Based on recent judicial precedents, let’s talk about whether the domestic regulatory direction on virtual currency has changed?

Based on recent court cases, has the regulatory trend of virtual currencies in China really changed?

Author: Chris Chu, web3 lawyer, former senior product manager of an exchange, on-chain data researcher

Cover: Photo by Snowscat on Unsplash

Recently, two crypto-related court cases from the Shanghai High Court and Jiangsu Liangshui Court have sparked a lot of discussion in the crypto community. Some believe that the domestic regulation of virtual currencies has shifted, and that individual citizens holding Bitcoins and other virtual currencies is now legal, and that virtual currencies are now protected in China. Although I also hope that the domestic regulatory policies towards the industry can be more friendly, and that the judicial practice can severely crack down on illegal and criminal activities such as theft and fraud of Blocks, and balance the interests of both parties in crypto-related cases. But is this really the case? Today, I will discuss the real situation of virtual currency regulation in China based on recent judicial precedents.

Regulatory Policies of the Crypto Sector in China

The evolution of regulatory policies in the domestic crypto sector is shown in the following figure:

In December 2013, the People's Bank of China and other departments issued the "Notice on Preventing Bitcoin Risks", hereinafter referred to as "Document 289"

Clarification of the nature of Bitcoin: It is believed that Bitcoin is not issued by the monetary authority, and does not have the attributes of legal tender and compulsory power like currency, and is not a true currency. From the nature, Bitcoin is a specific virtual commodity, does not have the legal status equivalent to currency, and cannot and should not be used as currency in the market circulation. However, Bitcoin transactions as a form of commodity trading on the Internet, ordinary citizens have the freedom to participate at their own risk.

Regulation of financial and payment institutions: Financial institutions and payment institutions shall not price products or services with Bitcoin, shall not buy or sell Bitcoin or act as a central counterparty to buy and sell Bitcoin, shall not underwrite insurance related to Bitcoin or include Bitcoin in the scope of insurance liability, shall not directly or indirectly provide other services related to Bitcoin for customers, including: providing customers with Bitcoin registration, trading, clearing, settlement and other services; accepting Bitcoin or using Bitcoin as a payment and settlement tool; carrying out exchange services between Bitcoin and RMB and foreign currencies; carrying out storage, custody, pledge and other businesses of Bitcoin; issuing financial products related to Bitcoin; using Bitcoin as an investment target for trust, fund and other investments, etc.

Regulation of trading platforms: Internet sites providing Bitcoin registration, trading and other services shall be filed with the telecommunications management department. The telecommunications management department shall, in accordance with the identification and punishment opinions of the relevant regulatory departments, legally shut down the illegal Bitcoin Internet sites. Banks, financial payment institutions and trading platforms need to fulfill their anti-money laundering obligations.

In September 2017, the People's Bank of China, the Cyberspace Administration of China and seven other departments issued the "Announcement on Preventing the Risks of Token Issuance Financing", hereinafter referred to as "Announcement 94"

Characterization of ICO: The issuance and circulation of tokens in violation of regulations, raising Bitcoin, Ethereum and other so-called "virtual currencies" from investors (ICO), is essentially an illegal public fundraising activity without approval, involving suspected illegal issuance of token tickets, illegal issuance of securities, and illegal fundraising, financial fraud, pyramid schemes and other illegal and criminal activities.

The tokens or "virtual currencies" used in token issuance financing are not issued by the monetary authority, do not have the attributes of legal tender and compulsory power, do not have the same legal status as currency, and cannot and should not be used as currency in the market.

No organization or individual may illegally engage in token issuance financing activities, and organizations and individuals who have completed token issuance financing should make arrangements for withdrawal.

Regulation of trading platforms: Any so-called token financing trading platform shall not engage in the exchange business between legal tender and tokens, "virtual currencies", shall not buy or sell tokens or "virtual currencies" or act as a central counterparty, and shall not provide pricing, information intermediary and other services for tokens or "virtual currencies".

Regulation of financial payment institutions: Financial institutions and non-bank payment institutions shall not engage in business related to token issuance financing transactions.

In September 2021, the People's Bank of China, the Supreme Court, the Supreme Procuratorate, the Ministry of Public Security, and the State Administration of Foreign Exchange issued the "Notice on Further Preventing and Disposing of the Risk of Virtual Currency Trading Speculation" (hereinafter referred to as the "September 24 Notice")

Clarification of the nature of virtual currencies and related businesses: Virtual currencies do not have the same legal status as legal tender, and virtual currency-related business activities in China are illegal financial activities. Overseas exchanges providing services to Chinese residents are also illegal financial activities.

Participation in virtual currency investment and trading activities carries legal risks. Any legal person, unincorporated organization and natural person investing in virtual currencies and related derivatives that violate public order and good morals, the relevant civil legal acts are invalid, and the losses arising therefrom shall be borne by themselves; if suspected of disrupting the financial order and endangering financial security, they shall be investigated and dealt with by the relevant departments according to law.

Multi-department supervision: The Ministry of Public Security will severely crack down on criminal activities related to virtual currencies, deploy the public security organs across the country to continue to carry out the "Special Action to Combat Money Laundering Crimes", the "Special Action to Combat Cross-border Gambling" and the "Card Cutting Action", and severely crack down on illegal operations, financial fraud and other criminal activities in virtual currency-related business activities, as well as money laundering, gambling and other criminal activities using virtual currencies, and illegal fundraising, pyramid selling and other criminal activities under the guise of virtual currencies.

The Cyberspace Administration will strengthen the management of Internet information content and access related to virtual currencies. The market supervision department, together with the financial management department, will strengthen the supervision of advertisements related to virtual currencies according to law, and promptly investigate and deal with relevant illegal advertisements.

Personal opinion: From the above regulatory documents, it can be seen that it is not illegal for individuals to hold Bitcoin and other virtual currencies. The "289 Notice" clearly defined Bitcoin as a specific virtual commodity, but Bitcoin, Ethereum and other virtual currencies do not have the attributes of legal tender and compulsory power, and cannot be used as currency in the market. At the same time, it also reminds that if participation in virtual currency investment and related derivatives violates public order and good morals, the contract will be invalid and the loss will be borne by oneself. Currently, there are no new regulatory policies in place.

In recent years, law enforcement agencies have taken high-pressure regulatory measures on virtual currencies. The public security organs have severely cracked down on illegal operations, opening of casinos, illegal fundraising, pyramid selling and other illegal and criminal activities involving domestic OTC merchants, trading platforms and project parties, covering the entire process of fundraising, deposit and withdrawal, and trading. In civil cases, there are problems in many regions that it is difficult to file cases involving virtual currencies. Even if the case is filed, the court often adopts a one-size-fits-all approach, making it difficult to protect the rights and interests of investors and lenders, and the risks and losses are ultimately borne by themselves.

From these judicial practices, it can be seen that while holding virtual currencies is not illegal, the protection of the rights and interests of holders is very weak, the core of which is to guide people to reduce their capital investment and limit the scale of participation.

Some people may say that this regulatory approach can crack down on illegal and criminal activities such as money laundering using virtual currencies, and reduce the property losses of innocent people caused by telecommunications fraud. But can it really prevent the relevant illegal and criminal activities? So I don't agree with this view. Many of the fraud cases involving virtual currencies in China are using the hype of virtual currencies to deceive victims into investing, and many victims only know the stories of getting rich quick in the emerging virtual currency industry, out of curiosity and human greed, choose to invest. For specific cases, you can read 《Crypto Newbies Must See: Beware of the "Pig Slaughtering" Exchange's Fake Freezing and Real Fraud Tricks》

With the development of technology, new technologies such as virtual currencies and AI will continue to emerge, and unscrupulous elements will use information asymmetry and the technical threshold of new industries to engage in illegal and criminal activities. For new technologies and new industries, it is better to open up than to block, reduce information asymmetry, and let everyone understand them better, so as to reduce the risk of being deceived from the root.

Recent judicial precedents on the characterization of virtual currencies

The People's Court News published an article in December by the Liangshui Court of Jiangsu, titled "Criminal Characterization of Illegal Theft of Virtual Currencies", in which the court had two views: 1. The defendant's behavior of using contract code to steal USDT constitutes the crimes of illegal acquisition of computer system data and theft, which are in imaginary concurrence, and according to the principle of choosing one crime in imaginary concurrence, it should be determined as the crime of theft.

2. The amount of theft shall be calculated based on the exchange rate of that type of virtual currency on the overseas trading platform at the time of the crime. In the article, when arguing for view 1, it was explained that virtual currencies are generated by "mining", and "mining" condenses social abstract labor, so virtual currencies have value and property attributes, constituting the crime of theft. This part of the discussion made many crypto users believe that the regulatory trend has changed, virtual currencies are legal, and mining is legal.

From the above regulatory documents, it can be seen that there is no provision that individual holding of virtual currencies is illegal. The article's discussion of "mining" is intended to prove that virtual currencies are not generated out of thin air, but are generated by purchasing mining machines and consuming energy to calculate blocks, and virtual currencies have value and are the public and private property protected by criminal law, in order to support the view that illegal theft of virtual currencies constitutes the crime of theft. Its essence is to crack down on illegal and criminal activities.

Regarding the characterization of virtual currencies in such cases, the Shanghai Xuhui District Court heard the (2024) Hu 0104 Criminal First Instance No. 301 case of a 360 employee's involvement in a coin theft case in May this year, where the defendant used technical means to obtain the victim's private key and steal the virtual currencies in the address, and finally sold them for over 2.5 million yuan in cash. The court finally held that the defendant, with the purpose of illegal possession, used technical means to intrude into the computer information system of others, secretly steal others' virtual currencies, the amount is particularly huge or there are other particularly serious circumstances, his behavior has constituted the crime of theft.

The Foshan Court of Guangdong heard the (2024) Yue 06 Criminal Final No. 300 fraud case in June this year, where the defendant fabricated an investment project and promised high interest rates to induce the victim to invest, and the victim Ye was defrauded of 500,000 yuan worth of USDT. The court finally held that virtual currencies have manageability, transferability and value, and can be the object of the crime of fraud, and the defendant constituted the crime of fraud.

The courts in Shanghai and Guangdong have recently ruled in crypto theft and fraud cases that virtual currencies are considered public and private property protected by criminal law, and have convicted and punished the offenders accordingly under the crimes of theft and fraud.

Reflections and Thoughts

Crypto theft and fraud cases are happening almost every day in the crypto space, and we see from the public rulings that law enforcement agencies are cracking down hard on such illegal criminal activities. But how many similar cases have been buried at the filing stage behind these rulings? For ordinary victims of crypto theft and fraud, how many of them can actually succeed in filing a case and getting a case filing notice? How difficult is it to file a case in practice, and those who have experienced it firsthand can certainly understand what I'm saying.

Additionally, this year there have also been cases where the parties involved sold USDT, received the fiat proceeds, and then bought USDT, only to be defrauded, and the parties who sold the USDT and received the illicit fiat proceeds were required by the public security organs to make restitution. There are many such cases in judicial practice, the underlying logic of which is that many law enforcement officers have prejudices against the crypto space, and crypto users are seen as having original sin.

Regarding the legality of domestic mining, in a recent virtual currency mining machine contract dispute case heard by the Jiahe Court in Hunan, the mining machines involved in the dispute between the plaintiff and defendant were actually deployed and operating in Canada, but the court still ruled the contract invalid on the grounds of violating the green principle, with the risks borne by the parties. See the article 《Does Deploying Bitcoin Mining Machines Overseas Also Make the Contract Invalid for Violating the Green Principle?》

If one day crypto holders can file a case smoothly after being victims of crypto theft or fraud, receive fair treatment when receiving illicit funds from selling USDT, have their legitimate virtual property rights protected, and the courts no longer take a one-size-fits-all approach to crypto-related civil disputes, then I think we can discuss the change in the regulatory direction. For now, the dream is still too rosy, and the reality is too bleak. Please suppress your restless heart for the time being, keep building, stay calm, we can win.

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