【Preface】If we were to argue whether the operation of an exchange under the guise of a virtual currency exchange is a model of a fund pool, or directly embezzling the assets entrusted by exchange users, or manipulating the exchange to cause targeted liquidation, and other unconventional and irregular modes of operation, whether such exchanges within China would constitute a criminal offense. Lawyer Liu believes that it definitely constitutes a criminal offense, and there is no defense. However, the scenario I want to discuss today is: a virtual currency exchange registered overseas, compliantly obtaining a financial regulatory license in the overseas jurisdiction, with servers used by the exchange located overseas, and explicitly refusing registration access for Chinese mainland users using their IP addresses.
Of course, for such legitimate exchanges, there are generally only three factors related to mainland Chinese users: first, the management: the actual controller or senior management of the exchange is Chinese; second, users: there are Chinese users on the exchange, who bypass the restrictions on Chinese mainland users using VPNs to "climb over the wall," or "tamper with mainland IP addresses," or "purchase overseas pseudonymous identities"; third, place of operation: the exchange's place of operation is entirely or partially within China. These three factors have led to the impression that even "foreign-funded overseas exchanges" can fall within the jurisdiction of Chinese law enforcement agencies.
In the following text, Lawyer Liu will discuss the application of Chinese law to this type of exchange model in China based on numerous related cases in judicial practice and the criminal offenses involving the so-called "legitimate" virtual currency exchanges within China.
I. Which public security organs have jurisdiction over exchange cases?
(I) Legal basis for jurisdiction over criminal cases
First, Article 19 of the Criminal Procedure Law:
"The investigation of criminal cases shall be conducted by public security organs, except as otherwise provided by law." The phrase "except as otherwise provided by law" refers to cases that, although classified as criminal cases in substantive law, do not require investigation as stipulated in procedural law, and the people's court can directly accept such criminal cases. Private prosecution cases fall into this category. It also refers to criminal cases that should be investigated and filed by other organs or departments as stipulated by law.
Second, Article 25 of the Criminal Procedure Law:
Criminal cases are under the jurisdiction of the people's court at the place where the crime was committed. If it is more appropriate for the people's court at the defendant's domicile to adjudicate, it may be under the jurisdiction of the people's court at the defendant's domicile.
Third, Article 2 of the Interpretation of the Supreme People's Court on the Application of the Criminal Procedure Law of the People's Republic of China:
The place of the crime includes the place where the criminal act was committed and the place where the criminal result occurred. For crimes targeted at or mainly utilizing computer networks, the place of the crime includes the location of the server used for the commission of the criminal act, the location of the network service provider, the location of the information network system and its administrator that was infringed upon, the location of the defendant and the victim's information network system used during the crime, and the location where the victim was infringed upon and where the victim's property suffered losses.
Fourth, Article 3 of the Interpretation of the Supreme People's Court on the Application of the Criminal Procedure Law of the People's Republic of China:
The defendant's domicile is considered their place of residence. If the habitual residence is different from the domicile, the habitual residence is considered the place of residence. The habitual residence is the place where the defendant has continuously resided for more than one year before being prosecuted, except for hospitalization. The registered place of residence of a defendant unit is considered its place of residence. If the main place of business or the main office location is different from the registered place of residence, the main place of business or the main office location is considered the place of residence.
(II) Determining which public security organs have jurisdiction based on legal basis
The buying and selling activities of exchanges occur on the internet. If there is suspicion of criminal offenses, the jurisdiction should be determined based on the principles of territorial jurisdiction, following the "primary jurisdiction of the public security organ at the place of the crime and the supplementary jurisdiction of the public security organ at the defendant's domicile," as stipulated in Article 16 and Article 17 of the Procedures for Handling Criminal Cases by Public Security Organs of the Ministry of Public Security, and the opinions on the application of criminal procedural procedures for handling network crime cases by the Supreme People's Court, the Supreme People's Procuratorate, and the Ministry of Public Security.
From the legal basis, it can be seen that:
First, the public security organ at the place of the crime has jurisdiction over the criminal activities of virtual currency exchanges.
Because: In the view of the investigating unit, virtual currency exchanges fall under "crimes committed using computer networks." Therefore, the location of the server used for the commission of the criminal act, the location of the network service provider, the location of the information network system and its administrator that was infringed upon, the location of the defendant and the victim's information network system used during the crime, and the location where the victim was infringed upon and where the victim's property suffered losses all have jurisdiction. This means that the following areas may obtain jurisdiction when handling virtual currency exchange cases:
Location of the server: The servers of virtual currency exchanges are generally provided by Amazon and are located overseas, so they are not considered. However, if "Alibaba Cloud" or "Huawei Cloud" is used, the public security organs in Hangzhou or Shenzhen may obtain jurisdiction because it is the location of the server. It is worth noting that some internet giants, due to considerations of shipping costs and labor, do not necessarily host all servers at their headquarters and may make other choices in terms of server location. For example, the Guian Huawei Cloud Data Center is the largest data center of Huawei Cloud globally, with a total land area of 1521 acres and a construction scale of over 1 million servers. It is also an important node for Huawei Cloud's business in the southwestern region. So, if a legal case extends from this location's server, would the public security organ in Guian also have jurisdiction? From the current judicial practice, Lawyer Liu believes it is worth discussing, but theoretically, Guian would have jurisdiction. Therefore, the jurisdiction of public security organs over the criminal activities of virtual currency exchanges has been expanded.
Location of the network service provider: The classification of network service providers mainly includes the following 5 types: Internet Service Providers (ISP), Network Service Providers (NSP), Network Application Service Providers (ASP), Infrastructure as a Service (IaaS), and Software as a Service (SaaS).
However, to apply the location of the network service provider, it must correspond to the "main business scope of the exchange." It must be the location of the network service provider related to the main business of the exchange. Therefore, if a domestic institution is only a cooperative institution of the exchange, or operates a non-main business of the exchange, such as marketing and promotion, it cannot simply apply the location of the network service provider. If the main business of the exchange is in the domestic jurisdiction, or if the main operating team and research and development team of the exchange are in the domestic jurisdiction, then the location of the network service provider is generally under the jurisdiction of the public security organ in the jurisdiction of the exchange.
Location of the information network system and its administrator that was infringed upon. Since virtual currency exchanges do not have a network infringement model, this provision does not apply to the situation of the exchange.
Location of the information network system used by the defendant and the victim during the crime, as well as the location where the victim was infringed upon and where the victim's property suffered losses.
Using this provision mainly refers to the existence of "victims" in the process of using the exchange. So, does the so-called "compliant virtual currency exchange" have victims? Some investigating units have pointed out that users who invest in virtual currency on the exchange are considered victims as long as they incur losses. However, Lawyer Liu believes this viewpoint is problematic because even if the model of the virtual currency exchange may constitute a criminal offense in China, users who incur normal investment losses on the exchange cannot be considered victims of the criminal offense committed by the exchange. This is because even if the virtual currency exchange constitutes a criminal offense, the infringement of legal interests and the resulting losses for users are not related. Therefore, as long as there are users incurring normal investment losses on the exchange, invoking the jurisdiction of the public security organ based on the "location of the victim" is a "relevance error," which has been widely criticized in practice. Lawyer Liu will provide specific arguments on this issue in the following text.
- Location of the defendant's domicile. To use this provision for jurisdiction, the investigating unit needs to provide reasons, according to Article 25 of the Criminal Procedure Law, as to why "it is more appropriate for the people's court at the defendant's domicile to adjudicate"?
Lawyer Liu believes that the jurisdiction of the people's court at the defendant's domicile can only serve as an auxiliary principle for determining jurisdiction. The so-called domicile of the defendant refers to the defendant's registered domicile or place of residence. However, what constitutes "more appropriate"? This generally refers to situations where the place of the crime is difficult to determine, or where there is significant public resentment at the place of residence, requiring the defendant to be returned for trial, and so on. Therefore, when the case does not meet these special conditions, it cannot simply and arbitrarily place the relevant case under the jurisdiction of the defendant's domicile without reason. Instead, a comprehensive analysis based on the specific circumstances of the case should be conducted to determine jurisdiction.
II. If you lose money buying coins on the exchange, does the local public security organ where the victim is located have jurisdiction?
To determine whether the public security organ at the location of the victim has jurisdiction, it is necessary to first consider the specific charges involved. Taking the suspected criminal offenses of the exchange, the most likely charges of "illegal use of information networks" and "organizing and leading pyramid selling activities" as examples:
First, for the charge of "illegal use of information networks," according to Article 287 of the Criminal Law, this charge regulates three types of statutory acts using information networks and does not involve victims or property losses. The public security organ with jurisdiction should be limited to the "location of the server, network access location, location of the website creator, and location of the administrator of the website" related to the exchange.
Second, for the charge of "organizing and leading pyramid selling activities," the jurisdiction can consider the "location of the information network system used by the victim," "location where the victim was infringed upon," and "location where the victim's property suffered losses." However, the premise is that the indictment specifies that there are individuals participating in pyramid selling activities in a certain location and that property losses have occurred. If there is no evidence or material indicating that users at the location of the victim have reported or assisted in the investigation, and there is no evidence or material indicating an actual connection between a certain location and the case, then that location does not have jurisdiction over the "organizing and leading pyramid selling activities" case.
In addition, for the location of the victim to be used as the jurisdiction, that location should have a strong connection to the case. Specifically,
First, for users who have suffered losses from investing in the exchange, law enforcement agencies should investigate whether the exchange has deceptive factors related to the user and the investment, rather than intervening in all actions of the exchange based solely on this. Here's a simple and easy-to-understand example: If a consumer reports to the local food safety department that a certain restaurant has food safety issues, the food safety department can only intervene in the restaurant based on its own authority regarding food safety issues, and cannot investigate and deal with unrelated issues such as fire safety. Otherwise, it would inevitably lead to the abuse and mismatch of power.
Second, due to the cross-regional and mass characteristics of internet crime cases, and the fact that pyramid selling crime cases typically involve significant confiscation of proceeds, when determining jurisdiction, factors favorable for clarifying the facts of the case, protecting the legitimate rights and interests of the victims, ensuring fair handling of the case, and ensuring a balanced and unified outcome should be considered, and appropriate public security organs should have jurisdiction. For major cases with significant impact nationwide and directly involving the property interests of tens of thousands of people, if the case is investigated by grassroots public security organs, directly involving the transfer of the private property of tens of thousands of people to a certain local finance department, this would obviously be unbalanced. In other words, criminal cases involving tens of thousands of users and significant property interests across the country should not be under the jurisdiction of a few users with weak connections. Instead, the jurisdiction should be determined based on the actual location of the main activities, the location of the main population, the actual impact of the harmful results, or the main affected area.
In summary, when determining whether the local public security organ where the victim is located has jurisdiction over users who have suffered losses from investing in the exchange, specific charges and case circumstances should be considered, and the relevant factors should be fully taken into account to determine jurisdiction. If there is no corresponding legal and factual basis, initiating an investigation would be a clear violation of the Criminal Procedure Law and should be corrected.
III. Can designated jurisdiction be applied to virtual currency exchange cases?
According to Article 27 of the Criminal Procedure Law and Articles 18 to 21 of the 2021 "Interpretation of the Supreme People's Court on the Criminal Procedure Law," designated jurisdiction only applies to three situations: first, cases with unclear jurisdiction; second, cases more suitable for trial by another court; third, cases where a lower court transfers a case it has accepted to another court. According to Article 22 of the "Procedures for Handling Criminal Cases by Public Security Organs," for criminal cases with unclear or disputed jurisdiction, the relevant public security organs can negotiate, and if no agreement is reached, the jurisdiction can be designated by the common superior public security organ.
Lawyer Liu believes that cases involving virtual currency exchanges are similar to complex and difficult cases involving securities and futures. In 2021, the General Office of the CPC Central Committee and the General Office of the State Council issued the "Opinions on Strictly Cracking Down on Illegal Activities in the Securities Market," which stipulates that "the establishment of securities crime investigation and trial bases should be in certain districts where securities exchanges, futures exchanges, and other relevant institutions are located. Cases should be concentrated for investigation and trial at the securities crime investigation and trial bases. Local governments should regulate various regional trading venues, crack down on various illegal securities and futures activities in accordance with the law, and carry out financial risk prevention and control work in the region to maintain social stability."
Therefore, for cases involving virtual currency exchanges, the application of designated jurisdiction should comply with Articles 21 and 22 of the "Criminal Procedure Rules of the People's Procuratorate." If it is not a case with unclear jurisdiction and no court has accepted the case, and it clearly does not meet the specific circumstances for designated jurisdiction, it cannot be arbitrarily designated for early jurisdiction, and should be reported to the Supreme People's Procuratorate.
IV. Which law enforcement agency should have jurisdiction over cases where virtual currency exchanges constitute criminal offenses?
Regarding cases where virtual currency exchanges constitute criminal offenses, the first consideration is the location of the main business of the exchange. Since most virtual currency exchanges operate in a decentralized manner, the determination of the main business should primarily consider the location of the actual controller and senior management of the exchange, which often represents the location of the company's business. It also includes the location of the exchange's technical, operational, and research and development teams. If a specific operating location is not the main business of the exchange, even if it has a specific business location, it should not be considered the location of the exchange, and should not be included in the category of "location of the network service provider."
Secondly, consideration should be given to whether the server used for the commission of the criminal act is located within China. The determination of the server's location should primarily be based on the physical location. If, based on a comprehensive analysis of specific case circumstances, it is indeed more appropriate for the jurisdiction to be based on the defendant's domicile due to the difficulty in determining the place of the crime, this can be chosen. In addition, when determining whether the local public security organ where the victim is located has jurisdiction over users who have suffered losses from investing in the exchange, the specific charges and case circumstances should be fully considered to determine jurisdiction.
Finally, for cases involving virtual currency exchanges, the application of designated jurisdiction should comply with Articles 21 and 22 of the "Criminal Procedure Rules of the People's Procuratorate." If it is not a case with unclear jurisdiction and no court has accepted the case, and it clearly does not meet the specific circumstances for designated jurisdiction, it cannot be arbitrarily designated for early jurisdiction.
V. Lawyer's Remarks
We believe that law enforcement agencies should adopt a comprehensive and cautious approach when handling cases involving virtual currency exchanges, and should only initiate cases after conducting a thorough analysis and assessment of the case. Otherwise, it would not only lead to the waste of judicial resources but also contradict the essence of criminal punishment, which is education rather than mere punishment. To avoid legal risks related to virtual currency exchanges, it is necessary to proactively ensure compliance, including but not limited to: refusing registration access for Chinese mainland users, using servers located overseas, and conducting an orderly withdrawal of domestic platform users. When necessary, professional lawyers can be hired to design compliance solutions based on specific operational circumstances, thereby avoiding the risk of criminal offenses.
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