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Judicial document: Virtual currency is legal property, and the assets involved in the case cannot be confiscated uniformly.

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Virtual currencies are still considered legal property and protected by law, as current laws and policies do not classify them as illegal items.

The original title: "People's Court Daily: Virtual currency is legal property, and the confiscated or returned property involved cannot be uniformly confiscated or returned"

Original author: Wang Zhongyi, Yang Conghui

Original source: W3C DAO

The People's Court Daily published an article titled "Identification of the Property Nature of Virtual Currency and the Disposal of Property Involved in Cases". The article analyzed the criminal law nature of virtual currency and stated that virtual currency has economic attributes that can be attributed to property. Current legal policies have not classified virtual currency as illegal goods. Therefore, under the current legal policy framework, virtual currency held by relevant entities in China is still legal property and is protected by law.

The article suggests that the involved funds should be handled from a standpoint of legality. In regards to criminal activities involving virtual currency, the seized funds should not be uniformly confiscated or returned. Instead, they should be treated differently based on the unified basis of criminal and civil law, in order to achieve a balance between personal property rights and the public interest.

The full text of "Recognition of the Property Nature of Virtual Currency and the Disposal of Involved Property" is as follows:

Virtual currency has become an increasingly prominent "accomplice" in illegal and criminal activities. The global transaction volume of virtual currency-related crimes has risen from $8.4 billion in 2020 to $20.6 billion in 2022, reaching a historic high. Currently, there are growing differences in the judicial practice regarding the characterization of virtual currency-related crimes and the handling of related assets, making it necessary to further clarify the criminal law attributes of virtual currency and the disposal of related assets.

1. Analysis of the Criminal Law Attributes of Virtual Currency

There are several opinions on the criminal law attributes of virtual currency in practice:

The first opinion believes that virtual currency is only electronic data stored in computer systems. Currently, it is circulating in the "black market" in China as illegal currency, mostly serving as illegal payment methods for criminal activities and as a means for illegal entry of foreign funds. In the absence of explicit legal provisions, it should not be recognized as property in the sense of criminal law.

The second opinion believes that virtual currency belongs to virtual goods, has property value, and from the judicial interpretation of theft, robbery, and other prohibited items, virtual currency should also be recognized as property in the sense of criminal law. However, considering that China's current policy prohibits the circulation of virtual currency, it is not appropriate to recognize it as legal property for protection.

The third opinion believes that virtual currency belongs to the property in the sense of criminal law and is legal property. Unless it is used for illegal activities by the holder or directly originates from the illegal activities of the holder, the property rights of virtual currency holders should be protected.

The author agrees with the third opinion. The reason is:

(一) Virtual currency has economic attributes and can be attributed as property

1. Virtual currency itself has use value. Legal currency, especially paper currency (excluding those with collectible value), besides having the functions of value scale, medium of exchange, and means of payment, does not have a general use value in itself.

However, virtual currencies are different in that they can have a certain use value, which is reflected in:

(1) Acting as a settlement intermediary. In some blockchain application fields such as securities settlement, the circulation of encrypted assets within the blockchain system is indispensable. For example, in order to achieve the delivery versus payment (DVP) in the blockchain securities settlement system, it is necessary for the controlling or designated nodes in the blockchain to issue a virtual currency called "Settlement Coin" under the premise of depositing an equivalent amount of legal currency into the custodian bank, in order to achieve the settlement of securities and funds within the system.

(2) Serve as virtual credentials or assets. For example, as concert or music festival tickets, using blockchain technology to achieve tamper-proof functionality; as electronic voting, game props, etc., using blockchain technology to ensure the immutability of virtual assets. In this case, although its monetary function should be denied by law, it does not affect the recognition of its property attributes, which is also a manifestation of the function of the law to reserve necessary channels for the development of emerging technologies.

2. The objective existence of exchange value of virtual currency. Virtual currencies such as Bitcoin connect strangers from any corner of the world through blockchain, and transfer value through "consensus mechanism" and "decentralized" peer-to-peer transactions, becoming a convenient settlement tool worldwide. Especially after stablecoins such as Tether (USDT) emerged by anchoring to fiat currency (or assets) to maintain price stability, the currency function of virtual currencies has become increasingly perfect. The decentralized feature of virtual currencies operates through distributed encryption systems, and all virtual currency hardware systems in the world store virtual currency ledgers, which will not disappear due to the loss of a hardware. Based on the immutability and antifragility of virtual currency technology, virtual currency is regarded as "hard currency" by some groups and has become a payment method for purchasing goods and services in real life. In the current world payment system, virtual currency has surpassed its physical characteristics of computer data and has been included in the financial system by many countries as a legitimate currency, such as Japan, the United States, Europe, Australia, and New Zealand. According to statistics, there are nearly 30,000 virtual currency ATMs in 73 countries worldwide.

Currently, China has not recognized the legal currency status and monetary function of virtual currency, due to considerations such as safeguarding the status of the RMB as the legal currency and cracking down on illegal activities. However, its exchange value objectively exists due to the legal recognition and legitimate circulation in overseas markets, which cannot be eliminated. If virtual currency is treated as a prohibited item like drugs and its exchange value is not recognized, it will inevitably lead to the loss of labor value and market value of virtual currency after it flows into China from overseas, objectively resulting in property loss and not conducive to the recovery of assets in virtual currency-related criminal cases.

3. Those who obtain virtual currency by illegal means shall be dealt with as property crimes. As mentioned earlier, virtual currency objectively has positive use value and exchange value, unlike prohibited items such as drugs that have no positive value. In order to protect ownership, theft, robbery, fraud, and other prohibited items such as drugs are defined as property crimes in judicial interpretations. Therefore, virtual currency should be considered as a property crime object.

Based on the physical characteristic of computer data as a virtual currency, there has been a practice and viewpoint in judicial practice and theory to convict and punish virtual currency-related crimes as computer information system crimes, which obviously abandons the evaluation of the use value and exchange value of virtual currency. It also has to seek a way to convict such behavior by expanding the interpretation of computer information system crimes stipulated in China's criminal law, which is suspected of violating the principle of "nullum crimen, nulla poena sine praevia lege poenali". In a certain case, the defendant did not illegally invade the computer information system by technical means stipulated in Article 285 of the Criminal Law, nor did he delete or modify the function of the computer information system as stipulated in Article 286 of the Criminal Law. His behavior was essentially to illegally obtain virtual currency, which infringed the property rights and did not infringe the public order protected by computer information system crimes. Abandoning property crimes and convicting and punishing them as computer information system crimes violates the basic principle of proportionality between crime and punishment and deprives the victim of the right to participate in litigation and the protection of property rights.

Based on the above analysis, the author agrees that the act of obtaining virtual currency from others through illegal means such as fraud, theft, and robbery should be considered as a competition relationship between criminal acts in the field of computer information systems, rather than an imaginary competition relationship. For cases where the amount of stolen virtual currency does not meet the standard for criminal punishment, it is not acceptable to resort to a lesser charge, and instead, the offender should be punished according to the criminal act of computer information systems.

(二) Current laws and policies do not classify virtual currency as illegal items

1. The relevant regulations clearly define virtual commodities. In December 2013, the People's Bank of China, the Ministry of Industry and Information Technology, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission jointly issued the "Notice on Preventing Bitcoin Risks" (Yinfa [2013] No. 289, hereinafter referred to as the "2013 Five Departments Notice"), which clearly stipulates that "in terms of nature, Bitcoin should be a specific virtual commodity, which does not have the same legal status as currency and should not be used as currency in circulation in the market." Therefore, other virtual currencies such as Tether, which have the same characteristics as Bitcoin, such as "no centralized issuer, limited total amount, unrestricted use and anonymity," should also be classified as virtual commodities. Article 127 of the Civil Code of China stipulates that "if the law has provisions for the protection of data and virtual property on the network, they shall be protected in accordance with such provisions." It can be seen that classifying virtual commodities such as Bitcoin as virtual property for protection is also supported by the open attitude of the Civil Code.

2. Administrative and legal policies do not completely prohibit virtual currency trading. On September 15, 2021, the People's Bank of China, the Supreme People's Court, and ten other departments issued the "Notice on Further Preventing and Dealing with Risks Associated with Speculation in Virtual Currency Trading" (Yinfa [2021] No. 237, hereinafter referred to as the "2021 Ten-Department Notice"). Article 1, paragraph (2) of the notice stipulates that virtual currency-related business activities such as legal currency and virtual currency exchange, exchange between virtual currencies, buying and selling virtual currencies as a central counterparty, providing information intermediary and pricing services for virtual currency trading, token issuance and financing, and virtual currency derivative trading, which are suspected of illegal issuance of token tickets, unauthorized public issuance of securities, illegal operation of futures business, illegal fund-raising and other illegal financial activities, are strictly prohibited and will be resolutely banned in accordance with the law. Regarding this provision, there are two interpretations in judicial practice: one is that all virtual currency trading activities are illegal financial activities that are prohibited; the other opinion is that only virtual currency trading activities that are suspected of illegal issuance of token tickets, unauthorized public issuance of securities, illegal operation of futures business, illegal fund-raising, etc. are illegal financial activities and are therefore prohibited.

The definition of 'business' refers to the professional work of an individual or organization. Occasional buying and selling activities cannot be defined as business activities, such as in the case of Li, who sold virtual currency as a seller. The existing evidence shows that this was the first time Li's son sold virtual currency within the country, and it is not appropriate to classify this sale as a business activity. Therefore, the author believes that the '2021 Notice of Ten Departments' did not classify all virtual currency buying and selling activities as illegal financial activities and prohibit them. Judicial practice must combine the characteristics of individual behaviors to determine whether they belong to illegal financial activities that should be prohibited.

Looking at the provisions of item (4) of the first article of the "2021 Notice of Ten Departments", buying and selling virtual currency can be recognized as "virtual currency investment and trading activities". Only behavior that violates public order and good customs is considered invalid, rather than being invalid due to the violation of mandatory provisions of laws and administrative regulations. Virtual currency trading activities that do not involve illegal financial activities do not have administrative illegality. Although the civil act of buying and selling virtual currency can be deemed invalid due to the harm caused to the country's financial order, the virtual currency itself as a trading object is not an illegal item.

3. From the perspective of civil trial practice, the mere "disgust" of trading behavior does not deny the legitimate property attributes of virtual currency. Based on 16 final civil judgments involving virtual currency transactions randomly selected from the China Judgments Online since 2022, the judicial practice has determined that civil acts aimed at producing, trading, and investing in virtual currencies are all invalid on the grounds of violating public order and good customs. However, the virtual currency and transaction price involved in the case have not been transferred to relevant administrative departments for processing, but have been recovered by the administrative department. Among them, the most representative and instructive civil judgment of the Supreme People's Court (2022) No. 1581 of the Supreme Court's knowledge of the people believes that the software development contract concluded for the purpose of obtaining virtual currency is invalid due to damage to the public interest. However, both parties to the contract have faults, so the judgment orders the appellant to return the contract payment of 100,000 yuan to the respondent, rather than confiscating the 100,000 yuan or excluding it from the scope of legal protection, which is consistent with the spirit of the "2021 Notice of Ten Departments". For virtual currency trading behaviors that do not involve the destruction of financial order or the harm of financial security, the civil actors bear their own risks and responsibilities, and the current legal policies have not yet prohibited them, nor have they identified virtual currencies as prohibited items of the same nature as drugs, obscene books and magazines, and controlled knives. The holding of virtual currency by relevant entities is legitimate. For example, Lin Nong's trees can be legally owned before obtaining a logging permit, but they cannot be disposed of by logging.

Overall, under the current legal and policy framework, the virtual currency held by relevant entities in China is still considered legal property and is protected by law.

二、以合法性的基本立场处理涉案款物

Translation:

II. Dealing with the funds involved from a basic standpoint of legality

Based on the above analysis, the author believes that for criminal activities involving virtual currency, the seized property should not be uniformly confiscated or returned. Instead, they should be treated differently on the basis of the unity of criminal and civil law and order, in order to achieve a balance between personal property rights and social public interests.

(I) Victims with no transaction behavior. For example, if someone steals another person's virtual currency, the victim has no behavior or intention of selling the virtual currency they hold to the outside world.

The defendant illegally obtained the victim's virtual currency key and stole the virtual currency. The act of theft infringed upon the victim's legal property rights to the virtual currency. The victim did not engage in any behavior that violated public order and good customs or endangered national financial order. In this situation, the defendant should be sentenced to bear the obligation of refunding the victim's economic losses. For the virtual currency that the defendant has not yet transferred, the defendant should be ordered to return it to the victim. For the virtual currency that has already been transferred, the criminal amount should be determined based on the defendant's sales price, the victim's purchase price, the previous purchaser's purchase price, or the recent transaction price of similar virtual currencies traded by the defendant or the victim, and the defendant should be ordered to refund the victim. If the sales price or purchase price cannot be determined, and considering that China has already cancelled all forms of domestic virtual currency trading platforms, there is a lack of corresponding market reference prices. Therefore, the price of the relevant virtual currency shall not be included in the criminal amount according to the provisions of the "Price Law of the People's Republic of China," but the criminal act should be recognized.

(二) Victims with transactional behavior.

For criminal acts related to virtual currency such as fraud, robbery, theft, etc. committed by the defendant by taking advantage of the victim's transaction behavior, if the victim's legal property is infringed upon during the process of committing an act that violates public order and good customs, the victim also bears some responsibility. When determining the defendant's responsibility for compensation and restitution in criminal judgments, attention should be paid to consistency with civil judgments. In cases where the defendant has engaged in multiple virtual currency transactions, cannot explain the legal source of virtual currency, and there is evidence to prove that the virtual currency was traded for the purpose of committing illegal crimes, the court may order the confiscation of all illegal gains obtained by the defendant and no longer require the defendant to compensate the victim. In cases where the above circumstances do not exist, the court should consider the degree of fault of the victim in civil matters and order the defendant to partially or fully compensate the victim. If the court orders partial compensation, the remaining amount should be confiscated and recovered from the defendant. Confiscated virtual currency can be legally sold in the international market through special channels, and the proceeds can be turned over to the national treasury.