Written by: Liu Zhengxiao

I. The Necessity of Judicial Disposal of Virtual Currencies

From the perspective of judicial institutions, there are two common types of judicial disposal of involved virtual currencies: first, before court judgment, public security and judicial authorities dispose of and realize the value of seized virtual currencies; second, after the criminal case verdict becomes effective, public security and judicial authorities dispose of the involved virtual currencies. Both disposal modes have corresponding legal basis, which will not be repeated in this article.

We will focus on why there is a need for judicial disposal of virtual currencies.

China's mainland regulatory policy on virtual currencies was gradually tightening before 2021. On September 15, 2021, ten ministries jointly issued the "Notice on Further Preventing and Handling Risks of Virtual Currency Trading Speculation" (referred to as the "9.24 Notice"), which basically established China's attitude towards virtual currencies from September 2021 to now. This includes:

(I) Bitcoin, Ethereum, Tether, and other virtual currencies are not legal tender and should not and cannot circulate as currency in the market; (II) Strictly prohibit domestic entities from exchanging virtual currencies with legal tender, conducting currency-to-currency trading, or providing pricing and information services for virtual currency trading; (III) Strictly prohibit overseas virtual currency exchanges from providing any services to mainland China.

Thus, a contradiction arose. In criminal cases involving virtual currencies, the involved assets are represented by various types of virtual currencies and have been seized as involved assets/evidence. For cases where involved assets need to be confiscated in the future (such as pyramid scheme crimes, gambling establishment crimes, illegal business operations), based on the "9.24 Notice" regulations, the court cannot rule to confiscate the involved virtual currencies to the state treasury and must convert the virtual currencies into legal tender.

However, China strictly prohibits anyone from exchanging virtual currencies with legal tender. This creates an irreconcilable contradiction between the need to dispose of and realize virtual currencies in judicial activities and the current mainland China's prohibition of virtual currency and legal tender exchange business. This contradiction determines that all compliant virtual currency judicial disposal businesses in China must be conducted overseas.

II. Current Common Disposal Modes

Based on my experience communicating with different disposal companies in practice, the current disposal modes can be summarized as follows:

First, a domestic + overseas joint disposal mode. This is the most common disposal mode, where a domestic代处置 company signs an entrustment contract with judicial authorities/suspects and then entrusts an overseas disposal entity to conduct the actual disposal. The overseas disposal entity must comply with local laws, regulations, and supervisory provisions, possess financial qualifications for virtual currency and legal tender exchange (trading), and then transfer the realized legal tender to the domestic代处置 company's account, which finally converts the disposal proceeds and remits them to the judicial authority's account or non-tax fiscal account.

Second, disposal in domestic and overseas free trade zones. Currently, some companies register in free trade zones jointly developed by China and foreign countries, taking advantage of the zones' application of laws from both countries to circumvent China's prohibition on virtual currency trading. The final disposal is conducted through auction. Judicial authorities with disposal needs sign a contract with the disposal company and must bring the virtual currencies to the company's registered location (in the trade zone) for actual auction, with the highest bidder winning. The disposal company then transfers the auction proceeds to mainland China through bank exchange.

Third, disposal through overseas banks. Another disposal mode is direct cooperation with overseas banks that have qualifications for virtual currency and legal tender exchange, with the bank converting virtual currencies to legal tender and then transferring the funds to mainland China.

Fourth, repurchase and disposal by overseas virtual currency issuers. In 2023, the Shandong Provincial Finance Department issued a document (Notice on the "Shandong Province Confiscated Goods Disposal Work Regulations (Trial)," Lu Cai Shui [2023] No. 18) specifying that enforcement agencies can negotiate with virtual currency issuers for the disposal of confiscated virtual currencies, with the repurchase price not lower than 80% of the virtual currency's value. This has created a mode where for centralized virtual currencies (such as the most common USDT), some disposal companies can negotiate with Tether to repurchase involved USDT and pay the disposal company legal tender of not less than 80% of the virtual currency's value, which can then be exchanged and remitted into mainland China.

III. Exploration of Compliant Disposal Modes

Virtual currency judicial disposal has gone through three stages from 2020 (or even earlier) to now: Disposal 1.0, Disposal 2.0, and Disposal 3.0. These stages are measured against the first mode mentioned earlier. The second, third, and fourth modes show no significant iteration.

In the Disposal 1.0 period, domestic disposal companies directly purchased currencies from judicial authorities using RMB. According to the "9.24 Notice," this was essentially an illegal financial activity. In the Disposal 2.0 period, domestic代处置 companies emerged, with actual disposal occurring overseas but not necessarily in a legally compliant manner (e.g., overseas virtual currency trading prohibition, selling virtual currencies to overseas individuals without anti-money laundering or counter-terrorist financing reviews). Funds were typically exchanged into mainland China under false trade or service trade names, violating State Administration of Foreign Exchange regulations. In the Disposal 3.0 era, these issues were largely resolved, though some details still need optimization, such as determining virtual currency trading benchmark prices, lacking domestic + overseas law firm legal opinions, missing overseas virtual currency transaction chain annexes, and post-disposal mechanisms to prevent involved virtual currencies from flowing back into mainland China.

In summary, for the current compliant disposal mode, we lean towards the domestic + overseas joint disposal mode, while needing to improve compliance in exchange, overseas trading, legal aspects, and blockchain technology.

IV. In Conclusion

Currently, virtual currency judicial disposal is difficult to be uniformly handled by a national department or institution as some people predict or expect, because behind this are massive issues of fiscal and judicial attribution. Even now, city-level cases may not necessarily be reported to provincial departments, and even if provincial departments or ministries are aware, they can hardly directly take over local cases. These current situations cannot be solved or explained by any law or legal work, and are beyond what lawyers can control or influence. What we can do is serve our clients well, ensuring that each disposal business is legal, compliant, safe, efficient, and without subsequent issues.