of Hype in Virtual Currency Transactions" (referred to as "924 Policy"). The document determined that virtual currency and related business activities are illegal financial activities; The legal status is equivalent to legal tender; virtual currency related business activities are illegal financial activities; overseas virtual currency exchanges provide services to residents in my country through the Internet are also illegal financial activities; participating in virtual currency investment and trading activities has legal risks. Those who carry out the above illegal financial activities constitute crimes shall be investigated for criminal responsibility according to law.

![Private key is safe? Sorting out the chaos and legal risks of China’s cryptocurrency judicial disposal] (https://img-cdn.gateio.im/resized-social/moments-69a80767fe-b53eca1bfa-dd1a6f-1c6801)

The introduction of the 924 policy has declared that companies and behaviors engaged in virtual currency and RMB transaction business services in Mainland China are illegal. **However, as virtual currency is used more and more frequently by criminal gangs, there will naturally be more and more criminal cases involving virtual currency, and the amount involved will also increase.

On July 18, 2023, the Public Security Bureau of Shayang County, Jingmen City, Hubei Province sent the principal criminal of a cross-border online gambling case to trial according to law. During the process of handling the case, the special case team followed the clues and successfully locked and frozen the virtual currency involved in the case worth 160 million US dollars (approximately more than 1 billion yuan). Currency confiscated by law. This case became the first "virtual currency case" confiscated by the court in the country.

![Private key is safe? Sorting out the chaos and legal risks of China’s cryptocurrency judicial disposal] (https://img-cdn.gateio.im/resized-social/moments-69a80767fe-e215f9d503-dd1a6f-1c6801)

Because of focusing on the segmented legal service market of blockchain, Mankiw colleagues, including lawyer Honglin, often receive legal advice and business cooperation olive branches on how to deal with the virtual currency involved in the case. There are legal professionals in the same industry, and there are also friends who have made a lot of money in the blockchain industry. The amount of judicial disposal involved in a single case ranges from millions to tens of billions. It can be said that the case is getting bigger and bigger, and the amount is increasing.

So here comes the question: Since it is illegal to engage in virtual currency and RMB transactions in China, how can those virtual currencies that have been investigated and confiscated by the Chinese judiciary become legal RMB in the treasury? **

With such a simple question in mind, we conducted special investigations, communicated and discussed with multiple virtual currency disposal providers at home and abroad, and tried to continuously clarify the common operations of judicial disposal of virtual currency in current Chinese judicial practice and the upstream and downstream of the industrial chain. , The results of the survey really surprised us. Many things cannot be said, but many things are being done.

We hope that the release of the Mankiw series of research articles, including this article, will attract the attention of friends in the industry, and promote the judicial disposal of the blockchain industry in China while protecting the legal property of citizens without judicial trials Link transparency and compliance.

**It should be noted that this article only represents the personal views of Honglin lawyers, and does not constitute legal opinions and suggestions on any specific matters. It is not an endorsement or recommendation for any commercial organization, it is purely for learning and communication, so don't think too much about it. **

02. Common paths for judicial disposal of virtual currency in China

According to the industry research conducted by Mankiw’s lawyer team, generally speaking, whether the public security unilaterally obtains the criminal suspect’s written authorization during the investigation stage, or the confiscation of virtual currency after the court’s trial is over, there are generally illegal illegal procedures. , The regulations are not specific, and the implementation methods are not uniform** and other issues.

Common virtual currency disposal operations have the following three methods:

Method 1: After obtaining the authorization of the criminal suspect or the judicial trial, the public security organ will entrust a specialized technology company on the market to deal with it. The proxy company will open an account on the virtual currency exchange without the judicial evaluation process. Sell directly to OTC merchants on the virtual currency exchange in the form of over-the-counter transactions, and OTC merchants pay RMB to the agency disposal company, and the agency disposal company will pay to the judiciary designated after deducting the service fee (the price is negotiable, and the price range is exaggerated). The account of the local financial department, of course, considering that large-amount transactions on the market are easy to drop the price, so this kind of case is suitable for small-amount judicial disposal or cases where the judiciary does not require a high number of days for disposal.

Method 2: After signing the contract with the public security agency and the agent disposal company, the police will pay a small amount of virtual currency for wallet verification, and then the agent disposal company will find some buyers with a lot of cash in Yiwu, Shenzhen and other places, and the agent disposal company will After deducting the service fee, hand over or deposit the cash to the local financial department designated by the judiciary. After the public security checks and collects the funds into the account, transfer the money to the currency collection address provided by the agency disposal company. And these companies that can come up with a lot of cash in a short period of time often have more connections with underground banks.

Method 3: After the public security organ and the disposal company sign the contract, the disposal company cooperates with the domestic foreign trade company. Through the model of fictitious export trade, the overseas company remits money according to the contract, and the foreign exchange settlement and exchange into RMB is carried out through the Foreign Exchange Administration of the People's Bank of China, and handed over to the agent. Disposal company. After deducting the service fee, the disposal company will pay to the account of the local financial department designated by the judiciary, and the judiciary will pay the corresponding amount of virtual currency to the wallet account designated by the disposal company in turn after each receipt is confirmed.

03. A disposal company that strives to comply

In order to reduce the judiciary's concerns about the legality of compliance, more and more disposal companies have begun to focus on compliance. However, the current standard and level of compliance in the industry, our Mankiw team feels: ** Yes Yes, but not enough. **

At present, the more common compliance efforts of resolution companies in the industry include the following aspects:

1. Obtain written authorization from the police

After reaching a cooperation intention with the judiciary that handles the case, the disposal company will ask the public security to issue a letter of explanation or authorization to authorize it to dispose of the assets of the virtual currency involved in the case; if it is in the investigation stage, there will be a crime Power of Attorney signed by the suspect. At the same time as receiving the authorization letter, the agent disposal company will sign a cooperation agreement with the public security department, agreeing on the transaction quantity, pricing basis, disposal completion deadline and other necessary matters. Generally speaking, the contract and authorization are relatively concise and relevant. Legal risks are usually agreed to be borne by the disposal company, which is very considerate for the relevant colleagues in the judicial department.

2. Provide proof of legality of funds

In order to prove their source of funds and disposal ability, the agency disposal company will take the initiative to provide deposit certificates from multiple banks of its own, emphasizing the legality and cleanliness of its funds, and can match funds from different channels according to the different disposal return ratio requirements of the judicial department , generally speaking, the higher the legality of the funds, the higher the disposal cost.

3. Change the shell company in another place with one shot

In order to improve its compliance level, proxy disposal companies usually set up or control a shell company with multiple shareholders and only one natural person in advance. This company is often registered as a technology company, and its legal representative and shareholders will arrange "octogenarians" , "cancer patients" and others are responsible for completing the asset disposal of a single virtual currency, which corresponds to canceling a company to avoid relevant legal accountability afterwards.

4. Looking for partners to cooperate with the auction

In order to meet the procedural requirements of the judiciary, the disposal company will take the initiative to propose the judicial disposal of virtual currency through "auction" and other forms, and arrange other third-party cooperative companies to participate in the bidding, and then sign a formal agreement after winning the bid. Due to the sensitivity of the matter, relevant auction information will not be announced through normal government websites.

04. Legal risk analysis of current virtual currency judicial disposal

1. What are the legal risks of the disposal company?

As mentioned above, the current agency disposal companies in the industry are often only general limited liability companies registered with the industry and commerce, and are often technology companies. Their business scope may include technology development and consulting related to blockchain, but they usually do not There is a written statement of judicial evaluation or judicial disposal of virtual currency. And the company will not have a specific financial license or related business qualifications, and there will not be any substantive business under the name of the company. In short, this company is born for the judicial disposal of virtual currency.

According to our understanding of China's 924 policy, it is obviously illegal for ordinary private companies registered in mainland China to carry out exchange and matching services between virtual currency and RMB in China without special business qualification permission ; This illegal act will not be changed by the authorization of the grassroots public security and other judicial departments and the written contract between the two parties. Therefore, if a large number of judicial disposal companies on the market sort out their entire transaction methods, they have essentially opened up the circulation and transaction channels between virtual currency and RMB, which obviously violates the provisions of the 924 policy and is suspected of illegal operation.

More importantly, for disposal companies, the virtual currency obtained must always have an export. After the agent disposal company obtains the virtual currency, based on security considerations, it often cleans the virtual currency address involved in the case through technical means, such as erasing the address on the chain of the virtual currency through a coin mixer, and then breaking it into pieces and selling it to Other domestic foreign trade merchants or high-net-worth buyers; either cash out virtual currency overseas through gray channels, and then cash out through "underground banks" or "false trade", apply to SAFE for foreign exchange settlement and return to China, These operations are often suspected of violating the national anti-money laundering law and foreign exchange management laws and regulations, and have great criminal legal risks.

2. What are the legal risks of relevant judicial personnel?

(1) Risk of property loss involved in the case

Virtual currency is still unfamiliar to the vast majority of judicial personnel. The vast majority of grassroots judicial staff often do not know its market price and transaction mode. In the judicial disposal process, how much can a coin sell for? Where should you trade? These questions are often unclear. Therefore, the vast majority of virtual currencies involved in the case often do not carry out any standardized procedures such as judicial appraisal and judicial evaluation, and simply use the transaction price of an exchange recommended by the disposal company as the basis for pricing. However, the phenomenon of stock exchange control is more operable in the hands of large-capacity bookmakers, which leads to a problem with the price benchmark for judicial disposal, and there is a certain risk of loss in the amount of disposal funds that are finally realized and returned to the state treasury.

(2) Disposal of capital involved risk

All walks of life are involved, as is the judicial disposal of virtual currencies. In addition to providing payment services for disposing of funds with different levels of cleanliness, most agency disposal companies often take the initiative to pay first and then hand over the coins in order to dispel the concerns of the police who have given coins but have not received the money.

It is more common for general disposal companies to have a daily capital disposal capacity of 500 million yuan, while the idle funds in the accounts of normal private trading companies are often not so abundant. Therefore, there will also be cases where multiple bank accounts controlled by the disposal company transfer funds to the same receiving account. Previously, there were funds paid to the public security agency on behalf of the disposal company in China, but it was another case that the public security in other parts of the country planned to track down and freeze the funds. It can be said that the flood washed the Dragon King Temple.

(3) The risk of being held accountable for improper performance of duties

The novelty of the industry and the increasing amount of money involved make more and more intermediaries start to focus on the good business of virtual currency judicial disposal. We often receive inquiries from customers in the industry, saying that they have hundreds of millions of virtual currency involved in the case and need judicial disposal, but if I ask some details, the other party starts to say that he is also asking for help from the superior, and in the middle of the inquiry People, often Russian dolls, layer upon layer. A friend joked that no one in the industry has talked to you about the judicial disposal of virtual currency these days, so you must not be an insider.

In this process, it is inevitable that a lot of rent-seeking will happen. It can be said that in order to solve one problem, another new problem is created. As a national judicial officer, he was led into a pit by a third-party disposal company under the guise of compliance because he did not understand industry operations, and was investigated by the Commission for Discipline Inspection and Supervision in the future. This is a bit too magical.