Author: Liu Honglin
In recent years, we can clearly feel a change: criminal cases involving virtual currencies handled by public security organs have been increasing. From telecommunication fraud, money laundering channels, organized pyramid schemes, to even local Ponzi projects, more and more funds are ultimately deposited in blockchain or exchange accounts. The status of virtual currencies in these cases has transformed from "peripheral assets" to "core objects". In other words, although mainland China still maintains a marginalized regulatory attitude towards virtual currencies, it has genuinely entered the main battlefield of Chinese criminal law enforcement.
Therefore, the judicial disposal of virtual currencies is no longer a question of "whether to do it" but a practical issue of "how to do it" and "who will do it". This is a problem that cannot be resolved without taking action. Once a case is investigated deeply and more coins are seized, the subsequent steps of withdrawal, return, and liquidation will be stuck on the word "disposal".
Today, we finally see this issue formally brought to the table - whether it's internal research by the Supreme Court, case-handling mechanism exploration led by the Ministry of Public Security, or research topics from academic and industry circles, all are attempting to provide an executable and replicable judicial disposal operational mechanism for such cases.
As legal practitioners, including lawyer Liu Honglin and the Mankun Law Firm team, have participated in multiple cross-border exchange and judicial assistance projects, I would like to share some observations and thoughts.
New Bottlenecks in Cryptocurrency Case Progression
Let me first share a very realistic detail: In the past two years, many client cases I've encountered have been stuck at the judicial disposal stage. Some were due to limited on-chain tracking technology, where tokens found in the case couldn't be matched to an identity or private key. Others had accounts and assets seized, but no one knew how to dispose of the pile of USDT.
In traditional case-handling approaches, freezing bank cards is the most routine operation. With just a court ruling, banks cooperate in freezing, transferring, and returning funds, making the process extremely smooth. However, when facing virtual currencies, problems arise:
First, these assets often lack a clear "token issuer" or "issuing institution", and have no "unique account", but are dispersed across various addresses, exchange accounts, and cold wallets, with unclear management entities;
Second, even with exchange accounts, many platforms are overseas, and domestic law enforcement agencies have no actual operational rights and must rely on platform "cooperation", which introduces issues of interface mechanisms, cooperation agreements, and trust costs;
Third, even if assets are successfully recovered, there are no ready-made solutions for how to liquidate and return, calculate value, or distribute property.
As a result, many local public security organs have begun trying "improvised methods": finding traceable on-chain transaction records, bringing in local crypto-savvy third parties for valuation, or even directly having project parties repurchase and return. It sounds primitive, but in the absence of unified guidelines, such "local independent exploration" has indeed pushed some cases forward to a certain extent.
However, this approach also brings enormous compliance and operational risks. For instance, the disposal price for the same type of token can vary completely across different cities, with some even facing controversies of "selling cheap" or "secret selling", potentially triggering new reports outside the case. This has forced higher-level law enforcement agencies to confront this "new bottleneck" - to solve cases and execute, they must address the judicial disposal of virtual currencies.
From the information we can see, systems including the Ministry of Public Security, Supreme Procuratorate, and Supreme Court have actually conducted several rounds of special research. Universities like Southwest University of Political Science and Law and China University of Political Science and Law have also formed research groups, attempting to build a universally applicable operational model. During communications with Hong Kong and multiple crypto asset trading platforms, we've discovered that some top exchanges are actively connecting with Chinese law enforcement, hoping to play the role of a "compliance bridge" in future disposal processes.
In other words, this is not just a grassroots law enforcement need, but a compliance system construction brewing at the national level.
Who Should Have Disposal Rights? Behind the Discussion of a "Fiscal Incentive Mechanism"
If the first part was about "difficulty in handling cases", the second part is about "weak motivation".
We must face a reality: China's local public security system has long been in a state of "solving resources by themselves". Investigation operations, cross-border asset recovery, and digital tracing are already expensive. Once several tens of millions, or even hundreds of millions of virtual currencies are discovered, if these assets are ultimately "turned over to the central government", it would be equivalent to "working for nothing" for front-line police.
So now, many local public security organs are actually internally conflicted: on one hand, they indeed hope cases can be more professional and compliant; on the other hand, they're afraid the disposal mechanism will be "one-size-fits-all", becoming "others benefit from the cases you solve".
In this situation, if the "disposal rights ownership" is not clarified and a reasonable fiscal sharing mechanism is not established, the enthusiasm of front-line investigators will be discounted. We've already seen some local tendencies to "investigate cases up to the coins" to avoid subsequent asset operation responsibilities.
So the questions become:
Which unit should be the focal point for virtual currency judicial disposal? City-level public security? Provincial-level economic crime investigation? Or Ministry of Public Security's direct institutions?
Should asset disposal revenue be retained locally as fiscal supplement? Or entirely turned over to the national treasury?
Can case costs be covered? Do case handlers have incentives? Will a "investigation cost subsidy mechanism" be introduced in the future?
Without resolving these issues, the so-called "standardized disposal mechanism" will be difficult to truly implement on the front lines. In my personal view, if the country wants to promote this towards institutionalization, beyond technical and procedural norms, the key is how fiscal benefits are reasonably distributed. Behind this lies a redesign of the governance system and law enforcement incentive mechanism.
Domestic or Overseas? The "Gray Area" of Disposal Processes Should Be Brought into the Sunlight
Only after discussing the first two issues can we possibly enter the question of "how exactly to dispose". And within this, there actually lies the most realistic and sensitive business ecosystem.
The trend we currently see is that more and more judicial disposals are attempting to bypass the domestic system and directly liquidate through exchanges in Hong Kong, Singapore, and other locations. This is actually driven by practical needs: on one hand, domestic banks and financial institutions generally do not accept crypto asset-related business; on the other hand, exchanges' actual settlement capabilities are overseas, with relatively low compliance connection costs in Hong Kong and easier formation of a process closed loop.
But this also brings a new problem: if we default that judicial disposal must be completed on overseas platforms, then:
Which exchanges can "qualify"? Is there an "officially approved" whitelist?
Do judicial cooperation agreements need to be signed? How will platforms assume obligations?
Which domestic companies can serve as judicial disposal intermediaries? How are their identities, fees, and permissions defined?
Currently, some third-party institutions are trying to enter this market, hoping to undertake public security entrusts as asset valuation parties, custody executors, or overseas transaction assistance parties. However, the problem is that this field still lacks an open, transparent bidding system and regulatory framework, easily degenerating into a "relationship-intensive" gray business.
We've also discovered that many exchanges are actively engaging with public security - but it's unclear whether their cooperation is "regulatory compliance" or "business expansion".
Looking long-term, I believe the national level will ultimately issue a "judicial disposal whitelist mechanism" and "disposal process guidelines", including:
Clearly defining the list of exchanges that can cooperate with law enforcement and their cooperation obligations;
Requiring all disposal processes to be traceable and auditable;
Establishing cross-border judicial disposal special accounts to monitor asset entry and exit paths;
Encouraging domestic law firms, audit, and technology institutions to participate in the entire closed loop to enhance process standardization.
This is both the bottom line for ensuring legal and compliant disposal of assets and the basic guarantee for users and case parties.
Mankun Lawyer's Advice
Virtual currency judicial disposal, on the surface, appears to be a technical operational issue, but in essence, it is an ongoing process of upgrading the judicial system's governance capabilities for new digital assets. Whether it's the law enforcement agencies' ability to trace asset sources, control and liquidation processes of on-chain assets, or the mechanism for cross-border collaboration, a more systematic exploration path is gradually taking shape.
We see that more and more local public security authorities are no longer avoiding this topic, but are actively seeking cooperation with platforms, law firms, and technical institutions to explore a processing flow that both meets the practical requirements of case handling and can withstand scrutiny. We also see research forces from universities, policy institutions, and the judicial system providing theoretical support and policy references for the reproducibility and standardization of this approach.
For the industry, this means a more stable and predictable disposal environment is forming. This not only helps to advance cases smoothly but also provides fundamental support for the healthy development of the entire digital asset ecosystem. More importantly, once this mechanism truly matures, it will become the "standard procedure" for the Chinese judicial system when facing the digital asset era, laying a more solid foundation for governance in the next stage.
We believe that with joint efforts from all parties, virtual currency judicial disposal will no longer be a "black box area" in case handling, but will become a transparent, compliant, and efficient law enforcement link. Such efforts will ultimately promote the entire industry towards a clearer and more orderly direction.
