Attorney Shao Shiwei | Can judicially frozen virtual assets be subject to compulsory enforcement if the party refuses to cooperate?

In recent years, we have observed that many legal scholars, experts, lawyers, and judicial personnel have engaged in discussions on how to handle virtual assets in judicial proceedings in a lawful and compliant manner. Attorney Shao has previously shared related views (➡️ “Public Security Organs Should Not Dispose of Virtual Assets Involved in Cases Without a Court Judgment!》）。

Without addressing what disposal procedures public security organs must adopt to ensure compliance,in practice, there is a sufficient and necessary precondition for case-handling authorities to dispose of virtual assets:the parties involved (suspects or defendants in criminal cases) mustvoluntarily return illicit gains and surrender them of their own free will.

The issue this article seeks to discuss is:Where virtual assets involved in a case have been frozen by public security or judicial authorities, if the party refuses to cooperate with case handlers by transferring their virtual assets from an exchange or digital wallet to a wallet address controlled by the case handlers, can such virtual assets be subject to compulsory enforcement even if there is a final and effective court judgment in the future?

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In brief, the judicial disposal process for virtual assets involved in cases, as carried out by case-handling authorities (currently, in practice, such disposals are conducted by public security organs rather than by the enforcement divisions of courts), is as follows:

Case-handling authorityFreezeVirtual assets involved in the case (not mandatory, as the party may voluntarily surrender them at the earliest opportunity) ➡️ Party’s cooperationTransferAssets to the account designated by the case-handling authority ➡️ The party cooperates with the case-handling authority to authorize a third-party disposal company to dispose of the virtual assets involved in the caseConvert into fiat currency.as fiat currency.

1, freeze

Here, two scenarios need to be distinguished: one is where the party’s assets are held on a virtual asset exchange (such as centralized exchanges like Binance and OKX), and the other is where the party’s assets are stored in digital wallets.

Whether it is Binance, OKX, or other mainstream virtual asset trading platforms, all have launched dedicated law enforcement request systems. Domestic public security organs can submit law enforcement requests and freeze accounts involved in the case through these systems.

Through this method, the case-handling authority can freeze the party’s account on the exchange, thereby restricting the transfer of assets within the account.

If the party’s assets are stored in a digital wallet, domestic public security organs can contact the issuer of USDT—Tether Limited—to request a freeze. For example, in a cross-border online gambling case investigated by the Jingmen police in Hubei Province, involving transaction flows totaling RMB 400 billion (known as the “first virtual asset case” in China [1]), it was reported that “because the platform settled all transactions in virtual assets, the public security organs coordinated with the issuer of the virtual assets to freeze the relevant accounts involved in the case.”

Through the foregoing measures, the case-handling authorities completed the first step in the disposal of virtual currency assets: freezing.

2. Transfer and Liquidation

Generally, in criminal cases, the lawful procedure for the confiscation of funds is as follows: public security organs, through statutory procedures, impose criminal compulsory measures such as sealing, seizure, and freezing on the property involved in the case. After the case is transferred for review and prosecution, prosecutors submit proposals for the disposition of the property involved. Upon further transfer of the case to the court, if the court, upon review, determines that the property involved constitutes illegal gains or should be recovered, it shall make a disposition and set it out in the judgment. After the judgment becomes effective, if the defendant fails to voluntarily return the illicit proceeds, the adjudicators will transfer the case to the Enforcement Bureau of the court for compulsory enforcement in accordance with law.

However, due to the special characteristics of virtual currencies (such as difficulties in custody and price volatility), and because virtual currency transactions are currently deemed illegal financial activities in China, law enforcement personnel’s conversion of the virtual currencies involved into fiat currency may raise suspicions of tacitly permitting virtual currency transactions, which is inconsistent with China’s current policy of cracking down on virtual currency speculation.Therefore, in practice, the disposal of virtual currencies is often carried out by public security organs at the investigation stage as an advance disposition; even during theenforcement stage after the court’s judgment, such matters are generally still handled by public security organs.

Continuing from the foregoing, after the case-handling authorities have frozen the party’s virtual currencies, the next step is to require the party tovoluntarily return illicit proceeds and provide restitution, voluntarily transfer the virtual currencies to addresses designated by the public security organs, and sign a virtual asset disposal agreement witnessed by the public security organs, thereby authorizing a third-party disposal company to convert the virtual currencies into fiat currency.

The current methods used by third-party disposal companies for liquidation include: conducting online over-the-counter (OTC) transactions through exchanges; seeking suitable buyers for offline transactions; and cooperating with foreign trade companies under pretenses such as fictitious export trades, whereby overseas companies remit funds that are then converted into domestic currency through the foreign exchange administration’s settlement process to achieve “lawful” entry of funds into China.

First, consider account assets held on exchanges. Pursuant to the Provisions on the Procedures for Handling Criminal Cases by Public Security Organs, the freeze period is six months; however, the freeze may be extended before expiration, and there is no limit on the number of extensions.

Mainstream virtual asset exchanges generallycooperate with domestic law enforcement agencies to implement freezes,。

butare there currently any instances in which virtual asset exchanges, based on effective criminal judgments issued by domestic courts, have cooperated with judicial authorities to transfer the virtual assets involved in a party’s case-related accounts to addresses designated by the case-handling authority?According to Attorney Shao’s understanding, drawn from his own case-handling practice and publicly available information, no such cases appear to have been reported.

Therefore, if a party refuses to cooperate with the case-handling authority in transferring and disposing of virtual assets held on an exchange, the measures available to the authority may be limited to maintaining a continuous freeze on the assets in the account.

What if the assets are held in wallets? Taking the PlusToken case, the largest crypto asset case to date, as an example (for case details, see ➡️ “Case Analysis: How Can Web3 Games Avoid Pyramid Scheme Risks? Insights from a $40 Billion Crypto Pyramid Case”), it was reported that in August 2024, hundreds of wallets that had been dormant for 3.3 years began transferring large amounts of Ethereum, totaling approximately USD 2 billion. Because the amount of ETH transferred did not match the amounts listed in the judgment, and because the official who led the PlusToken investigation in 2022 was later investigated for bribery, some observers speculate that individuals who have already been released from prison may be attempting to locate their previously held crypto assets.

If this speculation is accurate, it indicates that, prior to these transfers, certain wallet addresses were either unknown to the case-handling authority or, although known, lacked associated private key information.

Thus, regardless of whether a party’s assets are held on a virtual asset exchange or in a digital wallet, current judicial disposal of virtual assets is effectively premised oncan only proceed on the premise that the party voluntarily cooperates with the transfer of virtual assets.

Over the past six months, issues such as "long-arm" cross-regional enforcement and profit-driven law enforcement have been widely discussed. Attorney Shao has previously stated that it is not uncommon for cases in the crypto circle to be subject to "manufactured jurisdiction" and face profit-driven law enforcement due to the large amounts of funds involved.

In China, although the current legal system does not contain a concept equivalent to "plea bargaining" as found in common law jurisdictions, mechanisms such as leniency for admitting guilt and accepting punishment, and signing settlement agreements with victims, achieve effects substantially similar to those of plea bargaining to some extent.

In ordinary criminal cases, for typical case-handling authorities, if the party does not cooperate, so be it; at most, it results in an inability to dispose of the assets, and the court may simply render a judgment accordingly.

However, for cases that may be driven by economic interests,the disposal and liquidation of assets becomes the primary objective of the work.In such circumstances, from a defense perspective, the issue discussed in this article may serve as a negotiation strategy, although, for the party concerned, this is clearly a measure of last resort.

[1] The Nation’s “First Virtual Asset Case” Solved! https://mp.weixin.qq.com/s/SrpguHfXZTNzvC--rueHvg