In mainland China, trading virtual currency contracts on behalf of clients itself falls within a prohibited business scope. After a liquidation, the real question is not 'who compensates for the losses,' but what role the team actually plays in the chain of funds, accounts and permissions—this determines whether it is a civil compensation matter, a contract invalidity matter, or a direct step onto the red line of criminal liability.

This is not an ordinary investment-loss dispute

When clients come to ask, their questions are usually plain: we traded contracts on behalf of clients, a liquidation occurred, the client is pursuing liability, and what responsibility do we and the client each bear? Many teams' first reaction is to treat it as an ordinary entrusted wealth-management loss dispute, thinking 'the client voluntarily entrusted us and voluntarily bore the risk, so they should not come after me for the loss.' This approach is very likely unworkable in mainland China, because in mainland China the issue is not that money was lost, but that trading virtual currency contracts on behalf of clients itself falls within an expressly prohibited business scope.

First break the issue into three layers, otherwise the discussion becomes increasingly muddled.

The first layer is contract validity: the entrustment agreement, entrusted wealth-management agreement and profit-sharing agreement signed between the team and the client are very likely to be held invalid in mainland China.

The second layer is loss allocation: contract invalidity does not mean the team walks away unscathed; where the client's money has been lost, who was at fault and how great the fault was must still be allocated.

The third layer is criminal risk: whether the team promised principal protection, whether it fabricated transactions, whether it pooled funds from an unspecified number of people, and whether it knew the funds came from improper sources—these facts can push the matter from 'paying money' to 'going to prison.'

The judgment standards for these three layers are completely different and cannot be conflated. Contract validity turns on whether the subject matter is lawful and whether it violates public order and good morals; loss allocation turns on the fault of both parties and the burden of proof; criminal risk turns on whether the specific elements of conduct are complete. When pursuing liability, the client focuses on 'where did my money go,' while the team's real defensive focus should be 'what role do I play in this chain and what actions did I take.' The two are often not the same point.

Therefore, this article has only one main thread: first look at roles and funds, then look at contracts and evidence, and only finally discuss allocation of liability. Skipping roles and directly discussing how much to pay is like building a house on sand.

How is liability allocated?

The first step in determining liability is not to review the contract, but to answer four questions: who signed with the client, who collected money from the client, who actually controlled the accounts and private keys, and who bore the trading risk.

The answers to these four questions basically determine what role the team plays in legal terms. The same label of 'technical team' may, under these four questions, fall in completely different positions.

The first is a pure technology tool provider: the team only provides software, scripts, market data interfaces or strategy backtesting tools, does not touch client funds, does not hold account permissions, does not participate in order-placement decisions, and charges a fixed software service fee. This role is the furthest from funds and the financial chain, but it is not absolutely safe either—if the tool itself is designed to circumvent regulation and specifically serves prohibited trading activities, the provider may still be held liable for providing technical services.

The second is an investment adviser: the team provides strategy recommendations, trade calls and signals, but the client places the orders, and the account and funds always remain in the client's hands. The risk point of this role is that if the recommendations carry explicit return guarantees, or the team is in fact making decisions on the client's behalf, the boundary slides toward entrusted trading.

The third is an entrusted trading party: the client hands over the account, private keys or trading permissions to the team, and the team actually places orders, adjusts positions and adds leverage. This is the position into which this consultation is most likely to fall. Once the team holds account control, in the eyes of the regulator it is no longer "just taking a look" but is actually engaging in virtual currency-related business activities.

The fourth is a fund-pooling party: the team not only trades but also raises funds from multiple clients, deposits them centrally and distributes returns by share. This layer is the most dangerous, because it touches both fund pooling and an unspecified number of persons, and easily moves toward illegal fundraising or illegal absorption of public deposits.

This is where misjudgment is most likely: the team believes it is providing technical services, while in fact it has already entered the financial chain through quotation, matching, placing orders on behalf of clients or fund arrangements. The test is not what the team calls itself, but how the money flows, who holds the permissions and who bears the risk. Until these four questions are clearly answered, any liability analysis is empty talk.

If the contract is most likely invalid, what should be done?

The domestic regulatory position on virtual currency-related business activities is prohibitive. Virtual currency does not have the same legal status as legal tender, and engaging in virtual currency-related business activities within the territory constitutes illegal financial activity and is strictly prohibited without exception.

The forms expressly listed by the regulator include providing information intermediation and pricing services for virtual currency trading, and trading in virtual currency-related financial products. Operating contracts on behalf of clients is in essence conducting virtual currency-related financial product trading for clients, and it is difficult to interpret it as an ordinary civil entrustment unrelated to regulation.

A more direct rule is: where any unit or individual invests in virtual currency and related financial products in violation of public order and good morals, the relevant civil juristic act is invalid, and the resulting losses are borne by the investor itself. This sentence cuts both ways for clients and teams. For clients, it means "if I entrusted someone to trade coins and lost money, the court will not necessarily support my claim to recover it in full"; for teams, it means "the contract is invalid, and the management fees and profit shares I collected may have to be returned."

But "losses borne by the investor itself" is not a safe-conduct pass for the team. After the contract is invalid, the law still has to deal with two matters: first, whether property already obtained should be returned; second, whether the parties were at fault for the losses and how great the fault was. If the team was clearly at fault in the process—for example, adding leverage without authorization, operating beyond the scope of the entrustment, concealing the true trading situation, or falsely promising returns—the client may still claim that the team bear compensation liability within the scope of its fault.

Proof is the decisive factor at this layer. The client must prove the amount of the loss, prove that the funds were indeed handed over to the team, and prove that the team committed faulty operations; all of this requires chat records, transfer records, account screenshots and the entrustment agreement for support. The team must prove that it fulfilled its risk-disclosure obligations, that its operations did not exceed the scope of authorization, and that the losses mainly arose from market fluctuations rather than its own mistakes; this likewise requires evidence. Whoever has the more complete chain of materials is in a stronger position in negotiation and litigation.

There is a judicial attitude that is easily overlooked: courts take a negative attitude toward rulings that indirectly support redemption transactions between virtual currency and legal tender. A guiding case of the Supreme People's Court expressly held that an arbitral award ordering compensation in US dollars equivalent to Bitcoin and then converted into RMB constitutes indirect support for redemption transactions between Bitcoin and legal tender, violates the public interest, and should be set aside. This means that even if a client obtains some kind of award for "compensation calculated by coin price," it may still be overturned at the enforcement stage. The path for clients to "wash" losses in the coin circle into RMB claims through judicial channels is not smooth.

From Civil Compensation to Criminal Red Lines

The question many teams worry about most is: will this turn from a civil dispute into a criminal case? The answer is that several specific facts stand in between, not a feeling. Only by clearly explaining the triggering conditions for these categories of offenses can a team determine which side it stands on.

The first category is the illegal business operations direction. Regulators have made clear that business activities related to virtual currency are suspected of illegal financial activities such as illegally operating securities and futures businesses. If a team's conduct is found to constitute operating a prohibited financial business within the territory and reaches the corresponding circumstances, it may enter this direction. The key to the determination is: whether the team is continuously providing such services for consideration to others, rather than occasionally helping friends.

The second category is the fraud direction. The core of this category is not "the money was lost," but "how the money was lost." If the team never actually placed orders at all, but merely forged trading records and fabricated profit screenshots, and transferred the client's money away or misappropriated it, that is fabricating facts and concealing the truth, and the nature is entirely different. Conversely, if the trades actually occurred and the losses came from market fluctuations, then even if the team was at fault, it is closer to civil compensation than to fraud. The cause of the liquidation is crucial here: market fluctuations, unauthorized use of leverage, operational errors, and system failures carry very different legal consequences.

The third category is the illegal absorption of public deposits direction. The triggering elements are raising funds from an unspecified majority of people and promising repayment of principal and interest or the giving of returns. If the team serves only one client and operates with the client's own money, the risk in this category is relatively low; if the team pools funds from multiple clients, operates them uniformly, and distributes returns proportionally, the risk rises markedly. Whether it is "unspecified," whether there was "public promotion," and whether there was a "promise of returns" are the three handles for the determination.

The fourth category is the money laundering direction. The triggering condition for this category is knowingly or having reason to know that the funds come from proceeds of illegal or criminal activity, yet still helping to transfer, exchange, or conceal them. If the client's money itself comes from improper sources and the team knows or should know, the team may be drawn in. Hong Kong Customs once cracked a case suspected of using virtual currency to launder black money, in which the persons involved were arrested on the charge of dealing with property representing the proceeds of an indictable offense; this is a law enforcement case within the Hong Kong jurisdiction and cannot be directly applied to the mainland, but it points to a common logic: the anonymity and cross-border nature of virtual currency will cause the question of the source of funds to be scrutinized in an amplified manner.

Looking at these categories together, one common point emerges: what truly pushes a team toward the criminal direction is often not the outcome of "liquidation," but the actions the team took before the liquidation—promising principal protection, fabricating trades, pooling funds, and knowing that funds were illegal. The liquidation is merely the fuse that exposes these actions.

When this situation arises, what should be done?

For the team, the first thing is to stop new operations and external commitments. Do not continue placing orders on behalf of clients, do not continue promising clients or others that "the losses can be earned back," and do not sign any documents containing principal protection, guaranteed returns, or backstop language. These actions will be used as adverse evidence after the fact.

The second thing is to preserve materials. The materials that need to be organized include: the provisions in the engagement agreement or chat records regarding the scope of engagement, distribution of returns, and allocation of risk; records of the granting of account permissions, such as who obtained the private key, who had order-placing authority, and when the authority was given; fund flows, including every entry of client deposits, team fees, profit sharing, and returns; risk disclosure and communication records, such as whether the liquidation risk was ever flagged and whether the leverage multiple was ever disclosed; and trading records, used to prove whether the trades actually occurred and whether the losses came from market fluctuations.

The third thing is to assess one's own role positioning. Use the four questions above—who signed the contract, who received the money, who controlled the account, and who bore the risk—to make an honest positioning of oneself. If the team actually held control of the account and collected a share of the profits, then do not continue to explain externally that "we only provide technical services"; that statement cannot stand in the face of evidence and will instead damage credibility.

For the client, what needs to be sorted out is the fund path and the evidence of engagement: from which account the money was paid, into which account it went, whether there is a contract or chat records proving the engagement relationship, how the loss amount is calculated, and whether the team ever promised returns or principal protection. The client can consider two paths: first, a civil claim, demanding return of the funds or compensation for losses; second, reporting to the public security authorities, asserting that the team is suspected of a crime. The pros and cons of the two paths differ—the civil path has a long cycle and high evidentiary requirements, and may be discounted because the contract is invalid; once the reporting path is docketed, the investigation is vigorous, but the fact that the client himself participated in prohibited trading activities may also affect his claims.

There are several matters this article cannot resolve, and these must be made clear. The specific amount of compensation, the specific offence charged, and how to assess situations involving offshore contracting or offshore accounts all require further verification against the facts of the individual case and the currently effective version of the law. If the contracting entity, the account, or the trading platform is located offshore, the analytical path will be materially different: first, it is necessary to determine which jurisdiction's law applies; second, it is necessary to determine the position of domestic regulators on offshore entities providing services to domestic parties. Neither step can be completed by simply applying mainland conclusions.

Finally, return to the main thread: first examine roles and funds, then examine contracts and evidence, and only then discuss allocation of liability. What the team truly needs to defend is not the outcome that "the client lost money," but every action the team itself took within the chain of funds and authority. Clarifying these actions is more useful than arguing over "whether compensation should be paid."

Verification Checklist

  • It has been confirmed that the main thread of the article is "first examine roles and funds, then examine contracts and evidence, and finally discuss allocation of liability," and the full text is developed around this main thread.
  • The three levels of issues—contract validity, loss sharing, and criminal risk—have been distinguished and not conflated.
  • The four questions—"who signed the contract, who received the money, who controlled the account, and who bore the risk"—have been used as a tool for determining roles.
  • It has been explained that invalidity of a contract does not mean the team is exempt from liability, and it has been pointed out that proof is the decisive factor.
  • The triggering elements of the four directions—illegal business operations, fraud, illegal absorption of public deposits, and money laundering—have been explained separately.
  • The impact of the causes of liquidation (market fluctuations, unauthorized leverage, operational errors, and system failures) on characterization has been distinguished.
  • Executable action lists for both the team side and the client side have been provided.
  • The issues this article cannot resolve have been made clear: the specific amount, the specific offence, and conclusions on offshore jurisdictions require case-by-case verification.
  • Statements have been made separately by jurisdiction: mainland regulatory and judicial conclusions are the primary focus, and the Hong Kong case is provided only as background reference for extraterritorial enforcement.
  • No customer identity information, contact details, wallet addresses, account information, or identifiable project materials were included.
  • No guarantee was made regarding case filing, unfreezing, recovery, a favorable judgment, or any outcome.
  • No regulatory document numbers, case numbers, adjudication outcomes, data, or links were fabricated.

Reference materials

  1. Notice of the People's Bank of China, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Public Security, the State Administration for Market Regulation, the National Financial Regulatory Administration, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange on Further Preventing and Addressing Risks Associated with Virtual Currencies and Related Matters_China Securities Regulatory Commission｜People's Bank of China, National Development and Reform Commission, Ministry of Industry and Information Technology, Ministry of Public Security, State Administration for Market Regulation, National Financial Regulatory Administration, China Securities Regulatory Commission, State Administration of Foreign Exchange (published on the official website of the China Securities Regulatory Commission)｜2026-02-06｜Mainland China｜current｜https://www.csrc.gov.cn/csrc/c100028/c7614318/content.shtml｜Verified on 2026-09-16T16:12:03.246Z
  2. Responses of Relevant Persons in Charge of the People's Bank of China and the China Securities Regulatory Commission to Questions from the Press on the Notice on Further Preventing and Addressing Risks Associated with Virtual Currencies and Related Matters_China Securities Regulatory Commission｜People's Bank of China, China Securities Regulatory Commission (published on the official website of the China Securities Regulatory Commission)｜2026-02-06｜Mainland China｜official_disclosure｜https://www.csrc.gov.cn/csrc/c100028/c7614320/content.shtml｜Verified on 2026-09-16T16:12:03.259Z