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 reprints, legal consultations, or business exchanges, please add: sswls66
Introduction:
According to an article published by Wu Blockchain, the crypto exchange Bybit sued Ms. Ho, who was responsible for payroll payments within the company, for abuse of power, alleging that she transferred a large amount of USDT to addresses secretly owned and controlled by her. A total of 4,209,720 USDT were transferred, resulting in USD 117,238.46 being paid into her personal bank account [1].
In the crypto circle, litigation involving executives is not uncommon. Examples include previous high-profile cases: Zhao Dong, a prominent figure in the crypto industry and a major OTC trader, was taken away by police for investigation; the U.S. Commodity Futures Trading Commission (CFTC) accused Binance and its founder Changpeng Zhao of illegally operating a digital asset derivatives exchange; Xu Mingxing, founder of the OKCoin Group, was once taken by Shanghai police to the Weifang Xincun Police Station of the Pudong Branch of the Shanghai Public Security Bureau for investigation due to his involvement in disputes related to crypto trading rights protection; and Yang Zuoxing, founder of Shenma Miners, was previously approved for arrest by the Shenzhen Procuratorate for embezzlement.
In criminal cases involving executives in the crypto industry, duty-related crimes are often among the most frequently charged offenses. Today, we will discuss the crime of embezzlement under criminal law. The act of embezzlement involves company personnel taking advantage of their position to appropriate the property of their entity for personal use. This article discusses several typical scenarios in the crypto industry.
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Scenario 1: Internal Disputes Among Partners, Shareholders “Absconding with Funds”
The author previously received a consultation regarding an NFT digital collectibles platform that, due to chaotic internal management and unequal profit distribution, saw its majority shareholder appropriate company funds and cut off contact. The minority shareholders were criminally detained by public security authorities for fraud due to user rights protection actions against the digital collectibles platform. It is understood that the majority shareholder used the company’s funds to repay personal loans. There have also been online rumors that the former COO of the XinFuBao ICO project was suspected of embezzlement.
The subject of the crime of embezzlement is a special subject, namely “personnel of companies, enterprises, or other entities.” Digital collectibles platforms in China generally have corresponding registered companies. If relevant company personnel are suspected of embezzlement, they are regulated by China’s Criminal Law. However, as an Initial Coin Offering (ICO) is a token issuance crowdfunding project, the project initiators often do not have a statutory corporate organizational form but rather a loose cooperative alliance, which does not meet the subject requirements for this crime. If cooperating parties engage in acts such as “absconding with funds” that harm the team’s interests, other means of rights protection must be adopted.
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Scenario 2: Senior R&D Personnel Using Technical Means to Steal Company Virtual Currencies
Technical personnel in the crypto industry have backgrounds with stronger industry-specific attributes. In such cases, technical personnel obtain system administration privileges through methods such as tampering with company code or modifying computer software programs, and transfer the company’s virtual currencies to their own accounts.
A programmer at a certain company in Shenzhen stole the company’s virtual coins by tampering with code, transferring them to a personal address. He then exchanged centralized tokens for on-chain tokens, converted them into USDT, and deposited them into his BSC Binance Smart Chain wallet, ultimately cashing out on the Binance exchange for a profit of nearly one million yuan. The perpetrator was finally sentenced by the court for embezzlement to two years in prison [2].
The characterization of the perpetrator’s conduct is a highly controversial issue in such cases. Determinations often fluctuate between charges of theft, illegal acquisition/control of computer information system data, and embezzlement. Among these charges, embezzlement has the highest sentencing threshold. Therefore, from a defense lawyer’s perspective, assuming the perpetrator constitutes a crime, arguing that the conduct constitutes embezzlement rather than other charges can help secure a lighter sentence.
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Scenario 3: Taking Advantage of Position to Commit Insider Theft
Insider theft frequently occurs among senior company executives such as financial directors, sales directors, and HR directors who enjoy positional conveniences. So-called “convenient conditions” include the convenience of supervising, managing, or handling the entity’s property. For example: a financial director falsely reports expenses or inflates procurement costs; an HR director fabricates salaries for resigned employees and submits them, thereby illegally possessing company property by claiming these salaries; a sales director sells company goods personally or gives them away, or receives payment for goods without returning it to the company, etc.
He Mou served as an operations engineer at a Shanghai company, responsible for the management and maintenance of the company’s Bitcoin mining machines. In 2021, He Mou took advantage of his position managing and maintaining Bitcoin mining machines to repeatedly sell company-owned Shenma M21S Bitcoin mining machines, profiting more than 970,000 yuan. He was prosecuted by the public prosecution authority for embezzlement [3].
According to criminal law provisions, embezzlement constitutes a crime only if the amount involved is relatively large. For amounts exceeding 30,000 yuan, the penalty is imprisonment of up to three years; for amounts exceeding one million yuan, the penalty is imprisonment of three to ten years. In the aforementioned case, He Mou’s criminal amount was less than one million yuan, and the public prosecution authority recommended a sentence of two years and six months.
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Criminal Defense Strategies for Lawyers
If practitioners in the crypto industry are suspected of embezzlement, defense strategies may be adopted based on the actual circumstances of the case, focusing on aspects such as the subject of the crime, the characterization of the involved conduct, and the amount involved.
Additionally, in practice, attention should be paid to the following two difficulties in determining whether this crime is established:
1. Whether the Perpetrator “Took Advantage of Positional Conveniences”
Taking advantage of positional conveniences requires the perpetrator to possess certain authority, control rights, or the convenience of handling specific matters, or to influence others to commit embezzlement by virtue of their rights. Whether formal employees, contract workers, or temporary staff, all can be subjects of this crime.
However, if the perpetrator merely exploited the convenience of having easier access to the target of the crime during work, without having the duty to supervise or safeguard the company’s relevant property, this does not constitute the crime.
2. Whether the Perpetrator “Illegally Appropriated” the Entity’s Property for Personal Use
This is one of the important conditions distinguishing whether the perpetrator constitutes this crime or another crime (such as misappropriation of funds). Whether there was an “intent of illegal possession” is judged in judicial practice based on the following perspectives:
(1) Absconding with funds after transferring possession of company property;
(2) Attempting to conceal or destroy company accounts;
(3) Subjective unwillingness to repay or objective inability to repay;
(4) Squandering the property;
As China continues to issue relevant regulations, supervision over blockchain, virtual currency trading and mining, and NFT digital collectibles is continuously strengthening. Criminal defense must combine the industry characteristics of the crypto circle with an understanding of relevant laws and regulations to achieve effective defense and better protect the legitimate rights and interests of clients.
[1] Analysis of Self-Theft by Bybit’s Head of Compensation: Loopholes and Improvements in Financial Management of Blockchain Enterprises https://mp.weixin.qq.com/s/qzaWXud0a3s-SykhDWLlRA
[2] Virtual Currency Case | Pleaded Guilty and Accepted Punishment for 5 Years, Defended Down to 2 Years https://mp.weixin.qq.com/s/S527RvsfppP-M5icMyP98A
[3] Case Number: A County Proc. Crim. Indict. [2021] No. 29
