Although it is said that since the issuance of the "9.24 Notice" (Notice on Further Preventing and Dealing with the Risks of Speculation in Virtual Currency Trading) and the "Notice on Rectifying the 'Mining' Activities of Virtual Currency" in mainland China in 2021, the regulatory authorities have further tightened the supervision of investment and mining activities in virtual currency, it cannot be denied that there are still a large number of active investors in mainland China engaging in virtual currency mining activities and the underlying mining investment activities. Some institutions predict that currently there is still 20% of Bitcoin mining power in China (the authenticity is unknown, for reference only). (Extended reading: "2023 Bitcoin Mining In-Depth Report: Halving is Coming, Miners' Survival and Preparation")
This also explains why there are still "continuous" disputes and criminal cases related to currency in mainland China, even under strict regulation. Among them, a relatively representative type of case is the fundraising for virtual currency mining, and how should the initiator be evaluated legally after the final loss?
We have encountered similar consultations many times in practice, and some clients have even been investigated and some "victims" have filed criminal charges. This type of information constitutes the basis for this article: Does the initiator of fundraising for virtual currency mining constitute a criminal offense after the loss?
Before reaching a conclusion, we must clarify the following three issues:
01. Judgment of the Legality of Fundraising
In the field of virtual currency investment, most fundraising is conducted in the form of private placement. Therefore, before judging the legal nature of virtual currency investment and investment losses, Lawyer Liu reminds everyone to first judge the legality of private placement.
The legality of private placement needs to be judged from four aspects:
(1) Legality Judgment
For private placement, whether it is legal mainly depends on the "Interim Measures for the Supervision and Administration of Private Investment Funds" issued by the China Securities Regulatory Commission. As long as it complies with these "Measures," there should be no legal obstacles in terms of legality.
However, in reality, most fundraising activities are non-typical legal appearances formed among relatives and friends based on trust relationships (meaning that the law does not have clear, direct regulations, and such fundraising activities are not commonly seen in practice). To judge whether these diverse and colorful fundraising activities are legal, the core element is to determine whether the fundraising activities clearly violate national laws and regulations, as well as the prohibitive fund-raising behaviors explicitly stipulated in the field of financing management laws. As long as it does not violate the above provisions, it generally belongs to the free field where what is not prohibited by law is permitted.
In addition to meeting the requirements of legality, several other aspects need to be considered:
(2) Whether Public Fundraising is Involved
Currently, China has relatively high requirements and standards for public fundraising; in contrast, the threshold for private placement is not high, but once it is private placement, fundraising cannot be conducted publicly. If conducted publicly, it may result in administrative penalties for violating the State Council's "Regulations on the Prevention and Handling of Illegal Fundraising," and may even be suspected of committing fundraising-related crimes. Common ways of public promotion include through the media, the internet, promotional meetings, flyers, text messages, etc. In addition, even if there is no deceptive false advertising in public promotion, it may still be deemed illegal fundraising.
(3) Whether There are Promises of Principal and Interest Protection
Legitimate and compliant private placements cannot promise principal and interest protection. However, for the aforementioned "non-typical legal appearances" of private placements, or even "loan investment" activities among relatives and friends, it is not necessarily a violation of mandatory legal provisions when one party promises to return the principal and interest. To completely eliminate legal risks, Lawyer Liu suggests that regardless of whether it is private placement or fundraising activities with the appearance of private placement, fundraisers should not make any promises of principal and interest protection.
(4) Whether the Fundraising Targets are Specific
It is important to note that fundraising cannot be conducted publicly to the general public; the fundraising targets must be specific, limited to a limited and specific group of individuals, such as among relatives, friends, colleagues, or other legal organizations, institutions, or specific individuals.
02. Can the Raised Funds be Invested in Virtual Currency Mining?
After resolving the legality of fundraising, whether the raised funds can be invested in virtual currency mining depends on two situations:
The first situation is mining investment before September 3, 2021, which is generally considered valid; the second situation is mining investment after September 3, 2021, which is generally considered invalid.
In other words, before September 3, 2021, investing in virtual currency mining was an investment activity not explicitly prohibited by the state. Therefore, even if there were losses, the initiator should determine whether to bear legal responsibility based on the "Investment Agreement" or similar agreements or arrangements. If according to the investment agreement, the loss is considered a complete market risk, and if the initiator has provided sufficient risk warnings, it is difficult for the initiator to be held criminally responsible by judicial authorities.
If the investment activity occurred after September 3, 2021, because the relevant state departments issued the "Notice on Rectifying the 'Mining' Activities of Virtual Currency" on that day, in practice, the courts generally consider the virtual currency mining investment contract to be invalid due to violation of mandatory national regulations. The legal consequences of an invalid contract are: for unfulfilled contracts, termination of performance; for fulfilled contracts, based on the performance and nature of the contract, the parties may request restoration to the original state or take other remedial measures, and have the right to claim compensation for losses (based on the "Summary of the National Court Financial Trial Work Conference (Draft)" in 2023).
03. Does the initiator of fundraising for mining become guilty of fraud after the loss?
If there is a loss in the investment in virtual currency mining, can ordinary investors report to the public security authorities as victims? If the public security authorities accept the case, will they file charges of suspected fraud?
Lawyer Liu believes that for investment in virtual currency mining activities before September 3, 2021, even if there are losses, investors should generally resolve disputes through civil legal means. Of course, if the initiator uses investment in virtual currency mining to fraudulently obtain others' property, there is indeed a possibility of committing fraud; for investment in virtual currency mining activities after September 3, 2021, due to the limited effectiveness of civil remedies, it is not ruled out that "victims" may tend to choose criminal charges. Additionally, because virtual currency mining was explicitly prohibited by the national regulatory authorities after September 3, 2021, the fundraising activities of the initiators of virtual currency mining investments have a higher legal risk and are more likely to attract the attention of public security authorities, leading to the initiators facing criminal charges beyond ordinary business risks.
From the perspective of legal defense, whether the initiator of fundraising constitutes fraud or other crimes should be strictly judged according to legal provisions.
Taking fraud as an example, it is necessary to determine whether the initiator of the investment has the subjective intention of illegal possession; whether there are objective behaviors of fabricating facts or concealing the truth; whether the victim has fallen into a mistaken belief and disposed of property based on the mistaken belief, and ultimately suffered financial losses. Only if the above conditions are strictly met can the initiator of the investment be considered to have committed fraud. In addition, even if there is a dispute, it should be handled as a civil and commercial dispute.
However, in practice, the public security authorities' approach to handling cases may not strictly follow the defense strategy of lawyers, and may even be completely opposite. It cannot be denied that in the current process of handling cases, most public security authorities still have a clear preconceived mindset of filing charges. Once a criminal case is filed, the public security authorities are less likely to believe the suspect's defense. If the suspect does not have objective evidence to prove their innocence, they may succumb to the "strong offensive" of the public security authorities.
04. Lawyer Man Kun's Suggestions
Even in present-day China, blockchain, web3.0, and other technologies are still encouraged and supported by the state, and tokens are a very important component of blockchain technology, with virtual currency being the most common form of tokens, and mining being an indispensable part of generating virtual currency. Therefore, even though mainland China tightly regulates and prohibits virtual currency, mining activities are still difficult to eliminate, which inevitably involves mining investment. In the current situation where the national regulatory authorities prohibit virtual currency mining, although investing in such projects is not protected by law, as long as the initiator does not have the intention and behavior of fraud, it should not constitute fraud.
As for the "victims" wanting to seek criminal means to protect their rights, even if the "victims" are blameless, if the public security authorities intervene in a situation that clearly does not constitute a crime, it is obviously suspected of "intervening in civil disputes through criminal means," which for the public security authorities, ranges from violations to crimes of dereliction of duty. Therefore, even in the legal system, we must adhere to the principle of "render unto Caesar the things that are Caesar's, and unto God the things that are God's," and let civil matters be handled as civil matters, and criminal matters be handled as criminal matters.
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