Can the judicial disposal of virtual money be concentrated in the future or handled by the Central Bank?

At the beginning of this month, the "People's Procuratorate Magazine" published an article titled "Analysis of the Judicial Disposal of Involved Virtual Money" written by Prosecutor Bao Jian from the People's Procuratorate of Yuhang District, Hangzhou City, Zhejiang Province, among others. The article elaborates on the current state of judicial disposal of virtual money in our country, the causes of difficulties in judicial disposal, and suggestions for disposal models. Liu Zhengyao (web3_lawyer), a lawyer with some insights into judicial disposal research in China, provides a brief analysis of the aforementioned article, especially offering a comprehensive analysis of the disposal model suggestions mentioned in the article.

1. The Current Situation of Judicial Disposal of Virtual Money

In the view of the prosecutor, there are currently five ways to handle virtual money involved in cases in China's judicial practice:

First, in cases where the return of the victim's property involved in the case is required, the court orders the defendant to directly compensate with Virtual Money.

The second type still involves cases where compensation is required for the victim, and the court orders the defendant to compensate the victim with an equivalent amount in RMB.

The third method is that the public security organs will first dispose of the seized Virtual Money, and the court will rule to confiscate the proceeds from the liquidation.

The fourth type is that the judicial authorities adopt flexible methods and do not directly dispose of the virtual money involved in the case;

The fifth type is that the court does not clearly specify the disposal of the virtual money involved in the case in its judgment, or it expresses it in a vague manner. The prosecutor stated that this situation is the most common.

According to Lawyer Liu's experience in handling criminal cases in the coin circle, the first situation is actually rare. The main issue is that there is still no unified conclusion on whether virtual money is considered property under our criminal law. Although some staff members of judicial authorities have begun to believe that virtual money, especially mainstream virtual currencies (such as BTC, ETH, USDT, USDC, etc.), should be classified as property under our criminal law and not merely as data from computer information systems; however, there are still quite a few staff members of judicial authorities who do not recognize the property attributes of virtual money.

In the second case mentioned above, it is common for the defendant to convert the victim's money into virtual currency after the victim's RMB is defrauded/stolen/robbed, and at this time, when the court stage makes restitution, the court will refund the victim's "corresponding" virtual currency (rather than the "equivalent" virtual currency), because the second situation still involves that the virtual currency involved in the case needs to be judicially disposed of and can only be refunded after being converted into RMB. To give a simple example: Zhang San was defrauded of 900,000 yuan by Li Si, Li Si bought a BTC with the defrauded money, and after Li Si was finally caught, the BTC was also seized, at this time, the court either returned a BTC seized by Zhang San (in fact, it is the first case mentioned above), or returned Zhang San a BTC that was disposed of and realized, in practice, even if the price of Bitcoin did not fluctuate during the handling of the case, then the price of a BTC after being judicially disposed of cannot be equal to its market price (i.e., 900,000 yuan). Because the disposal agency also charges a certain amount of handling fee.

The third scenario is actually quite common in practice; in such cases, there are no victims, and the funds involved will ultimately be transferred to the national treasury.

The fourth situation is actually when the prosecutor's statement is unclear, for example, "adopting alternative methods," what kind of alternatives are being referred to? Does "avoiding direct disposal of virtual currency" mean indirect disposal of Virtual Money?

The fifth situation and the conclusion of the prosecutor, which Lawyer Liu agrees with: Currently, the judicial disposal of the virtual money involved in the case has "far from formed a relatively unified standard" in practice. Based on my experience in handling cases, it can be clearly stated that there are still some judicial authorities that dispose of the virtual money involved in the case through illegal financial activities (such as directly engaging in the exchange of virtual money and fiat currency within the territory).

II. The Dilemma of Judicial Disposal and Suggestions from Prosecutors

(1) The Dilemma of Judicial Disposition

Regarding the current situation of disposal mentioned above, the prosecutor also raised what he believes to be the practical dilemmas of judicial disposal, such as the lack of control measures, improper storage methods, and inconsistent execution methods. In fact, these are only partial reasons and not the fundamental cause.

The lack of control measures is not an issue of the judicial authorities or even technical companies (investigation companies) that work in cooperation with the judicial authorities and possess professional capabilities; it is determined by the characteristics of blockchain technology or virtual money itself. From this perspective, technology transcends the law, and there cannot be an all-powerful control measure that can make suspects/defendants obedient (even if the judicial authorities illegally use torture to extract confessions).

Lawyer Liu fully agrees with the prosecutor's viewpoint on the issues present in the custody and execution methods.

(2) Suggestions for Future Judicial Disposal

Regarding the judicial disposal of Virtual Money, the prosecutor believes that two principles should be adhered to:

First, centralized disposal. To avoid local judicial authorities acting independently, the Ministry of Public Security can take the lead in establishing a national or provincial "Virtual Money Liquidation Management Platform."

Second, official disposal. The prosecutor does not recognize the current model where judicial authorities entrust a third-party company for disposal and believes that banks should engage in Virtual Money cash-out operations.

3. Are the prosecutor's recommendations reliable?

To start with the conclusion: the prosecutor's suggestion is very unreliable.

First of all, we must clarify that the latest, strictest, and most authoritative regulatory policy for virtual money in China is the "Notice on Further Preventing and Disposing of Risks in Virtual Money Trading and Speculation" jointly issued by ten ministries and commissions of the state (including the "Two Highs and One Ministry") on September 15, 2021. This regulation clearly states the following: It prohibits any entity in mainland China from engaging in the exchange business between virtual money and fiat currency. So how can we talk about establishing a domestic management platform or banks directly engaging in the monetization of virtual money and fiat currency?

Secondly, the current third-party disposal is not directly conducted by third-party companies purchasing the Virtual Money from judicial authorities. Strictly speaking, compliant third-party disposal companies in the country should be called "disposal agent companies," which accept entrustments from judicial authorities/defendants or suspects, and then re-entrust these to compliant entities abroad for disposal, avoiding direct engagement in the conversion business of Virtual Money and fiat currency by domestic entities (even if domestic companies go abroad for disposal and conversion, it still constitutes a violation of the aforementioned "Notice");

Finally, judicial disposal business is not just a legal issue, but also involves complex problems related to finance, taxation, and central-local relations. It is hard to say who can directly take away the case sources for disposal. Of course, given the strong top-down administrative power in our country, the "upper levels" can indeed require the "lower levels" to submit case sources for unified disposal. However, this may also lead to a lack of motivation for grassroots judicial organs to combat crimes related to Virtual Money, ultimately resulting in higher authorities having no cases to dispose of.

This seems to be a paradox, but it is also reality.