China officially declares "virtual asset trading" a crime! What does this mean for the market?

FX168 Financial News Agency (Asia Pacific) Xiao Sa's team mentioned in a WeChat public account article on Wednesday (August 21) that the Supreme People's Court and the Supreme People's Procuratorate of China jointly held a press conference and officially announced the release of the "Interpretation on Several Issues Concerning the Application of Laws in Handling Criminal Cases of Money Laundering". The team mentioned that, to put it bluntly, this means an increase in criminal risks for people in the currency circle.

The "Interpretation" has a total of thirteen articles, with few words and great things, and it intercepts money laundering crimes in all directions. It is worth noting that Article 5 of the "Interpretation" clearly stipulates the bottom-line clause for money laundering crimes and clearly includes "virtual asset trading" in it.

After the new regulations come into effect, can you still speculate in coins?

According to Article 13 of the "Interpretation", this interpretation will take effect on August 20, 2024. It was announced on the same day and implemented the next day, which is really fast enough. So, for Chinese currency circle partners, the top priority is to draw a clear conclusion: Can you still speculate in coins after the new regulations?

First give the conclusion: Yes.

First of all, the Interpretation is not formulated for the cryptocurrency industry. From its name and the related criminal penalty clauses, we can know that its target is crimes such as money laundering and concealing the proceeds of crime, and it is not intended to attack the cryptocurrency industry or blockchain and Web3 industries.

Secondly, Article 5 of the Interpretation has made it clear that only those who use virtual asset transactions to cover up the proceeds of the seven specific upstream crimes stipulated in the crime of money laundering may constitute the crime of money laundering. The upstream crimes stipulated in Article 191 of the Criminal Law for money laundering include: drug crimes, organized crimes of a mafia nature, terrorist crimes, smuggling crimes, corruption and bribery crimes, crimes that undermine the financial management order, and financial fraud crimes.

The Sister Sa team believes that the main reason why "virtual asset transactions" are clearly defined as one of the methods of the money laundering crime (Article 191, paragraph 1, item 5 of the Criminal Law) is that when crypto assets are used as a money laundering tool, they are too easy to use.

In recent years, crypto assets have increasingly become a "weapon" for money laundering and concealing criminal proceeds, relying on the technical advantages of blockchain technology's point-to-point and global transmission.

According to the research report of China Science and Technology Chain Security, in 2021 alone, the amount involved in cases of money laundering, pyramid schemes, and online gambling using cryptocurrencies has reached 298.542 billion yuan, of which USDT Tether, BTC Bitcoin and ETH Ethereum account for the majority. To this day, this number is still expanding rapidly.

At the same time, according to statistics from an article published in the second issue of Police Technology in 2023, among the types of virtual currency crimes, the crime of aiding and abetting ranked first, and the crime of concealing ranked second, and the number was far higher than other crimes.

In addition to money laundering, pyramid schemes, and online gambling, in practice, the Sajie team has also handled the following cases of illegal and criminal acts using crypto assets:

1. One spouse uses cryptocurrencies to conceal and transfer common property;
2. A high-net-worth individual uses cryptocurrencies to circumvent China's foreign exchange controls, transfers assets overseas, and purchases real estate, securities and other assets;
3. A company and its actual controller use crypto assets to circumvent the legal exchange settlement channel, transfer overseas income to China, and evade taxes;
4. A dishonest debtor uses crypto assets to evade the property inquiries of the court and creditors and maliciously refuses to perform the debts determined by the effective judgment.

In addition, there is another case that everyone is familiar with, the case of Tianjin Lantian Ge Rui illegally absorbing public deposits. On the eve of the 2017 thunderstorm, the culprit Qian Zhimin used only a mobile hard drive to pocket the stolen money converted into Bitcoins, easily took it out of the country and fled abroad, living a life of spending money until he was arrested by the British police in 2024. It can be seen that once crypto assets are used as a money laundering tool, they are really easy to use.

After the new regulations are released, what are the most risky behaviors in the currency circle?

First, currency traders, and then people with large OTC demand and frequent transactions. According to the provisions of China's Criminal Law, whether it is the crime of money laundering or the crime of concealing the proceeds of crime, it must be based on the fact that the criminal "knows or should know" that the relevant money is the stolen money or the derivative income of the stolen money obtained by others from the upstream crime of money laundering. The upstream crime of concealing the proceeds of crime is the proceeds of other crimes other than the upstream crime of money laundering, such as the proceeds of telecom fraud.

For a long time, the most troublesome problem for currency traders and people with large OTC demand and frequent transactions is receiving the stolen money involved in the case. There is even a saying in the currency circle that "if the card has not been frozen, it is not considered to have speculated on the currency." So, since receiving stolen money and black money has become an inevitable and objectively possible thing, it is extremely important to define the "knowing or should know" of the crime of money laundering and the crime of concealing the proceeds of crime in the provisions of the Chinese Criminal Law.

Article 3 of the Interpretation makes clear provisions for determining "knowing or should have known": it should be based on the information the perpetrator has accessed and received, the circumstances of handling the proceeds of crime and their proceeds from others, the types and amounts of proceeds from crime and their proceeds, the transfer and conversion methods of proceeds from crime and their proceeds, abnormal circumstances such as transaction behaviors and fund accounts, and the comprehensive review and judgment of the perpetrator's professional experience, the relationship with the upstream criminals, his confession and defense, the testimony of co-defendants and witnesses.

Take a real case handled by the Sister Sa team before the release of the Interpretation as an example. In 2023, Student A was criminally detained by a judicial authority in a certain place in China on suspicion of "concealing the proceeds of crime" for selling U (USDT). When meeting Student A, he clearly told us that his U was the proceeds from cryptocurrency speculation, and he was just selling U, and he had no idea about the source of funds of the underground bank.

After the intervention of Sister Sa's team, it was found that the reason why Student A was identified by the Chinese judicial authorities as suspected of "concealing the proceeds of crime" was mainly due to the following reasons:

1. The funds transferred from the underground bank to Student A's account came from the stolen money of telecommunications fraud;
2. Student A had a specific relationship with the underground bank, and the chat records of the two could prove that Student A had a certain understanding of the source of funds of the underground bank;
3. The funds transferred from the underground bank to Student A's account were far greater than the income from the U (calculated according to the exchange rate at the time of the U);
4. Student A could not reasonably explain the reasons for the transfer of excess funds and the direction of the transfer and did not retain objective evidence;
5. After receiving the stolen money, Student A had the behavior of depositing funds and transferred them out after a long time.

Based on the above objective evidence, the judicial authorities determined that Student A "knew or should have known" that the funds transferred from the underground bank to his account came from telecommunications fraud, and convicted and sentenced him.

Coincidentally, in 2023, the People's Court of Dongsheng District, Ordos City also sentenced a case very similar to the case handled by the Sister Sa team - Case No. (2023) Nei 0602 Xingchu 203. In this case, the defendant Xu provided his three bank cards to others for use between February 27, 2022 and March 3, 2022, resulting in more than 90 yuan of telecom fraud funds running out of the cards and being frozen. Subsequently, when he was playing U online on March 5, 2022, he received another 200,000 yuan in telecom fraud money, and he withdrew cash from the bank counter on the same day.

The court's logic for Xu's subjective "knowing" intention in concealing the proceeds of crime is as follows:

1. Because, when Xu's card was frozen, he already knew that "in the process of virtual currency transactions he was engaged in, both the seller's collection account and the buyer's payment account may be telecom fraud-related accounts, that is, the funds paid by the buyer to him to purchase virtual currency may be telecom fraud money".
2. Therefore, "in the virtual currency transaction on March 5, 2022, the defendant Xu should have known that the money paid by the buyer was the proceeds of crime".

In this regard, the Sister Sa team cannot agree that Xu's behavior of providing cards for profit is certainly wrong and may be suspected of aiding and abetting the crime, but there is no evidence to prove that the person using the card and the U-coin collector are the same group of people, and there is no evidence to prove that the two funds involved in the fraudulent proceeds are from the same or related telecommunications fraud cases, so how can Xu's understanding of the improper source of funds in the crime of aiding and abetting the crime be directly "pushed" to the crime of concealing and concealing the proceeds of crime?

It is suspected that the conviction and punishment of him is in violation of the principle of legality of crime and punishment just because "the funds paid by the buyer to him to buy virtual currency may be the proceeds of telecommunications fraud" as stated in the judgment.

How should people who trade in coins protect themselves?

In recent years, due to the rampant fraud, a large amount of black money has flowed into underground banks, and the probability of currency traders receiving dirty money has increased greatly, but in most cases, their cards are frozen, and occasionally they are questioned by the investigation agency as witnesses. But criminal risks are like black swans around us, and we must guard against them.

Therefore, based on practical experience, the Sister Sa team has made some suggestions for cryptocurrency trading partners to prevent criminal risks.

First, keep a record of the source of funds for cryptocurrency trading. As far as the Sister Sa team knows, in fact, most cryptocurrency trading partners have very clean sources of funds. Some are their own salary income, some are legal business income, and some are idle funds from the disposal of real estate, stocks and other assets in previous years. Therefore, the top priority is to keep evidence of the source of funds used for cryptocurrency trading, so that once asked, you can tell everything clearly.

Secondly, keep a record of your purchase and sale of encrypted assets on the platform. This part of the evidence is very important. Some encrypted asset platforms only provide record query functions for the past three months, and further query platforms may not cooperate. Therefore, cryptocurrency trading partners must develop the habit of taking screenshots and recording videos every month to prevent the situation of cramming at the last minute.

Again, relevant records must be kept consistent, and the capital chain must be complete. No matter what the reason, there should not be a situation where the source of large amounts of funds is unknown, far exceeding the returns from cryptocurrency trading and cannot be explained clearly.

Finally, if it is not necessary, the frequency of OTC can be reduced, and only reliable channels can be selected to issue coins when necessary. When issuing coins, both parties can prove and promise to each other the clean sources of encrypted assets and legal currencies by signing relevant agreements, etc., and leave traces for future reference.

Xiao Sa's team wrote: "China's official announcement of "virtual asset trading" as a crime, to put it bluntly, means an increase in criminal risks for people in the currency circle. The sword of Damocles on the heads of currency traders +1, and currency trading partners need to be cautious and can no longer directly apply previous currency issuance experience to today. Keeping evidence is the best way to protect yourself."

"In addition, don't be afraid to seek medical advice. If risks arise, you must seek help from a trustworthy professional lawyer in a timely manner. When communicating with a lawyer, you must tell the truth and prevent the breeding of criminal risks in all aspects."