Attorney Shao Shiwei | Public Security Organs Should Not Dispose of Virtual Assets Involved in Cases Without a Court Judgment!

In criminal cases involving cryptocurrencies, the judicial disposal of virtual assets is an unavoidable topic.

Recently, reports and developments concerning the disposal of virtual assets involved in cases have emerged in succession. On August 23, 2024, the Supreme People’s Court issued the “Announcement on Bidding for Major Judicial Research Projects in 2024.” On August 29, the Xuhui District People’s Procuratorate and the Xuhui District Public Security Bureau jointly signed the “Guidelines for the Disposal of Virtual Currencies Involved in Criminal Proceedings.” On September 3, the People’s Court Daily published an article titled “Judicial Disposal of Virtual Currencies Must Be Standardized.” These developments indicate that judicial authorities in China are progressively strengthening their attention to and emphasis on compliance in the judicial disposal of virtual assets.

However, in judicial practice, public security organs typically carry out advance disposal of virtual assets involved in cases during the investigation stage, before a final judgment is rendered in the criminal case. Is there a legal basis for public security organs to conduct advance disposal of seized virtual assets during the criminal investigation stage? What issues may arise from such advance disposal? This article explores these questions.

Authors | Attorneys Shao Shiwei and Bao Jie

The following are common scenarios in criminal cases involving the cryptocurrency industry. Any resemblance to actual events is purely coincidental:

One day, A was suddenly visited by public security officers at home and informed that he might be involved in a certain criminal case. The police requested A’s cooperation with the investigation. Meanwhile, technical personnel accompanying the police took away A’s mobile phone, computer, cold wallet, USB drive, and other items. After being taken to a police station or detention center, A was asked by the public security organ to provide the private keys to his digital wallets and to sign an authorization letter consenting to the public security organ’s engagement of a third-party company to dispose of the virtual assets held by A. Shortly after A signed the documents (possibly while A was still detained in the detention center), the public security organ informed him that his virtual assets had been sold by the disposal company, yielding RMB xx yuan.

1. Is there a legal basis for the advance disposal of virtual assets?

 Provisions concerning the sealing, seizure, and disposal of property involved in cases are mainly reflected in the legal provisions listed below. From this, it can be seen:

For deposits, remittances, bonds, stocks, fund shares, and other property, only freezing measures may be adopted (therefore, judicial disposal of virtual assets is limited to freezing measures).

With respect to case-related property subject to investigation, freezing, or seizure by public security organs,only freezing measures may be applied; such property shall not be misappropriated or disposed of independently prior to the issuance of a legally effective judgment by a people's court.However, the regulations also provide fortwo exceptions:：

1. Except where property must be returned to victims in accordance with law or is confirmed upon investigation to be unrelated to the case, disposal may be carried out before the conclusion of litigation;

2. For property that is perishable, prone to depreciation, or subject to significant value fluctuations, prior disposal may be undertaken upon approval by the principal person in charge of a judicial organ at or above the county level. However, this is subject to the following precondition:consent or application by the rights holder。

[Extended Reflection]

• The phrase “must be returned to victims in accordance with law or is confirmed upon investigation to be unrelated to the case” clearly intends that case-related funds and property be returned to victims, or that virtual assets unrelated to the case be returned to suspects. However, in judicial practice,the virtual assets subject to prior disposal by public security organs do not necessarily involve victims(e.g., cases involving pyramid schemes or gambling-related offenses)Criminal cases, in such cases, is there a legal basis for the public security organs to dispose of virtual assets in advance?

• Do virtual assets constitute property that is “subject to significant value fluctuationsproperty?

• During criminal detention, did the rights holder truly provide “voluntary consent” or apply for a third-party company to dispose of their virtual assets? If not,what adverse effects might advance disposal have on the rights holder?

 2. Potential Issues Arising from the Advance Disposal of Virtual Assets

• What impacts may advance disposal actions have on criminal cases?

Because, prior to the transfer of the case to the people's procuratorate for review and prosecution, defense counsel has not yet accessed the criminal case file, and without a complete and comprehensive analysis of the facts of the case, the client cannot clearly understand whether their conduct indeed constitutes a criminal offense. If it does constitute an offense, is there relevant evidence to substantiate this? Is the amount involved in the crime alleged by the judicial authorities accurate? Have portions of lawful income, assets unrelated to the case, or assets belonging to third parties been excluded? Even at the procuratorial stage, for certain cases involving disputes, there is a possibility that the people's procuratorate will decide not to prosecute or that the public security organ will withdraw the case. In such circumstances, if the public security organ has already disposed of the virtual assets involved in the case during the investigation stage, or even spent the proceeds, how should the case proceed? It may only be forced forward—transferred to the court (this point is implied and will not be elaborated further here).

Before the case is transferred to a court for trial, with respect to illicit gains that should be returned to victims or subject to recovery or confiscationthe specific amounts have not yet been finally determined, and there may be other lawful rights holders in the virtual assets involved in the case, in such circumstances, the public security organs’ act of disposing of the assets in advance during the investigation phase clearly violates the aforementioned procedural provisions.

• What “future liabilities” may arise from advance disposal acts?

Of course, if the suspect voluntarily surrenders the property involved in the case and applies for its disposal by the public security organs or a third-party disposal company, this may satisfy procedural compliance to a certain extent. However, based on the author’s practical experience in handling crypto-related cases, this is merely superficial procedural “compliance,” which may nevertheless give rise to “endless future liabilities.”

This is because the suspect, while under criminal detention or released on bail pending trial, experiences constant anxiety and fear, and bears immense psychological pressure from daily worries about the length of the potential sentence, when “voluntarily signing” an agreement authorizing a third-party disposal company to dispose of their virtual assets. The true reason for such “voluntary consent” at that time is the desire for freedom—namely, the wish to escape the current “predicament” as soon as possible—rather than “voluntary consent” given after the court has found the facts of the case clear and the evidence reliable and sufficient, rendered a criminal judgment, and the defendant has ceased to appeal and accepted the judgment as final.

Therefore, the “future liabilities” for the public security organs may include facing the party’s continued petitions, applications for retrial, and administrative lawsuits seeking compensation from the public security organs for losses caused by improper sale prices, among other claims.

• Does advance disposal of virtual assets increase the criminal risks for the parties involved?

Third-party disposal companies are generally entities cooperating with public security organs; in practice, disposal fees ranging from 15% to 30% are agreed upon. For the parties involved, they only have the right to sign and authorize, without the ability to choose the disposal company, negotiate prices, or revise contract terms to safeguard their legitimate rights and interests.

In practice, the risks associated with buying and selling virtual assets are extremely high, ranging from frozen bank accounts in less serious cases to involvement in criminal offenses in more serious ones. Moreover, the value of virtual assets awaiting disposal and liquidation in criminal cases is often substantial, with amounts in the tens of millions or even hundreds of millions being common. Where in China are there so many over-the-counter (OTC) merchants with such large daily capital flows? Those capable of providing large amounts of cash in the short term are highly likely connected to underground banks. Additionally, in practice, disposal companies cooperating with public security organs may also repatriate funds from abroad “legally” by fabricating export trade transactions and then converting foreign exchange through the State Administration of Foreign Exchange.

Consequently, additional risks for the parties involved may arise if, for example,the RMB proceeds obtained by the disposal company contain illicit funds or funds from illegal foreign exchange conversions, should this risk be borne by the entity disposing of the assets, the public security organs, or the parties involved? Will the parties themselves face "aggravated liability," with additional charges such asthe crime of aiding information network criminal activities, the crime of concealing or disguising the proceeds of crime, and the crime of illegal business operationsadded to the original charges?

Public security organs often dispose of virtual assets in advance during the investigation stage, typically considering several factors: significant market price volatility of virtual assets, the need to determine the value of the virtual assets involved before a court judgment, and the risk that the virtual assets on record may be transferred by third parties, thereby necessitating advance disposal for security reasons. We hereby discuss these issues as follows:

1. Do virtual assets constitute property with "significant value volatility"?

In practice, public security organs considerthat the value of virtual assets is significantly affected by market fluctuations, and therefore dispose of virtual assets in advance during the investigation stage. However, this view does not appear entirely sound logically.

For assets such as Bitcoin, Ethereum, or meme coins, their market values are indeed subject to significant market fluctuations; thus, disposal by public security organs on the grounds of significant market price volatility of the property involved has some legal basis.

However, most crypto-related cases actually involve USDT (Tether), which is astablecoin issued by Tether Limited and pegged to the U.S. dollar. Is it appropriate to justify advance disposal on the grounds of significant price volatility in such cases?This remains open to debate.

2. Does the failure to carry out preliminary disposal affect the court’s judgment?

In practice, there is another view: in criminal cases,the amount involved serves as the basis for the court to determine conviction and sentencing,and the defendant’s illegal gains must be turned over to the state treasury;the judgment must specify the amounts subject to recovery, confiscation, or forfeiture.Accordingly, it is argued that public security organs have a necessity to conduct preliminary disposal of virtual assets during the investigation stage. We do not agree with this position.

Under the current announcements or notices issued in China concerning virtual assets, it is stipulated that “no organization or individual may provide pricing services for virtual assets.” Therefore, regardless of the pricing method employed, it would contravene China’s regulatory policies. Nevertheless, as a type of virtual commodity, its property attributes are recognized in China, and in criminal cases, the amount involved is one of the factors considered by judicial authorities in determining conviction and sentencing. Consequently, in certain cases involving virtual assets, the value of the virtual assets must be determined before the court renders its judgment.

In his previous article, “How to Determine the Involved Coin Price in Virtual Asset Theft Cases?,” Attorney Shao noted thatthe methods commonly adopted in current judicial practice for determining the price of virtual assets include:

1. A report issued by a price appraisal institution or a judicial appraisal institution; 2. The consideration paid for the purchase of virtual assets; 3. The consideration received from the liquidation of virtual assets; 4. Reference to the prices of the relevant virtual assets on cryptocurrency exchanges; 5. No valuation is calculated, and the court exercises its discretion in considering the matter.

Not all cases involving cryptocurrencies require a determination of the price of the virtual assets. For example, in the theft case (2020) Yue 0304 Xing Chu No. 2, the court’s judgment only vaguely stated that it would exercise discretion in considering circumstances related to the number of virtual assets stolen by the defendant.

If the virtual assets involved in the case are stablecoins such as Tether (USDT), methods 1, 2, and 4 mentioned above may all serve as references for determining the amount involved in the case.There is no mandatory requirement to dispose of and liquidate the assets during the investigation stage.

Furthermore, although court judgments must address the recovery and confiscation of property involved in the case, in practice, the descriptions in many judgments are very broad. Examples include: “Illicit gains shall be confiscated,” “Continue to recover illicit gains,” or even, as in the case of aiding information network criminal activities (2023) Min 0524 Xing Chu No. 1300, where the judgment directly stated: “Confiscate the xx USDT tokens seized.”

From this, we can conclude that whether the public security organs dispose of virtual assets in advance will notaffect the subsequent court judgment.

3. If no prior disposal is made, will there inevitably be securityrisks?

Security issues concerning virtual assets are one of the factors considered by public security organs when deciding whether to dispose of virtual assets involved in a case in advance.

Possession of the private key or mnemonic phrase corresponding to a digital wallet confers the power to dispose of the virtual assets. Therefore, if persons other than the suspect also possess the private key or mnemonic phrase for the wallet, there is indeed a possibility that the virtual assets involved in the case could be transferred.

However, if the public security organs have obtained the suspect’s private key and other information, this necessarily implies that the suspect provided it. In situations where the public security organs already have control over the suspect’s digital wallet and exchange accounts, investigators can directly transfer the assets to a cryptocurrency wallet account controlled by the public security organs. (Although there may be no explicit legal basis for this procedure, it is indeed practiced. We believe that even temporarily storing the assets in the personal wallet accounts of relevant personnel from the public security organs is more compliant than disposing of the virtual assets by selling them outright.) As for security concerns, the public security organs can use multi-signature wallets to prevent internal personnel from misappropriating the assets.

As can be seen from the relevant legal provisions initially listed in this article, prior to the conclusion of litigation proceedings, public security organs only have the authority to take freezing measures with respect to property involved in the case, "freezing is the rule, and preliminary disposal is the exception.”。

The primary duty of public security organs should be to investigate crimes, rather than to directly dispose of property involved in the case.The disposal of property involved in the case must be conducted within the legal framework. After a judgment becomes effective, it shall be disposed of and liquidated by the Enforcement Bureau of the people's court through judicial procedures. Let us examine the following two vivid examples to better understand this point.Only disposal methods that comply with proper procedures can safeguard the fairness and legality of criminal proceedings.

Case 1: Rent-Seeking by Public Security Investigators

Due to the absence of explicit legal guidelines, the judicial disposal of virtual currencies has long been in a state of unregulated growth in practice. Urgent compliance issues remain to be resolved regarding the determination of ownership, valuation, and methods of liquidation of virtual currencies. Nevertheless, countless companies assisting in investigations, disposal firms, and scalpers are eyeing this highly profitable opportunity (for example, in the notable PlusToken case, the largest case in the crypto circle, one disposal firm earned over RMB 1 billion from a single engagement). Consequently, there are many parties seeking to profit from this sector, and fraudsters are even more numerous.

If public security organs continue to dispose of assets based solely on a suspect’s written authorization, such judicial irregularities will give rise to further legal issues. In March 2024, the Chengdu Public Security Bureau issued the following police advisory, which noted that “criminals and intermediaries claim to have connections enabling them to obtain authorization from public security organs, or even forge signatures of public security organ officials,and fabricate fictitious entrustment contracts for the disposal of case-related virtual currenciesto defraud third-party companies or individuals into paying security deposits, ‘activity fees,’ and other properties. Furthermore, the Chengdu Public Security Bureau emphasized that ‘virtual currencies seized and detained by public security organs in criminal cases... shall ultimately be adjudicated and disposed of by the people’s courts in accordance with the law.’

                                                                                                                                              （Police Advisory: Beware of criminals engaging in illegal and criminal activities by claiming to act on behalf of public security organs in the disposal of virtual currencies.）

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