According to an article from the official WeChat account of the Xuhui District Procuratorate in Shanghai, on August 29, 2024, the Xuhui District Procuratorate and the Xuhui District Public Security Bureau jointly signed the “Guidelines for the Disposal of Virtual Currency in Criminal Proceedings” (referred to as the “Guidelines” below). This provides specific guidelines for the handling of criminal cases involving virtual currencies by public and procuratorial authorities in the jurisdiction, including “detailed and clear provisions on the entire process and various aspects such as evidence retrieval, seizure and custody, transfer and disposal,” as detailed in the article “Another Innovative Initiative in the Comprehensive Performance of Network Procuratorates! “Guangqi X Space” officially launched.” After reading some analysis articles online, lawyer Liu found that some headlines exclaimed “China’s first standard for handling cryptocurrency crimes is released!” However, some authors believe that the “Guidelines” aim to regulate the specific circumstances of judicial disposal of virtual currencies. In fact, these interpretations are not entirely correct. Given the convenience of “the nearer the water’s edge, the brighter the moonlight,” lawyer Liu has an understanding of the general content of the “Guidelines” and will provide a brief analysis and commentary in this article.
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(Image source: “Xuhui Procuratorate” WeChat account)
I. Main Content of the “Guidelines”
In fact, the article from the Xuhui District Procuratorate is quite clear. The main theme is the establishment of the Xuhui District Procuratorate’s brand for comprehensive performance in network prosecution, “Guangqi X Space,” which aims to combat and punish new types of network technology crimes. As one type of new network technology crime, crimes involving virtual currencies are also mentioned. The specific approach is the signing of the “Guidelines” by the public security and procuratorial authorities in Xuhui District.
The content of the “Guidelines” is not extensive. It mainly involves how to legally and compliantly retrieve and secure evidence related to virtual currency in criminal cases (with a focus on electronic evidence), how to seize and secure virtual currencies involved in the cases (which possess both evidentiary and property attributes), and general requirements for the transfer and disposal of virtual currencies involved in the cases.
II. Impact of the “Guidelines” on Criminal Defense in the Cryptocurrency Industry
To be frank, the “Guidelines” will not have a significant impact on criminal defense in the entire cryptocurrency industry. This is mainly because the “Guidelines” are only a regulatory document for handling cases in Xuhui District and do not have direct influence on neighboring districts, let alone the impact on Shanghai or the whole country.
In addition to geographical limitations, the “Guidelines” are not the so-called “China’s first standard for handling cryptocurrency crimes,” as some articles claim. Lawyer Liu knows that there have been at least five similar regulations or guidelines on handling criminal cases involving cryptocurrencies, some at the provincial level and others at the municipal level. If we are talking about regulations at the district or county level, Xuhui District in Shanghai is indeed the first.
Overall, the existing regulations in different places are quite similar. The Supreme People’s Court, the Supreme People’s Procuratorate, and the Ministry of Public Security have already provided clear regulations on evidence standards and procedures for obtaining evidence in network crime cases (such as the 2022 “Opinions on Issues Concerning the Application of Criminal Procedure in Handling Information Network Crime Cases” and the 2021 “Provisions of the People’s Procuratorates on Handling Network Crime Cases”). All cryptocurrency-related criminal cases can fall under the broader concept of network crimes. Therefore, it is difficult at present for the Supreme People’s Court, the Supreme People’s Procuratorate, and the Ministry of Public Security to issue specific regulations for cryptocurrency criminal cases nationwide. Instead, similar to the “Judicial Interpretation on Money Laundering Crimes” and the “Judicial Interpretation on Illegal Fundraising Crimes,” when revising some judicial interpretations on specific crimes, they may include provisions on virtual currencies (with two exceptions: if there are a sufficient number of criminal cases in the cryptocurrency industry and there are specific changes in evidence and legal application, such as adding provisions on virtual currencies to the law; or if there are specific regulations on the disposal of virtual currencies).
III. Impact of the “Guidelines” on the Disposal of Virtual Currencies Involved in Cases
One of the current debates regarding the disposal of virtual currencies involved in cases is the timing of disposal or the authority responsible for disposal. According to laws or judicial interpretations, the principle is that the court is responsible for disposing of properties involved in criminal cases. However, in current judicial practice regarding cryptocurrency criminal cases, the disposal is mostly carried out directly by the public security authorities. Lawyer Liu has also analyzed this in previous articles. From the perspective of public security authorities, the basis for disposal is as follows:
First, based on departmental regulations, there seem to be rules for the disposal of virtual currencies:
1. Provisions on the Management of Properties Involved in Criminal Cases by Public Security Authorities
“For properties such as bonds, stocks, fund shares, etc. with large market price fluctuations, and bills of exchange, promissory notes, and checks with expiration dates approaching, if the right holder has made a clear written agreement or application and obtained approval from the main person in charge of the public security authorities at or above the county level, they can be legally sold or auctioned, and the proceeds should be deposited into the only compliant account of the unit.”
2. Procedures for Handling Criminal Cases by Public Security Authorities
“During the investigation, for items that are easy to be damaged, lost, rotten, or deteriorated and are not suitable for long-term storage, or items that are difficult to be kept, with the approval of the main person in charge of the public security authorities at or above the county level, they can be entrusted to relevant departments for sale or auction after taking photos or recording videos. The proceeds from the sale or auction shall be temporarily preserved until the end of the litigation, and then processed together.”
“For frozen properties such as bonds, stocks, fund shares, the parties concerned or their legal representatives or authorized agents with the right to apply for sale should be informed.”
Even for the procuratorate, there are conditions under which the disposal of properties involved in cases can be carried out during the investigation process.
3. Rules of Criminal Procedure of the People’s Procuratorates
“Frozen properties such as bonds, stocks, and fund shares should be notified in writing to the parties concerned or their legal representatives or authorized agents with the right to apply for sale.”
Specific disposal can be carried out after the party applies and the chief procurator approves it, and the proceeds from the sale or realization of bonds, stocks, fund shares, etc. involved in the case can be transferred to the procuratorate’s designated bank account before the case is concluded.
Second, considering the nature of virtual currencies themselves, timely disposal is necessary.
Due to the anonymity and decentralization of virtual currencies, their storage differs significantly from traditional assets. There have been cases where the virtual currencies of suspects/defendants were seized and subsequently lost. The reason is that the handling authorities did not promptly transfer the virtual currencies involved in the cases to new wallet addresses. If someone other than the suspect/defendant also has access to the wallet private key (mnemonic phrase), it is easy to transfer the virtual currencies involved in the cases in a very short time. Additionally, virtual currencies experience significant market fluctuations, and prices can rise or fall dramatically within a day. If the proceeds from the eventual realization of the virtual currencies are much higher or lower than the amount at the time of the offense, it would be unacceptable for both the prosecuting authorities and the defense (as the defendant’s sentencing could be very severe or very light, or even result in acquittal, such as how to charge when the value of the virtual currencies involved becomes zero). Therefore, the more timely the disposal, the smaller the confrontation in litigation between the prosecution and defense may be.
Third, challenges in disposal
However, from another perspective, the public security authorities, the procuratorate, and even the court face the following problems when disposing of virtual currencies involved in cases:
First, virtual currencies are neither “bonds, stocks, and funds” nor “debt securities and equity securities.” The disposal of virtual currencies by public security authorities, procuratorates, or courts lacks a clear legal basis.
Second, current regulatory documents on virtual currencies do not allow anyone to engage in virtual currency-to-fiat currency exchange activities. Public security authorities entrust third-party disposal companies to handle the disposal of virtual currencies involved in cases, and there is still controversy about whether this practice complies with current regulatory requirements.
Third, overall, there is no clear, unified standard or guideline for the disposal of virtual currencies involved in cases at present, leading to different grassroots experiences in handling cases by authorities in different regions. The “Guidelines” are one of them, but Liu believes that the release of the “Guidelines” is still significant and would have even greater meaning if they could be made public to all citizens (or at least citizens within the jurisdiction of Xuhui District).
In conclusion, there has been an overwhelming amount of news recently regarding the disposal of virtual currencies involved in cases. From the Supreme People’s Court’s topic bidding to articles in the People’s Court Daily (see “Recommended Readings” at the end of this article), and now the “Guidelines” in Xuhui District, all of these indicate one thing: an increasing number of judicial authorities are paying attention to compliance issues in the field of disposal of virtual currencies involved in cases, and there is an urgent need for compliant disposal. This also serves as a warning to third-party disposal companies that compliance is the only way to ensure long-term success.
