Blockchain Technology Companies Assisting Public Security Organs in Combating Virtual Currency Crimes: How to Ensure Legal Compliance? | Mankun Web3 Legal Education

Key Considerations for Implementation

In recent years, with the rapid development of blockchain technology and the growing prosperity of the digital currency market, virtual currencies have gradually become a new type of investment and payment tool. However, the anonymity and decentralization characteristics of virtual currencies have also made them favorable tools for criminals, leading to frequent cases of virtual currency-related crimes.

Given the current limitations in investigative methods and the need to effectively combat such criminal activities, public security organs often rely on the capabilities of blockchain technology companies during investigations. Consequently, an increasing number of crypto asset practitioners are transforming their businesses into relevant blockchain technology companies to assist judicial authorities in combating virtual currency crimes. Local public security organs have also adopted a positive attitude toward such collaborations due to considerations such as technical capabilities, case scale, and fiscal needs.

However, blockchain technology companies face numerous legal issues when assisting public security organs in combating virtual currency crimes. This article will deeply explore the legal issues surrounding the participation of blockchain technology companies in combating virtual currency crimes from five major aspects: legality, data privacy and protection, leakage of secrets, erroneous enforcement, and the disposal of virtual currencies.

Maintaining Operational Compliance

When assisting public security organs in combating virtual currency crimes, blockchain technology companies must ensure the legality of their own actions. In other words, this involves the legality of the blockchain technology company's role in providing auxiliary investigative support, the legality of the methods employed, and the legality of the contracts signed with public security organs.

Generally, only public security organs have the authority to initiate investigations into criminal cases related to virtual currencies, but they often require technical assistance from blockchain technology companies. Blockchain technology companies must ensure the legality of their technical methods and ensure that their cooperation with public security organs complies with all legal provisions. Currently, neither the Criminal Procedure Law nor the Provisions on the Procedures for Handling Criminal Cases by Public Security Organs, among other legal documents, provide clear explanations regarding the participation of third-party companies in investigative activities by public security organs, nor do they propose a review of the legitimacy of their status. This has led to confusion among participating entities in practice, lacking unified standards and presenting certain compliance issues. Meanwhile, the technologies provided by technology companies must be compliant, and there is an obligation to audit their use.

Virtual currency-related business activities are considered illegal financial activities in China. When providing technical support, blockchain technology companies must comply with relevant laws and regulations. If a blockchain technology company fails to fulfill its corresponding review obligations, thereby providing technical support or assistance to criminals, it may also bear corresponding legal liabilities. For example, a certain blockchain technology company provided virtual currency tracking services to a client without strictly verifying the client's identity, only to discover later that the client was actually a criminal gang suspected of money laundering. Ultimately, the blockchain technology company was penalized for violating laws and regulations such as the Anti-Money Laundering Law.

Furthermore, if the technical means or methods adopted by a blockchain technology company during its assistance in public security investigations violate legal provisions—for instance, if technical investigation exceeds the scope prescribed under Article 148 of the Criminal Procedure Law—it may constitute illegality. Therefore, when participating in the fight against virtual currency crimes, blockchain technology companies must pay attention to the legitimacy of the contracting entity with the public security organ, the legality of the application of technology, and the legality of the service content.

Ensuring Data Security

When assisting public security organs in investigating virtual currency crime cases, blockchain technology companies need to collect and process large amounts of user data. This data may include sensitive information such as users' personal information, transaction records, and communication content. If a blockchain technology company fails to protect this data properly, resulting inthe leakage of customer information, it will not only infringe upon users' privacy rights but may also incur criminal liability for suspected infringement of citizens' personal information. For example, while assisting public security organs in investigating a virtual currency fraud case, a certain blockchain technology company collected personal information of relevant citizens using technical means without obtaining lawful authority to request evidence, causing significant negative impact and ultimately being found guilty of the crime of infringing upon citizens' personal information.

In addition to data leaks, blockchain technology companies may also face the issue of data beingillegally obtained. Some criminals may obtain data from blockchain technology companies through hacker attacks, internal leaks, or other means, and use it to commit other criminal activities. This not only brings economic losses and reputational damage to the blockchain technology company but may also trigger more severe legal consequences.

Therefore, when collecting, storing, and using user data, blockchain technology companies must strictly comply with relevant laws and regulations, strengthen data security management and technical protective measures, and ensure the security and confidentiality of user data.

Guarding Against Leakage of Investigative Secrets

During the investigation of virtual currency crime cases by public security organs, all collected information constitutes state secrets. Investigative secrets are crucial factors for ensuring the successful resolution of cases and maintaining social stability. Therefore, blockchain technology companies may come into contact with a large amount of investigative secrets while assisting public security organs in their investigations. If a blockchain technology company fails to properly safeguard these secrets or inadvertently leaks them to the outside world, it could have serious consequences for the case. The issue of leaking investigative secrets mainly manifests in the following aspects:

First, obstruction of case resolution. Once investigative secrets are leaked, suspects may take various measures to evade crackdowns or destroy evidence, increasing the difficulty of solving the case.
Second, the backend data involved in the case is key to conviction and sentencing. Once leaked, it may lead to significant flaws in the case evidence.
Third, the core of virtual currency crimes lies mainly in controlling the criminals' wallet addresses and private keys. If these are leaked, assets can be easily transferred, causing significant property losses.

To prevent the leakage of investigative secrets, blockchain technology companies should take the following measures:

Strengthen information security management and technical protection. Establish and improve information security management systems and technical protection frameworks to ensure the security and confidentiality of data;
Clarify confidentiality responsibilities and sign non-disclosure agreements. Clearly define their own confidentiality responsibilities and sign non-disclosure agreements during cooperation with public security organs;
Enhance employee training and raise legal awareness. Strengthen training for employees on information security and confidentiality knowledge, improving their safety awareness and skill levels.

Preventing Harm to the Innocent

In the process of assisting public security organs in investigating virtual currency crimes, blockchain technology companies may also face the issue of erroneous enforcement. Due to technical limitations, misjudgment of information, or other reasons, blockchain technology companies may mistakenly identify non-involved individuals or legitimate enterprises as targets involved in the case and take action against them. In such instances, the company needs to ensure that it does not erroneously freeze or handle the virtual assets of innocent customers, as this would not only harm the customers but also bring legal troubles to the company.

Specific manifestations of erroneous enforcement include:

First, non-involved accounts being frozen, sealed, or deducted, and legitimate transactions being misjudged;

Second, non-involved individuals being listed as criminal suspects and subjected to criminal coercive measures.

In practice, such phenomena are relatively common. In some profit-driven law enforcement cases, relevant personnel target objects holding substantial virtual assets, utilizing judicial means for investigative crackdowns. Finally, even in the absence of substantive evidentiary materials, it is quite common for accounts associated with upstream criminal transactions to be subject to deductions or restitution. From a legal perspective, the problems and harms caused by erroneous enforcement are extremely severe, and the consequences are difficult for blockchain technology companies to bear.

Therefore, in the process of participating in public security organs' handling of virtual currency cases, blockchain technology companies still need to strictly control both procedural and substantive legal aspects, strengthen the verification of information during investigations to avoid affecting innocent customers due to inaccurate information, and ensure strict implementation of multiple verifications in data checks to reduce the risk of misjudgment and avoid a lose-lose situation.

Compliant Disposal of Virtual Currencies

One of the most critical aspects of blockchain technology companies assisting public security organs in combating virtual currency crimes lies inpossessing priority disposal rights. The judicial disposal of virtual currencies is a long-standing issue, which will not be elaborated on extensively here; we will only briefly discuss its general problem points:

First, the lack of clear legal provisions and operational standards for the judicial disposal of virtual currencies may give rise to legal issues for third-party disposal companies. For example, the custody and disposal of virtual currencies should follow the principle of 'separation of custody and disposal.' Violating this principle may lead to asset loss or illegal transfer due to poor management, thereby creating problems.

Second, public security organs may rush to liquidate seized virtual currencies before the case is finalized to avoid value losses caused by market fluctuations. This practice may lead to third-party companies disposing of property in pending cases. If the decision of the procuratorial organ does not align with the expectations of the public security organ, the third-party company may bear corresponding legal liabilities. Therefore, premature disposal of virtual currencies before the case is concluded requires extreme caution to avoid bringing legal disputes to blockchain technology companies.

Third, if public security organs unauthorizedly entrust third-party companies to dispose of involved virtual currencies without following statutory procedures, such behavior itself may violate relevant regulations such as the Measures for the Administration of Confiscated Property, thereby rendering the disposal actions of the third-party company procedurally illegal. Therefore, when accepting entrustment, blockchain technology companies must confirm that the disposal procedures of the public security organ have been legally authorized.

Fourth, according to relevant regulatory policies, virtual currency-related business activities are considered illegal financial activities in China. Therefore, even if a third-party company disposes of virtual currencies under the entrustment of public security organs, such as through foreign exchange settlement channels, it may lack the corresponding qualifications, violate relevant laws, and constitute criminal offenses such as illegal business operations. Therefore, when disposing of virtual currencies, blockchain technology companies must ensure they possess legitimate qualifications.

Fifth, during the disposal process, blockchain technology companies may also face legal issues such as bribery, especially in cases involving large amounts of virtual currency assets. Ensuring transparency and compliance during the disposal process is crucial.

Summary by Mankun Lawyers

When Web3 blockchain technology companies assist public security organs in combating virtual currency crimes, although combating crime itself is not wrong, how to combat crime within the framework of legality and compliance deserves study. This article has only provided a preliminary overview of the issues. If interested, please feel free to add Mankun Lawyer at mankunlawyer to join the Mankun exchange group for in-depth discussions. You are also welcome to add the author for communication and exploration, aiming to create a win-win situation that truly combats crime, protects the legitimate rights and interests of citizens, maintains social stability, and creates commercial value.

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Blockchain Technology Companies Assisting Public Security Organs in Combating Virtual Currency Crimes: How to Ensure Legal Compliance? | Mankun Web3 Legal Education

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