From the actions of major exchanges like Binance and Ouyi, it is evident that the crackdown on internal corruption will only intensify in the future.

Written by: Liu Zhengyao

Introduction

Recently, I encountered two consultations regarding potential embezzlement crimes by practitioners in the cryptocurrency industry. Therefore, it is necessary to write a brief analysis on this issue, aiming to provide reference for ordinary employees, executives, and leaders in the cryptocurrency industry, clarifying legal boundaries, and collectively building a positive web3.

I. Dissecting the Criminal Composition of Embezzlement

From the perspective of China's Criminal Law, the crime of embezzlement is not complex—staff members of companies, enterprises, or other units (subject identity) illegally occupy property belonging to their unit for personal use by taking advantage of their position, with a significant amount involved (objective behavior). There are three levels of punishment for embezzlement: for general circumstances, a prison term of up to three years; for a large amount, a prison term of three to ten years; and for an especially large amount, a prison term of ten years or more, or life imprisonment (behavioral consequences).

According to relevant judicial interpretations, the threshold for filing a case for embezzlement is 30,000 yuan, which is quite low.

II. The Specificity of the Cryptocurrency Industry

Since the "9.4 Announcement" in 2017 (Announcement on Preventing Risks of Token Issuance and Financing), all projects related to virtual currency financing in mainland China have been halted, and some virtual currency exchanges operating in mainland China have moved out of the country. After the "9.24 Notice" in 2021 (Notice on Further Preventing and Dealing with Risks of Virtual Currency Trading Speculation), all business activities related to virtual currencies in mainland China have been classified as "illegal financial activities," and virtual currency exchanges have completely lost their legal basis for compliant operations in mainland China, all relocating overseas.

Other business activities involving virtual currencies, such as exchanges between virtual currencies and fiat currencies, exchanges between virtual currencies, acting as a central counterparty for buying and selling virtual currencies, and providing pricing and information intermediary services for virtual currency trading, are also prohibited in mainland China.

Currently, relatively safe cryptocurrency startups in the country generally involve blockchain projects (not involving token issuance), virtual currency wallet companies, etc.

Although the "9.24 Notice" prohibits overseas virtual currency exchanges from providing services to mainland residents via the internet, the number of mainland users in virtual currency exchanges established by individuals of Chinese descent still accounts for more than half; there are also some technical and customer service teams from overseas virtual currency exchanges in places like Shenzhen, Hangzhou, and Shanghai.

This situation is rare in other industries—where national policy declares a certain business illegal, but in reality, that business still exists "stably" in mainland China, and even now, judicial authorities may engage in some form of judicial "cooperation" with these overseas companies involved in illegal financial activities. For example, domestic judicial authorities may apply for evidence from overseas virtual currency exchanges and use the relevant evidence as proof of the criminal activities of suspects.

III. Can Employees in the Cryptocurrency Industry Constitute the Subject of Embezzlement?

As mentioned above, the subject of the crime of embezzlement must be "staff members of companies, enterprises, or other units." If it is an overseas company engaged in "illegal financial activities" (such as a virtual currency exchange), or its domestic branches or controlled companies, can they be considered "companies, enterprises, or other units" in the context of embezzlement?

This brings us to the viewpoint expressed by the official account of the Beijing High Court in the article "Is it Legal to 'Obtain' Virtual Currency by Taking Advantage of One's Position? Court: Criminal!" In response to the defense lawyer's argument that the victim (the company) was involved in virtual currency projects and should bear the risk, thus not protected by legal benefits, the court held that the risks of virtual currency trading and the nature of the victim company's project do not affect the legal evaluation of the defendant's (suspected criminal) behavior based on established facts and relevant legal provisions.

In simple terms, in the business context of a virtual currency exchange, if an employee of the exchange engages in embezzlement or other criminal behavior, it will not be disregarded based on whether the exchange's business is legal or illegal in mainland China.

Another question is, how to prove that Zhang San or Li Si is an employee of a certain virtual currency exchange or other cryptocurrency company? On the surface, this can be judged by whether there is a signed "Labor Contract," payment of social insurance, etc. More importantly, it depends on whether the company has management and control functions over the employee's labor remuneration.

In practice, virtual currency exchanges or other cryptocurrency companies generally do not directly employ staff in mainland China under their own name; they may use labor companies or other controlled companies (which do not operate currency-related businesses in mainland China) as the labor employment entity. Of course, there are also more "free-spirited" web3 employment models—where no labor contracts are signed, and salaries are paid directly in USDT or other tokens. At this point, determining the identity of the victim in embezzlement cases is highly controversial in practice. Both the prosecution and defense can "show their skills" to protect their legal rights.

The final question is, if the funds or property involved are virtual currencies, does it constitute a corresponding crime? Taking embezzlement as an example, if one uses their position to embezzle the company's USDT, ETH, BTC, etc., there may be little dispute in practice, as these mainstream virtual currencies are widely recognized as having property attributes in judicial theory and practice. However, what if the embezzled tokens are those issued by the company itself? Or does embezzling certain future expected benefits (such as tokens that have not yet been unlocked or listed) constitute embezzlement? These are highly controversial areas and present significant opportunities for specialized web3 lawyers (whether for defense or prosecution).

IV. The Application of Non-State Staff Bribery in the Cryptocurrency Industry

For some cryptocurrency practitioners, there may be a legal scenario where both embezzlement and non-state staff bribery are involved. For example, in the Supreme Court's publication of "Typical Criminal Cases Promoting the Development of the Private Economy," the case of "Shi Mouyu's Non-State Staff Bribery and Embezzlement" is mentioned.

Case summary: Shi Mouyu took advantage of his position to illegally accept a total of 6.08 million yuan in property from other companies in the introduction of cooperation business (virtual currency rewards) between other companies and his own; at the same time, he used his position to convert virtual currencies from the aforementioned two companies' cooperation into cash through multiple accounts of his company, transferring a total of 3.66 million yuan into his personal bank account.

Ultimately, Shi Mouyu was sentenced by the Haidian District Court of Beijing to a combined sentence for both non-state staff bribery and embezzlement, serving a prison term of 12 years.

Conclusion

In December last year, it was reported that some virtual currency exchanges, represented by Binance, began to rigorously investigate internal corruption issues. The mouse warehouse incident involving Binance employees that broke out in March this year is actually just the "tip of the iceberg" in the cryptocurrency industry. Due to the centralized institutions in the virtual currency industry not being as tightly regulated as traditional financial and securities institutions, insider trading, collusion with market makers, and project parties are indeed rampant. However, the legal costs of these incidents are low, and the difficulty of investigation is high (unless some basic mistakes are made); from the perspective of defense lawyers, there is relatively ample room for defending cases of embezzlement or non-public bribery involving cryptocurrencies.

However, based on the actions of major exchanges like Binance and Ouyi, the crackdown on internal corruption will only become more severe in the future. Coupled with the increasingly strict compliance regulations for the web3 industry in countries and regions like Singapore and Hong Kong, Lawyer Liu believes that the internal compliance development of virtual currency exchanges or other cryptocurrency industries will increasingly converge with, or even evolve into, that of traditional internet companies.

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