Nothing has ever made the law so entangled as Bitcoin.

Written by: Liu Yang

On November 27, 2020, a criminal judgment was leaked online, igniting not only the cryptocurrency community but also drawing significant attention from many traditional legal professionals, and even catching the eye of those outside the legal industry. Yes, it was the PlusToken case, possibly one of the largest pyramid scheme cases to date.

Just how big is it? The second-instance criminal ruling of the PlusToken case shows that "the PlusToken platform collected a total of 314,211 Bitcoins, 9,174,201 Ethereum, 928,280,240 Ripple, 117,450 Bitcoin Cash, 96,023 Dash, 11,060,162,640 Dogecoin, 1,847,674 Litecoin, and 51,363,309 EOS." "According to the price recognition center of the Price Bureau of Yancheng City, based on the lowest price from May 1, 2018, to June 27, 2019, the total value of these eight cryptocurrencies is equivalent to 148××××8037.50 RMB." The "××××" makes the case value quite elusive.

Based on the market value at the time of writing, the Bitcoin involved in the case was worth 37 billion USD, and the combined value of Dogecoin and Ripple was nearly 5 billion USD (and this was not even at the peak market value).

Back to the main topic, the second-instance criminal ruling of the PlusToken case mentions: "The issue of disposing of the confiscated property. It was found that Chen Bo applied to the Yancheng Public Security Bureau to authorize Beijing Zhifan Technology Co., Ltd. to legally sell the digital currency seized by the public security organs, with all funds being treated as restitution." This is the core point that attracted widespread attention; at that time, people in the cryptocurrency community were worried whether the massive amount of virtual currency would "crash" the market, legal professionals were concerned about the legality of such disposal, and those outside the legal industry sensed a chance to get rich, bringing the issue of disposing of the involved virtual currency into the public eye for the first time.

Since I have been engaged in the defense of criminal cases involving virtual currencies, I had encountered the disposal of involved virtual currencies even before the PlusToken case. At that time, there were no fixed rules for disposing of involved virtual currencies. Some law enforcement units allowed suspects to sell the currencies themselves on trading platforms, while others had the suspects' family members sell the currencies on their behalf, and some allowed suspects to entrust third-party companies to liquidate the assets. After the PlusToken case emerged, entrusting third-party companies for disposal became mainstream. Regardless of the method, the voluntariness of the suspects was highly questionable.

Let’s tentatively call this stage the Third-Party Company Disposal 1.0 stage. In the 1.0 stage, the method of disposal by third-party companies was to find large OTC traders, who would absorb the virtual currencies and then find buyers in the market, with the OTC traders earning the exchange difference, while the third-party companies earned service fees.

The service fees of third-party companies were earned like this: for example, if the agreed disposal service fee was 15%, and the third-party company received 100 units of involved virtual currency from the judicial authority, after dealing with the OTC trader, they only needed to return 85 units to the judicial authority. This means that the third-party company could realize profits in real-time during the disposal process, and the profits were substantial. As for why the service fees were so high, the third-party companies explained it as due to price fluctuations, transaction wear and tear, etc.

Whether it was the suspects themselves, their families, or third-party companies finding OTC traders for disposal, was there any legal basis for this? It cannot be said that there was none. On September 4, 2017, the central bank and seven other departments issued the "Announcement on Preventing Risks of Token Issuance and Financing," which stated in the third paragraph that the management of token financing trading platforms should be strengthened. Specifically, from the date of this announcement, any so-called token financing trading platform was prohibited from engaging in the exchange of legal currency and tokens, "virtual currencies," and from buying or selling tokens or "virtual currencies" as a central counterparty, and from providing pricing, information intermediary, and other services for tokens or "virtual currencies."

Upon closer inspection, the 94 "Announcement" regulated token financing trading platforms, not individuals, so ultimately having OTC traders liquidate was not a major issue.

However, it was not without problems. Since the disposal of involved virtual currencies was still a niche business with excessive profits, it also gave rise to some illegal issues, such as corruption, law enforcement personnel embezzling virtual currencies, third-party companies losing all the seized virtual currencies in the market, and OTC traders deliberately laundering money into the involved special accounts (after all, special accounts are not afraid of being sealed or frozen). Many OTC traders were also targeted by law enforcement in other jurisdictions for involvement in money laundering, etc. In short, it was quite lively.

In 2021, as law enforcement intensified its crackdown on the cryptocurrency sector, various disposal companies sprang up like mushrooms after rain. I once described it in an article as:

There are more scythes than leeks.

In September 2021, a significant event changed the landscape of disposing of involved virtual currencies. On September 15, the central bank and ten departments issued the "Notice on Further Preventing and Disposing of Risks from Virtual Currency Trading Speculation," known as the "924 Notice." It stated that activities related to virtual currencies are considered illegal financial activities. Engaging in the exchange of legal currency for virtual currencies, exchanges between virtual currencies, buying and selling virtual currencies as a central counterparty, providing information intermediary and pricing services for virtual currency trading, token issuance financing, and virtual currency derivatives trading are all strictly prohibited and must be resolutely banned by law.

Compared to the 94 "Announcement," the "subject" prohibiting the aforementioned behaviors was removed; the 94 "Announcement" regulated token financing trading platforms, while the 924 "Notice" did not specify a subject, regulating "everything." Companies cannot do it, platforms cannot do it, and individuals cannot do it.

The previous method of organizing a group of OTC traders for liquidation by third-party companies was no longer feasible.

Since it was not feasible domestically, the business was moved abroad, giving rise to the Third-Party Company Disposal 2.0 stage. In the 2.0 stage, all disposal companies' PPT presentations invariably highlighted "overseas disposal" as their core selling point, but is it really overseas disposal? Not necessarily.

In reality, the vast majority of virtual currency disposals during this period were still completed through domestic matching; the money entering the judicial authority's account came from overseas, but this money is not the same as that money. It needs to be explained that the money exchanged back did not require a one-to-one correspondence with the money from virtual currency disposal, meaning it was impossible to verify whether the money returned was from the virtual currencies disposed of overseas.

I say this based on evidence: first, there were several individuals in a southern province who were investigated by law enforcement in other jurisdictions for "illegal disposal"; second, some disposal companies consulted me on how to legally dispose of virtual currencies and frankly stated, "After those people were arrested, all disposal activities came to a halt"; third, whether it was overseas disposal, judicial authorities only recognized the exchange settlement slips. And those few individuals were the ones who could obtain the exchange settlement slips.

In the 2.0 stage of third-party company disposal, there were also several changes: first, disposal service fees significantly decreased. As the number of virtual currencies awaiting disposal increased across the country, the disposal business became more transparent, and with competition among disposal companies, service fees gradually dropped to below 10%, and I even heard of cases as low as 4%. Second, some local governments intervened in the disposal of virtual currencies, publicly bidding for the asset packages awaiting disposal, with relevant departments such as the discipline inspection commission, political and legal committee, and finance bureau supervising the disposal on-site. Third, the service fees were implemented with a clear separation of fiscal revenue and expenditure; in the past, the third-party company would take 100 units of currency and return 85 units, but now the third-party company takes 100 units of currency and must return 100 units to the treasury, then pay the pre-agreed service fee to the third-party company through fiscal expenditure.

At this stage, some well-known third-party disposal (co-investigation) companies that had made significant profits in earlier years no longer personally engaged in specific disposal activities; they often subcontracted the assets awaiting disposal to multiple teams for handling, partly to set up a firewall and partly to facilitate better work.

Finally, in 2024, the Supreme People's Court stepped in, making "Research on the Disposal of Involved Virtual Currencies" a major judicial research topic for the year. The research group includes universities and judicial authorities from Beijing, Chongqing, and Shenzhen, and I was fortunate to participate in some research activities in Beijing and Chongqing. The information learned at the meetings cannot be disclosed, but I will discuss the Third-Party Company Disposal 3.0 stage based on publicly available news releases online.

Before the 3.0 stage of third-party company disposal, there was a period when disposal work was stalled due to uncertainty in how to handle it, and it was widely rumored online that the market value of involved virtual currencies awaiting disposal by judicial authorities across the country was an extremely exaggerated figure. The emergence of Hong Kong provided a compliant path for the disposal of involved virtual currencies.

For example, recently, Beijing took the lead in announcing its successful experience in disposing of involved virtual currencies through the Beijing Property Exchange by leveraging Hong Kong. According to my understanding, other regions are also exploring compliant disposal through Hong Kong. Based on my analysis, although the methods vary, they all adhere to the same principle, which may contain a "universal formula."

First, compliant disposal of involved virtual currencies cannot be separated from the State Administration of Foreign Exchange and domestic banks. The inflow of foreign exchange must be reported to the State Administration of Foreign Exchange for record-keeping and returned through bank channels; since it is returned through bank channels, Hong Kong's banking institutions are also indispensable. Second, according to the regulations of the Hong Kong banking industry and the requirements of licensed trading platforms in Hong Kong, Hong Kong banks cannot act as the main body in opening trading accounts, so a local institution in Hong Kong that can open trading accounts is needed. Third, after the institution disposes of the involved virtual currencies on the trading platform, the funds are transferred to a Hong Kong bank, which must be reported to the State Administration of Foreign Exchange for record-keeping, and the settled funds are transferred from the Hong Kong bank to a domestic bank.

As for the institutions outside this formula, they can be freely replaced; whether it is a company or an exchange, they are not an essential part.

Therefore, I offer the following suggestions: first, the disposal subject of involved virtual digital currencies should be the provincial-level judicial authorities; second, it is recommended that higher-level departments take the lead in establishing a "green channel" between provincial-level judicial authorities and the headquarters of state-owned banks, allowing judicial authorities to open special accounts for the disposal of involved virtual currencies at banks, entrusting the headquarters of state-owned banks to handle the disposal. Third, state-owned banks should fully utilize their overseas branches in Hong Kong or other jurisdictions where disposal is legal to complete the legal disposal of involved virtual currencies abroad.

In summary, reducing unnecessary circulation links, returning disposal profits to state ownership, and maximizing disposal efficiency.

Recently, the "People's Court Daily" published an article titled "Disposal of Criminal Involved Virtual Currencies: Challenges, Innovations, and Judicial Responsibility," which pointed out that "it is possible to explore entrusting qualified third-party institutions to dispose of virtual currencies in legally compliant jurisdictions abroad, such as Hong Kong, through compliant licensed trading platforms, converting virtual currencies into legal tender at market prices, and after realizing them abroad, handling them in accordance with the provisions of the State Administration of Foreign Exchange regarding the opening of foreign exchange accounts and handling foreign exchange receipts and payments in foreign-related judicial activities."

I hope that the Supreme People's Court, based on thorough research of practical experiences from various regions and investigations by various research groups, will soon issue normative guidance documents to thoroughly regulate the disposal of involved virtual currencies.

Finally, I reiterate a phrase I often mention:

"Nothing has ever made the law so entangled as Bitcoin."

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