How can virtual assets involved in a case be liquidated?
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In current judicial practice, the disposal of virtual assets seized in connection with suspected criminal offenses is a highly contentious issue. On one hand, judicial authorities, particularly public security organs, consider the timely disposal of such virtual assets essential to preserving evidence of property involved in the case and determining the amount implicated in the alleged crime. On the other hand, under China’s current regulatory framework for virtual asset transactions, any entity engaging in the exchange of virtual assets for fiat currency by any means is prohibited. The severity of this conflict inevitably creates a sense of fragmentation. Attorney Liu writes this article against this backdrop to explore the dilemmas surrounding the disposal of virtual assets in criminal cases within contemporary judicial practice.
How are virtual assets disposed of in criminal cases?
Following the “Card-Breaking Campaign,” telecommunications providers, banks, and other institutions have intensified oversight of SIM cards and bank accounts. Due to their anonymity, virtual assets have become favored by traditional illicit and gray-market industries. Perpetrators of fraud, gambling, money laundering, pyramid schemes, and other crimes have begun leveraging virtual assets to facilitate unlawful activities.
It is important to note that this does not mean individuals engaged in virtual asset businesses are necessarily committing crimes; rather, it indicates that those already engaged in criminal conduct have chosen to use virtual assets.Among the many friends in the crypto community whom Attorney Liu has encountered, there are numerous individuals who are idealistic, passionate, and diligent in their work.
In criminal cases involving virtual assets, judicial authorities currently adopt two common approaches: First, during the public security investigation stage, a third-party company is entrusted to liquidate the assets. In practice, suspects or their families may also engage third-party companies for liquidation. However, given that suspects in such cases are typically detained or placed under residential surveillance at a designated location, they cannot independently contact third-party companies during this period and must obtain permission, or even receive “guidance,” from public security organs. Second, the virtual assets are merely seized during the public security and procuratorial stages, and their liquidation is handled by the court’s enforcement bureau after judgment. The specific method invariably involves entrusting a third-party company (often operating under the guise of a technology company) to carry out the liquidation.
Therefore, under the current regulatory framework, judicial authorities recognize that they cannot actively participate in the disposal of virtual assets. Whether judicial authorities proactively engage third-party companies for disposal, or the parties to the case or their family members commission third-party companies to do so, the conversion between virtual assets involved in the case and fiat currency currently appears to be possible only through third-party companies. But is this compliant?
Is it lawful for third-party companies to dispose of virtual assets involved in a case on behalf of others?
The term “third-party company disposing of virtual assets involved in a case on behalf of others” refers to the practice whereby a domestic company, upon being entrusted by judicial authorities, liquidates the virtual assets involved and transfers the proceeds to an account designated by the judicial authorities. There are two common forms of entrustment:
(1) Directly accepting individual mandates
In scenarios where a disposal company accepts the mandate of a party to the case or their family members to dispose of virtual assets involved in the case, it is generally sufficient for the party or their family members to directly sign an agreement with the disposal company, without anydirect and obvioussigns of intervention by judicial authorities. In such circumstances, the disposal company faces the greatest legal risk, because the "Notice on Further Preventing and Disposing of the Risks of Virtual Currency Trading and Speculation" (hereinafter referred to as the "September 24 Notice") issued by ten ministries and commissions, including the Supreme People's Court, the Supreme People's Procuratorate, and the Ministry of Public Security, explicitly states that "conductingfiat currencyandvirtual currencyexchange services, exchange services between virtual currencies, acting as a central counterparty to buy and sell virtual currencies,providing information intermediary and pricing services for virtual currency transactions, etc." constitutes illegal financial activities. In this case, for the disposal company, at best it violates regulatory provisions, and at worst it involves criminal offenses (such as the crime of illegal business operations).
(2) Accepting mandates from judicial authorities
In situations where judicial authorities (primarily public security organs) entrust disposal companies to liquidate virtual assets involved in cases, although such entrustment itself has a legal basis (such as Article 236 of the Provisions on the Procedures for Handling Criminal Cases by Public Security Organs and Article 34 of the Relevant Provisions on the Application of Seizure and Freezing Measures in the Handling of Criminal Cases by Public Security Organs), the content of such entrustment clearly fails to comply with the requirements of the September 24 Notice. Specifically, any entity conducting exchange services between fiat currency and virtual assets within mainland China is deemed to be engaging in illegal financial activities. As forconducting disposal services for judicial authoritieswhether such purpose can preclude or offset the characterization as illegal financial activities under the September 24 Notice, Attorney Liu believes that, from the perspective of legal sentiment or moral judgment, providing assistance in liquidating virtual assets seized by judicial authorities to facilitate the smooth progress of judicial proceedings is commendable. However, strictly speaking, under current laws and regulatory provisions: regardless of the purpose, conducting exchange services between virtual assets and fiat currency is prohibited. In practice, Attorney Liu has encountered cases where Company B (a virtual asset disposal company), entrusted by the public security organs of Region A to conduct disposal and liquidation, was subsequently investigated by the public security organs of Region C because part of the liquidated funds received by Company B during the disposal process were linked to telecommunications fraud proceeds. Reality is thus fragmented; numerous disposal companies similar to Company B cannot guarantee 100% safety even with the endorsement of the entrusting public security organs.
Therefore, under the current judicial environment, the identity of the entrusting party is not the essential element in determining compliance for third-party companies. The sole basis for determination is the nature of the actions taken by the third-party company after accepting the entrustment. For third-party companies conducting exchange services between virtual assets and fiat currency, whether for profit through service fees or to serve judicial authorities, they cannot evade the regulatory provisions of the September 24 Notice; such activities constitute illegal financial activities.
Conclusion
Currently, although exchange services between virtual assets and fiat currency are considered illegal financial activities in mainland China, judicial authorities are compelled to liquidate virtual assets due to the practical necessities (and indeed rigid demand) of judicial proceedings. Where there is demand, there is a market, even if such market operates under prohibitive regulatory policies. Furthermore, the relatively low number of cases in current practice where parties have been held liable for assisting judicial authorities in virtual asset disposal has provided many third-party disposal companies with a certain sense of security, believing that they are unlikely to face liability. However, Attorney Liu wishes to emphasize that even when accepting entrustment to dispose of and liquidate virtual assets to meet the operational needs of judicial authorities, third-party companies must closely monitor the latest regulatory developments and maintain comprehensive and complete business records. This will enable them to maximize their protection should they face accountability inquiries from other judicial authorities.
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