Generating Revenue Lawfully
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Regarding how virtual currencies involved in criminal cases should be disposed of, the judicial theoretical community may offer various arguments that appear highly reasonable. However, in practice, pragmatic case-handling authorities (particularly public security organs) are not bound by diverse legal theories characterized as "one scholar says this, another says that." The rationale is straightforward: from the perspective of public security organs, delaying a case will only prove more detrimental to their position; therefore, disposal is imperative. As long as the disposal act and procedure are not obviously unlawful, or even if unlawful, the legal consequences of proceeding with disposal are clearly superior to those of non-disposal, public security organs will choose to proceed with disposal.
Currently, the process of disposing of and liquidating virtual currencies involved in cases inevitably involves third-party disposal companies. Since we characterize the disposal of virtual currencies by public security organs as an "operational necessity," does it follow that third-party disposal companies inherently possess a "halo of legitimacy" in their cooperation with public security organs? The answer is certainly negative.
Attorney Liu has encountered numerous third-party disposal companies during case handling. Many express concerns regarding the safety of their situation. In light of this, Attorney Liu has authored this article to serve as a practical reference for third-party disposal companies, but it shall not be construed as specific business advice.
Why Must Virtual Currencies Involved in Cases Be Liquidated?
Taking suspected fraud as an example: A criminal suspect commits fraud via virtual currencies, defrauding 70,000 USDT, which is approximately equivalent to RMB 500,000 at market rates. During investigation and case filing, public security organs must ascertain the exact amount involved in the case. Here, the "amount" must be denominated in fiat currency, preferably Renminbi (RMB). If the public security organ converts the 70,000 USDT into over RMB 500,000, the criminal suspect may potentially be sentenced to fixed-term imprisonment of more than 10 years in the future. However, if the public security organ does not liquidate the virtual currencies, at least two scenarios must be considered:
First, due to the high volatility of the virtual currency market, if the 70,000 USDT drops in value to RMB 490,000 or less after one month, the sentencing range for the criminal suspect would shift to 3–10 years. Furthermore, if the value of the 70,000 USDT falls below RMB 3,000, the criminal suspect might not constitute a crime at all. This outcome is fundamentally unacceptable to public security organs.
Second, if the public security organ transfers the seized virtual currencies unchanged to the procuratorate, the procuratorate must also clarify the amount involved during its review for prosecution—whether it is RMB 500,000 or RMB 499,900? Otherwise, the indictment cannot be drafted. However, if liquidation occurs at the procuratorate stage, the criminal case has typically proceeded for at least 3–4 months. If the liquidation price of the virtual currencies at this stage is lower than the price at the time of the incident, it is generally acceptable (as this constitutes an actual benefit obtained by the criminal suspect, and neither the suspect nor their defense counsel would typically raise objections to the liquidation). However, if the price of the seized virtual currencies is significantly higher than the price at the time of the incident, especially when it materially impacts the conviction and sentencing of the criminal suspect, there is substantial controversy regarding whether the determination of the amount involved is reasonable and lawful.
Continuing with the fraud case example: If the virtual currencies were liquidated at the time of the incident, the amount involved would be under RMB 30,000 based on market prices, resulting in a potential sentence of under 3 years. If liquidated at the procuratorate stage, where the market value is RMB 500,000, the potential sentence could exceed 10 years. Such a disparity is difficult for anyone to accept.
Therefore, virtual currencies involved in criminal cases must be liquidated in a timely manner.
How Can Disposal Companies Ensure Safety?
Since public security organs need to liquidate virtual currencies involved in cases in a timely manner, yet current national regulatory provisions on virtual currencies explicitly prohibit any individual, organization, or institution from engaging in exchange businesses between virtual currencies and fiat currencies (see Article 1, Item 2 of the "Notice on Further Preventing and Disposing of the Risks of Virtual Currency Trading and Speculation," i.e., the "September 24 Notice"), in current judicial practice, public security organs largely entrust third-party disposal companies in the market to handle the disposal and liquidation of virtual currencies involved in cases.
Consequently, for public security organs, they do not directly participate in exchange activities between virtual currencies and fiat currencies, yet they can presume the timely progression of the case, thereby avoiding regulatory risks without delaying case handling. For third-party disposal companies, they collect service fees while obtaining a certain degree of security assurance (assisting the government, particularly powerful public security organs). Why would they not engage in such arrangements?
However, Attorney Liu believes that given the current judicial landscape, for disposal companies, until the state's regulatory stance on virtual currencies changes (at least until separate regulations are issued for the liquidation of virtual currencies involved in criminal cases), acting on behalf of public security organs does not guarantee safety in terms of legal compliance. Of course, the suggestions in Attorney Liu's article cannot ensure 100% safety for disposal companies; they can only be described as relatively safe under the current status of judicial practice.
(1) Entrustment Procedures Must Be Lawful
Public security organs must sign written contracts when entrusting third-party disposal companies. In addition to the specific case-handling authority, the entrusting entity should ideally be at the municipal bureau level or above, preferably involving a cooperative framework agreement with the provincial department. Participating in bidding processes, such as through tenders, to secure the entrustment would be relatively more compliant.
(2) Entrusted Matters Must Be Specific
Disposal companies must clarify which services they can provide. In practice, in addition to the disposal and liquidation of virtual currencies involved in cases, services generally include tracing of funds involved in the case, auditing, analysis of the organizational structure of personnel involved, and preservation of electronic evidence involved in the case.
(3) Service Fees Must Be Reasonable
Current disposal service fees generally range between 10% and 20%. Attorney Liu has encountered situations where fees reached as high as 30% during case handling. However, we recommend that service fees should not exceed 20%, as a 20% fee allows for a reasonable profit margin under current conditions. Fees exceeding 20% may easily give rise to suspicions of benefit transfer during the disposal process.
(4) Disposal Process Must Be Compliant
The disposal of virtual currencies involved in cases must be conducted through licensed virtual currency exchanges overseas that comply with local laws, regulations, and regulatory requirements. Basic verification of the identity of counterparties should be performed. It is advisable not to conduct transactions with mainland Chinese residents or organizations, and not to directly receive Renminbi (which may constitute proceeds of illegal or criminal activities).
(5) Risks in Fund Repatriation
The most common area of legal risk for disposal companies arises in how repatriated funds are transferred domestically after liquidating virtual currencies involved in cases. Some current disposal companies attempt to evade supervision by institutions such as the People's Bank of China and the State Administration of Foreign Exchange by remitting funds liquidated overseas back to China through fabricated trade contracts and courier tracking numbers, or via computing power contracts, computer service contracts, and cloud computing service contracts. This entails significant risk. If public security organs can facilitate coordination with relevant institutions or departments (such as the headquarters or branches of the People's Bank of China, the State Administration of Foreign Exchange, the National Financial Regulatory Administration, or relevant banks), the transfer of liquidated funds can be fully executed into the special account for case funds of the public security organ domestically via the CIPS (Cross-Border Interbank Payment System) for Renminbi.
Conclusion
Until the September 24 Notice is amended or repealed, any institution or individual engaging in the exchange of virtual currencies and fiat currencies constitutes illegal financial activity. None of the measures or suggestions mentioned in this article can alter this conclusion. However, as stated earlier, faced with the "hard demand" of public security organs in handling criminal cases, someone must engage in the exchange of virtual currencies and fiat currencies. For disposal companies engaged in this business, merely undertaking such operations seems to incur a certain "original sin." Therefore, what disposal companies must do is to maximize their self-protection under the hanging Sword of Damocles, and look forward to, or even collaborate with, relevant authorities to promote the early clarification of disposal rules by competent authorities for virtual currencies involved in cases. This represents the most realistic and fundamental path to security.
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