The traceability of the overseas disposal model of the virtual money involved in the case

Introduction

Recently, I had the chance to read an article by Teacher Di from a judicial authority in Suzhou. Teacher Di had conducted systematic and scientific thinking and research on the judicial disposal of virtual currencies involved in cases as early as 2022. Therefore, I specifically gathered relevant materials. This has given me new insights into the judicial disposal of virtual currencies involved in cases in current domestic judicial practice. However, since my "new insights" are not yet systematic, this article will focus on discussing the origins of the current domestic business model for the judicial disposal of virtual currencies.

It should be noted that although Teacher Di's article has not been published in public journals, the publicly available related content on the internet (such as "Judicial Practice in Virtual Property Criminal Cases - Record of the Fourth Practical Criminal Law Forum") allows us to glimpse the general development trajectory of judicial handling of virtual currency in judicial practice and even theoretical design.

1. Judicial disposal before the "9.24 notice"

China's regulatory policies on virtual currencies are mainly focused on three important aspects:

First, the notice titled "Notice on Preventing Bitcoin Risks" (Yin Fa [2013] No. 289) issued by five ministries on December 3, 2013, aimed to "put out the fire" on the then "emerging" enthusiasm for Bitcoin. However, at that time, the five ministries acknowledged that "Bitcoin should be a specific virtual commodity," and this characterization has not changed to this day.

Second, on September 4, 2017, the seven ministries issued the "Announcement on Preventing Risks of Token Issuance and Financing", which is famously known in the crypto community as the "9.4 Announcement". This announcement completely prohibited token issuance and financing activities in mainland China, having a huge impact on the domestic and even global crypto space.

On September 24, 2021, ten ministries jointly issued the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation", which is widely known in the industry as the "9.24 Notice". This notice remains the most authoritative and stringent regulatory policy for virtual currency in China. The law enforcement and judicial approaches for currency-related cases generally follow the provisions of the "9.24 Notice". It clearly states: "Activities such as conducting exchange services between legal currency and virtual currency, exchanges between virtual currencies, and trading virtual currencies as a central counterparty are all illegal financial activities, and must be strictly prohibited and resolutely banned in accordance with the law."

Thus, we can simply divide the judicial disposal of the virtual currency involved into the judicial disposal before the "9.24 Notice" and the judicial disposal after the "9.24 Notice."

Before the "9.24 notification", there was no clear policy in China explicitly prohibiting the exchange of virtual currencies and fiat currencies in the mainland. In 2017, mainland virtual currency exchanges were required to go abroad, so there were certainly no publicly available virtual currency exchanges in the mainland in 2021, at most there were underground virtual currency exchanges. Therefore, the judicial disposal model at that time was relatively "rough": law enforcement agencies mostly cooperated with virtual currency "professional purchasers" to liquidate the involved virtual currencies. Virtual currency purchasers usually operated on a "pay first, deliver later" model, buying virtual currencies from law enforcement agencies at low prices and then reselling them at a markup in exchanges or over-the-counter trades. Teacher Di believes that although this model did not violate the relevant laws and regulations at that time (for example, the applicable regulations were the 1986 Ministry of Finance "Measures for the Administration of Confiscated Property and Recovery of Stolen Property"), it lacked compliance because it did not consider the requirement for priority public auctions and did not conform to the principles of "openness, fairness, and justice" in the disposal of confiscated property.

II. Three Theoretical Designs for Judicial Disposal

After the release of the "9.24 Notice", it is explicitly prohibited for anyone in mainland China to engage in the exchange of virtual currencies and fiat currencies. As a result, it has become a consensus in the practical field that the virtual currencies involved in the case cannot be disposed of within the territory.

According to Teacher Di's article, based on the regulations of the "9.24 notice", it explored three main disposal models:

The first is "Law enforcement agencies directly engaging in offshore transactions." In short, it means that offshore law enforcement agencies act directly as the main body to conduct transactions abroad. However, the biggest obstacle to this model is that offshore trading platforms (such as overseas virtual currency exchanges) generally do not accept account registrations (opening accounts) from law enforcement agencies in China. If transactions are not conducted through virtual currency exchanges, there may be multiple issues, such as incomplete understanding of the identity information of offshore trading counterparties and unfair transaction prices, when law enforcement agencies act directly as the trading parties.

The second is "professional intermediary offshore trading." Compared to the "9.24 notice" before its release, the professional intermediary offshore trading model is driven by national authorities to establish specialized institutions for the offshore disposal of involved virtual currencies. Specifically, this means that judicial authorities sell confiscated virtual currencies to professional intermediaries, who then transfer them for sale overseas. This model seems feasible at first glance, but a deeper investigation reveals significant compliance obstacles: first, there is no guarantee that professional intermediaries can actually sell the involved virtual currencies overseas; second, there is insufficient basis for pricing virtual currencies by judicial authorities and professional intermediaries; third, even if professional intermediaries sell overseas, the issue of converting proceeds into domestic currency compliance is also difficult to resolve.

The third is "Overseas Trading by Authorized Agents." Lawyer Di specifically designed a model of "domestic agency, overseas re-agency, overseas trading, and foreign exchange settlement return" by referring to the "foreign trade agency export system" from the early stage of reform and opening up. This model not only complies with domestic regulatory requirements for virtual currencies but also minimizes disposal costs, ensures transparency, fairness, and justice in judicial disposal, and allows for a smooth and compliant return of realized funds into the country. It is currently a relatively prudent choice.

III. Current Judicial Disposal Model

In the field of judicial disposal of involved virtual currencies, the currently mainstream judicial disposal model is the aforementioned third model of "entrusted agents conducting offshore transactions." The disposal path designed by Teacher Di in 2022 has had a lasting impact; for example, in 2022, Suzhou State-owned Assets invested to establish enterprises following this approach, creating a dual compliance disposal model for both domestic and overseas. This is the earliest exploration of the dual agency model that I am aware of. The "Beijing Stock Exchange" model for the judicial disposal of involved virtual currencies by the Beijing Public Security Bureau, which attracted much attention in June of this year (the author conducted a detailed analysis in the article "What is the 'New Channel' for Judicial Disposal of Involved Virtual Currencies by the Beijing Public Security Bureau? Can Disposal Be Opened Now?"), essentially adopts the dual agency model of "domestic + overseas."

We analyze the compliance of this model as follows:

(1) Comply with domestic regulatory policies regarding virtual currencies

The domestic agency did not actually participate in the exchange of virtual currencies and fiat currencies; after accepting the commission from the judicial authorities, it entrusted an eligible entity abroad to handle the matter.

(2) Comply with relevant laws and regulations requirements

For example, laws and regulations such as the "Government Procurement Law", "Measures for the Management of Confiscated Property", and "Foreign Exchange Administration Regulations" in our country stipulate various requirements for state organs regarding procurement and disposal services, conducting disposal activities, and fund settlement requirements. The judicial disposal of virtual currencies involved in the case must comply with relevant laws and regulations. Through theoretical verification and practical examination, the "entrusting agents for overseas transactions" model complies with relevant regulations.

(3) Ensured fairness, justice, and openness.

Judicial authorities with disposal needs can selectively choose domestic disposal agencies in the open market, ensuring compliance, economy, safety, and efficiency for the disposal process, which guarantees the fairness, justice, and openness of judicial disposal operations.

(4) Ensure that the virtual currency involved in the case does not remain within the country.

One of the intentions behind the strong regulatory policies on virtual currencies in the mainland is to minimize the investment of domestic entities (individuals, legal persons, and non-legal organizations) in virtual currencies (our country does not prohibit virtual currency investment) in order to prevent harm to the financial order. In particular, virtual currencies involved in cases cannot be sold to domestic entities. Under the model of entrusted agents trading overseas, handling the domestic involved virtual currencies on compliant overseas platforms and markets at least initially ensures that the involved virtual currencies will not continue to circulate in the mainland, reducing the impact of virtual currencies on the domestic economic and financial order.

IV. Conclusion

Where the future disposal business will head, no one can rashly say. However, if we want to look back to the past and trace the origins of the domestic + overseas agency model, it should undoubtedly be attributed to this Mr. Di within the Suzhou system. Objectively speaking, there isn't a fixed model for the judicial disposal of the involved virtual currencies. The author also understands that this field is currently a place where hidden talents abound, with everyone showcasing their own unique skills.

However, there is a prerequisite that it must comply with our country's regulatory requirements for virtual currencies, as well as the legal regulations involved in the complex areas of the entire disposal chain (such as civil and commercial contracts, government procurement, foreign exchange supervision, policies regarding overseas virtual currencies, etc.). As long as one link in this process fails to be implemented, a complete compliance loop cannot be formed.