The Crime of Illegally Utilizing Information Networks: The 'Catch-All' Charge for Criminal Legal Risks in the Crypto Circle
Special Disclaimer: This article is an original work by Attorney Shao Shiwei. It represents only the personal views of the author and does not constitute legal consultation or legal advice on specific matters. For article reposting, legal consultation, or business exchanges, please add: sswls66
Following the issuance of the September 4 Announcement in 2017, domestic virtual currency exchanges announced their overseas expansion one after another. Subsequently, after the issuance of the September 24 Notice in 2021, domestic exchanges also successively stated that they would cease services to users in mainland China and liquidate existing user accounts.
However, to this day, many virtual currency trading platforms claiming so-called overseas expansion have merely relocated their company registration and servers abroad, with some management personnel physically moving overseas, while other relevant personnel remain in China.
According to insiders in the industry, as of now, there are at least thousands of virtual currency exchanges still being operated by Chinese nationals.
Against the backdrop where virtual currency-related businesses are characterized as illegal financial activities, virtual currency exchanges face primary criminal risks. Based on publicly available judgments, the more frequent criminal risks involved in exchanges include operating casinos, illegal business operations, illegally absorbing public deposits, and pyramid scheme crimes, while the Crime of Illegally Utilizing Information Networks is relatively rare.
So why does this article single out the involvement of virtual currency exchanges in the Crime of Illegally Utilizing Information Networks for discussion? Because it is acatch-all charge.
Unless virtual currency exchanges established by Chinese nationals have truly achieved full overseas relocation and the platform does not involve domestic users, no matter the extent of criminal compliance achieved, it is difficult to defend against accusations under this catch-all charge. However, Attorney Shao believes that the application of this charge itself is highly controversial. Why is this so? This article will share four cases for discussion.
Author | Attorney Shao Shiwei
01 [Case A]
Starting in 2018, the defendant, Mr. Wu, recruited employees in a certain location in Shanghai to develop software for virtual currency trading, induced clients to invest and trade self-developed virtual currencies on the platform, and arranged for personnel to manipulate the price fluctuations of the virtual currencies. The judgment determined that, as of the incident in January 2021, more than 4,000 clients nationwide had invested and traded on the platform. The court sentenced Mr. Wu for the Crime of Illegally Utilizing Information Networks, imposing a fixed-term imprisonment of ten months.
[Attorney Shao's Analysis]
This was a case involving a guilty plea and acceptance of punishment, so the judgment was written rather simply, with effective information limited to the above. Although the judgment stated 'manipulating the price fluctuations of virtual currencies,' the actual situation may not have been as such. The evidence corresponding to the fact of 'manipulating price fluctuations' likely consisted only of the parties' confessions. The reasons for this inference are as follows:
From my past handling of criminal cases involving virtual currency exchanges, judicial authorities do not conduct technical audits of the trading platform's code, such as whether the platform is decentralized or whether smart contract applications are used. Judicial authorities are more concerned with whether there are victims reporting investment losses; whether the platform has gambling-style mechanisms offering high returns for small stakes; whether the platform's promotion model involves hierarchical structures for recruiting members and developing downlines; and so on. Because if these significant features exist, it is easy to determine that the platform is suspected of other crimes.
If the platform truly engaged in behavior controlling price fluctuations, it must have manipulated the backend through technical means to cause user losses and platform profits. However, since the platform operated for more than three years, why did the judgment in this case not mention any information regarding victim reports? Since it was possible to statisticize that the platform had more than 4,000 clients, it would not be difficult to find several people to testify.
For example, in one of the typical cases of 2023 officially released by the Qingyuan Intermediate People's Court ➡️ the fraud case involving Lu and nine others, according to the case description, Lu and others set up a fake investment platform for clients to invest in virtual currencies. Their accomplices manipulated the backend data of client investment fluctuations, defrauding more than 50 victims of property worth nearly one million yuan. The court determined that Lu and others committed the crime of fraud.
Based solely on public information, the behavioral pattern in this case was no different from that of Mr. Wu: both involved setting up platforms for users to invest in virtual currencies. One was charged with the Crime of Illegally Utilizing Information Networks, and the other with fraud. The difference lies in whether there were victims in the case.
So why was 'manipulating price fluctuations' recognized as an undisputed fact in the judgment? Because the Crime of Illegally Utilizing Information Networks is a minor offense. If the platform were truly determined to be suspected of operating a casino or fraud, the sentence would start at three or even five years. Therefore, recognizing this fact may have been a compromise reached by the defendant and their defense lawyer from a results-oriented perspective, after comprehensive weighing. Although initial coin offerings (ICOs) and the operation of virtual currency exchanges are prohibited in China, the basis for such prohibition lies only in relevant notices and announcements. To characterize the actor's conduct as a criminal offense, judicial authorities can only proceed from the platform's operational model itself to consider which charge is more appropriate. As mentioned earlier, if the platform involves no fraud, no gambling, and no pyramid schemes, what then?The Crime of Illegally Utilizing Information Networks can serve as a catch-all.
Because the legislative intent of this crime is to independently criminalizepreparatory acts for cybercrimes.In other words, even if there are currently no victims, if the purpose of establishing the platform is to carry out illegal or criminal activities, this meets the conditions for constituting the Crime of Illegally Utilizing Information Networks. How to prove that the purpose of establishing the platform was to carry out illegal or criminal activities? Because the platform engaged in 'manipulating the price fluctuations of virtual currencies.' Does this not make logical sense?
02 [Case B]
In 2021, Zhu and others established a company in Shanghai, set up a virtual currency trading platform, and divided labor among themselves and other company personnel, cooperating with each other (in business, finance, human resources, technology, etc.). They impersonated beauties on chat software, published a large amount of false information to induce foreign male clients to recharge and invest using other virtual currencies on the aforementioned platform. Zhu and others controlled backend data, rejected clients' requests to withdraw coins or funds, and induced clients to pay additional margin deposits, thereby defrauding clients of their virtual currencies. Until the incident came to light, there were approximately 300,000 coin deposit records on the platform, and Zhu and others profited a total of RMB 100,000. The court held that Zhu and others published information to carry out illegal and criminal activities such as fraud, and all were convicted of the Crime of Illegally Utilizing Information Networks, sentenced to fixed-term imprisonment ranging from two years and one month to six months.
[Attorney Shao's Analysis]
To be honest, if one has seen enough adjudication methods in crypto circle cases, one can reach a conclusion: regardless of what legal theory dictates, anything is possible in the outcome of case handling.
From a jurisprudential perspective, [Case B] is similar to the case involving Lu and nine others, a fraud case released by the Qingyuan Intermediate Court mentioned in the analysis of [Case A] above. Both involved setting up virtual currency platforms for user investment, both allowed company personnel to manipulate platform backend data, and both had sales staff use fixed scripts to communicate online with foreign men, fostering romantic relationships to defraud foreigners of their money.Yet Lu and others were charged with fraud, while this case was charged with the Crime of Illegally Utilizing Information Networks?
If the actors indeed completed the entire process of defrauding others of their money through the method of 'setting up a platform, finding clients, guiding investments, and obtaining investment funds,' is this not clearly the consummated crime of fraud? Furthermore, this case did not differentiate charges based on the specific division of labor among different company personnel. The boss was certainly aware of the company's operational conduct, but each sales staff member had their own specific job responsibilities. They might not have been aware of all the details by which the boss completed the fraud against foreigners through a set process and the division of labor among all personnel. Therefore, from the perspective of conviction, applying the Crime of Illegally Utilizing Information Networks uniformly to all personnel is unreasonable.
The remaining two cases will be discussed tomorrow.
(Currently on a business trip in Inner Mongolia, stealing some leisure time to write a short article and share daily insights from case handling)
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