Written by: Xiao Za Legal Team

There has always been a saying in the community regarding the investigation agencies handling cryptocurrency-related criminal cases: "Those who haven't handled it hide from it, while those who have handled it rush to handle it again…" While this saying is humorous, the various chaotic phenomena in cryptocurrency cases do exist in reality.

For example, a recent case involving a technician in Shenzhen who stole over 180 BTC from an overseas online "gambling platform" has sparked significant public controversy. In this case, the suspect was criminally detained by police in two locations, and rumors circulated that a large amount of cryptocurrency was quickly liquidated and confiscated before the suspect was swiftly released on bail. After being amplified by numerous media outlets, this once again stirred the public's sensitive nerves: Do the police in both locations have jurisdiction? Did the "gambling platform" truly exist at a specific time? Is the rapid liquidation and confiscation measure compliant? What is the rationale behind the frequent changes in charges against the suspect during the investigation phase? Opinions are divided.

Today, the Xiao Za team will not discuss "deep-sea fishing," but rather a topic that is generally considered more "taboo" — how can investigators ensure the integrity of their official conduct during case handling?

I. Investigators stealing involved cryptocurrency during case handling has long existed; what crime should it be?

"There are things that have happened, and there will be more in the future; things that have been done will be done again." This saying was later popularized by the philosopher Hegel as: "There is nothing new under the sun."

Indeed, investigators stealing involved cryptocurrency during case handling has long existed. The case (2022) Xiang Criminal Final 209 published by the Hunan Provincial High People's Court revealed such a "rat" case.

(A) The case of a certain investigator stealing cryptocurrency in Hunan

Yan, a former police officer, was assigned to participate in the investigation of a "certain" organization leading a pyramid scheme during his work at a police station in early 2019.

In early May 2019, while clearing the assets involved in the pyramid scheme case, Yan discovered that the suspect Zhang had an application installed on his phone. Yan then used this phone to obtain the login verification code for the platform and, based on Zhang's password habits, accessed Zhang's account. Subsequently, Yan downloaded the app on his own phone and opened a trading account and cryptocurrency wallet. On May 15, Yan directly transferred virtual digital currency worth approximately 15.48 million yuan from Zhang's account to his own, profiting 71,161.47 yuan through four OTC transactions.

Unexpectedly, just after Yan sold this batch of cryptocurrency, the special investigation team invited a third-party technology company to clear the virtual digital currency accounts of suspects Zhang and Liao (presumably to facilitate subsequent price appraisal and audit reports). Fearing that his theft would be discovered, Yan transferred the cryptocurrency he had already moved to his account but had not yet sold back to Zhang's account.

In May 2019, while clearing the involved assets, Yan also discovered that suspect Liao had screenshots of private keys on his phone. Yan then transferred 22,520,075 coins worth approximately 500,000 yuan from Liao's account to his own wallet, profiting about 260,000 yuan after multiple OTC transactions. In late May, after modifying Liao's account password using Liao's phone, Yan switched the account to his own phone. From June 30 to October 6 of the same year, Yan used coins worth approximately 5 million yuan from Liao's account to trade futures contracts. After the incident, Yan cooperated with the investigation agency to close Liao's account.

(B) What crime should it be?

1. Yan constitutes the crime of embezzlement

Initially, after the incident, Yan was investigated by the police for "concealing and hiding criminal proceeds." Later, during the prosecution phase, the charge was changed to "theft."

During the first trial, Yan's defense attorney argued that there were significant procedural flaws in the case, and considering Yan's public office status, the investigation agency should have been the supervisory committee rather than the police, thus some evidence obtained in the case was illegal and should be excluded. The first-instance court held that the facts charged by the prosecution were clear, and the evidence was indeed sufficient, but the charge was inappropriate.

After a second hearing, the Intermediate People's Court of Yueyang City, Hunan Province, determined that Yan's actions constituted embezzlement and sentenced him to eleven years in prison, fined him 500,000 yuan, and deprived him of political rights for two years. Yan's appeal was dismissed by the Hunan Provincial High People's Court.

2. Controversy in this case

The Xiao Za team does not dispute the conviction in this case. Embezzlement is a crime of identity, and as a police officer, Yan is a state worker. His actions of illegally transferring the suspect's cryptocurrency to his name for profit while managing the involved assets during a major criminal case fall under the relevant provisions of Article 382 of the Criminal Law of China regarding "embezzlement."

The main controversies in this case revolve around two points: First, does the investigation by the police for public office crimes comply with Chinese law? Second, do the illegally obtained virtual currencies constitute "public property" as required for embezzlement?

Regarding the first point, concerning the investigating agency. This case was initiated for the crime of concealing and hiding criminal proceeds. Although the choice of charge did not consider the essence of Yan's crime committed in the course of his duties, according to the Criminal Procedure Law and the regulations on the jurisdiction of criminal cases by the Ministry of Public Security, the police in the area where the crime occurred have jurisdiction over cases of concealing and hiding criminal proceeds.

After the initial investigation was reported to the prosecutor's office for arrest, the prosecutor's office only changed the charge to theft and approved the arrest without raising objections regarding the jurisdiction of the investigating agency. Therefore, a special situation arose: although both the police and the prosecutor's office mischaracterized the case, the police had jurisdiction over both the crimes of concealment and theft, and continuing to investigate the case did not violate legal provisions.

Regarding the second point, concerning whether cryptocurrency belongs to the "public property" required for embezzlement. Some opinions argue that these cryptocurrencies were not discovered during the police investigation and were not clearly identified as involved assets, even though the suspect's phone was seized, the coins were not on the phone.

The Xiao Za lawyer team believes that according to the definition of "public property" in the second paragraph of Article 91 of the Criminal Law of China: "Private property managed, used, or transported by state organs, state-owned companies, enterprises, collective enterprises, and people's organizations shall be regarded as public property." It is a confirmed fact that the suspect's phone was legally seized by the police, and it has also been established that the suspect converted a large amount of criminal proceeds into cryptocurrency during the commission of the crime of organizing and leading criminal activities. In other words, the police may not have had precise knowledge of the involved assets, but they had already taken effective control measures regarding the relevant property, awaiting subsequent hiring of third-party agencies for professional clearance.

Therefore, the virtual currency illegally obtained by the suspect Yan in this case is actually private property already managed by the police and should be regarded as public property according to the law.

II. How to prevent investigators from "stealing coins" during case handling?

Integrity and honesty are among the most important qualities of public officials, and they are also the greatest expectations of the public towards public officials, as well as an important source of credibility for state power agencies. The Xiao Za team believes that to prevent investigators from "stealing coins" during case handling, it is crucial to do the following:

First, provide comprehensive, complete, and professional education on blockchain and cryptocurrency knowledge to frontline investigators. Based on the Xiao Za team's case handling experience, many frontline investigators still have a "chaotic state" of understanding regarding cryptocurrency, often viewing it (especially BTC and ETH) as a "high-value," "concealed," "illegal," and "unseemly" gray asset, while knowing very little about the underlying blockchain technology, the detailed categories of cryptocurrencies, and existing fund recovery technologies. This leads many frontline investigators, after initially realizing the value of cryptocurrency, to develop the misguided notion that "taking a little won't matter." Little do they know that even the smallest criminal evidence cannot escape the "memory" of the blockchain and can still be held accountable years later.

Second, it is also important to ensure the welfare and security of frontline investigators. Professor Lü Dewen from Huazhong University of Science and Technology conducted a study on the deep-seated reasons for profit-driven law enforcement and conducted long-term research in a grassroots police agency in central China. In his research article "How Does Police 'Profit-Driven Law Enforcement' Occur?" he wrote: "The police bureau is so poor that it has to rely on law enforcement to 'generate revenue' to solve its operational problems." Additionally, the long-standing issues of understaffing and many frontline investigators working in a state of overload and fatigue, with income not commensurate with their workload, have persisted for many years. Therefore, ensuring welfare and security is also an important measure to prevent investigators from "stealing coins" during case handling.

In Conclusion

Finally, some "old clichés" — relevant departments should quickly introduce specialized regulations for the management and disposal of involved cryptocurrencies, clarifying the operational processes, responsible entities, and supervision mechanisms at each stage to strengthen the supervision and constraints on the entire process of handling involved cryptocurrencies.

At the same time, it is also important to involve third-party professional institutions in the management, disposal, and auditing of involved cryptocurrencies. The involvement of third-party institutions can not only enhance the professionalism and efficiency of disposal but also their independent status can provide effective external supervision over the actions of investigation agencies, reducing the space for internal manipulation.

This concludes the Xiao Za team's sharing. Thank you, readers!

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