Article from the People’s Court Daily Chinese virtual currency is considered legal property protected by law.
Chinese virtual currency is legally protected property.
Author | Wang Zhongyi, Yang Conghui (Author Affiliation: People’s Court of Siming District, Xiamen, Fujian Province)
Original article link:
http://rmfyb.chinacourt.org/paper/html/2023-09/01/content_231971.htm
Wu Shuo’s Foreword:
This article is a theoretical article in the “People’s Court Daily” under the Supreme Court, which to a certain extent represents the current discussions in the legal industry. The article points out that currently in China, due to considerations of safeguarding the status of the RMB as the legal currency and combating illegal activities, the legal status and monetary functions of virtual currencies have not yet been recognized. However, their exchange value objectively exists due to the legal recognition and legitimate circulation in overseas markets, and cannot be denied. It also emphasizes that the current legal policies do not classify virtual currencies as illegal items. Under the current legal policy framework, the virtual currencies held by relevant entities in China still belong to legal property and are protected by law.
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The full text is as follows:
The trend of virtual currencies becoming “accomplices” in illegal activities is becoming more prominent. The global transaction volume of virtual currency-related crimes has risen from 8.4 billion USD in 2020 to 20.6 billion USD in 2022, reaching a historical high. Currently, there are increasing differences in the judicial practice regarding the characterization of acts involving virtual currency crimes and the disposal of assets involved in such cases. It is necessary to further clarify the criminal law attributes of virtual currencies and the issues related to the disposal of assets involved.
I. Analysis of the Criminal Law Attributes of Virtual Currencies
In practice, there are several opinions on the determination of the criminal law attributes of virtual currencies:
The first opinion holds that virtual currencies are merely electronic data stored in computer systems and are currently circulating in the “black market” in China as illegal currencies. They mostly serve as illegal payment methods for criminal activities and as intermediaries for illegal inflow of overseas funds. In the absence of explicit legal provisions, they should not be recognized as property in the sense of criminal law. The second opinion holds that virtual currencies belong to virtual commodities, have economic value, and based on the provisions of judicial interpretations regarding theft, robbery, and illicit drugs, they should also be recognized as property in the sense of criminal law. However, considering that the current policy in China prohibits the circulation of virtual currencies, they should not be recognized as legal property and protected. The third opinion holds that virtual currencies are property in the sense of criminal law and are legal property. Unless they are used for criminal activities by the holders or directly derived from the holders’ criminal activities, the property rights and interests of virtual currency holders should be protected. The author agrees with the third opinion. The reasons are as follows:
(1) Virtual currencies have economic attributes and can be classified as property
1. Virtual currency itself has use value. Legal currency, especially paper money (except for those with collectible value), besides having the functions of value scale, medium of exchange, and means of payment, does not have general use value in itself. However, virtual currency is different. It can have certain use value itself, manifested in: (1) Acting as a settlement medium. 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 virtual currency, also known as “settlement coin”, under the premise of depositing an equivalent amount of legal currency into the custodian bank, in order to realize the settlement of securities and funds within the system. (2) Acting as virtual vouchers or properties. For example, as tickets for concerts, music festivals, etc., through blockchain technology, the tamper-proof function can be achieved; as electronic voting, gaming props, etc., blockchain technology can be used to ensure the immutability of virtual properties. In this case, although its currency function should be denied according to law, it does not affect the recognition of its property attributes, and it also reflects the function of the law to reserve necessary channels for the development of emerging technologies.
2. The exchange value of virtual currency objectively exists. Virtual currencies such as Bitcoin connect strangers from any corner of the world through the blockchain, and transfer value through the “consensus mechanism” and “decentralized” peer-to-peer transactions, becoming a convenient settlement tool worldwide. Especially after stablecoins like Tether (USDT) emerged, which maintain price stability by anchoring to legal currency (or assets), the currency function of virtual currency has become increasingly perfect. With the decentralized characteristics of virtual currency, running through distributed encryption systems, all virtual currency hardware systems in the world have virtual currency ledgers, and virtual currency will not disappear due to the loss of a single 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 means of payment for purchasing goods and services in real life. In the current world payment system, virtual currency has surpassed its physical characteristic of computer data and has been included in the financial system by many countries, and it is used as a legal currency, such as in Japan, the United States, Europe, Australia, New Zealand, and other countries. According to statistics, there are nearly 30,000 virtual currency ATMs in 73 countries around the world.
Currently, in order to safeguard the status of the renminbi as the legal currency and combat illegal activities, China has not yet recognized the legal currency status and currency function of virtual currency. However, its exchange value objectively exists due to the legal recognition and legitimate circulation in overseas markets, and cannot be eliminated. If virtual currency is treated as a prohibited item like drugs, without recognizing its exchange value, it will inevitably lead to the loss of the accumulated labor value and market value when virtual currency flows from overseas to domestic market, which objectively leads to the loss of property and is not conducive to the recovery and loss prevention work of virtual currency-related criminal cases.
3. Those who obtain other people’s 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, different from prohibited items such as drugs that have no positive value. In judicial interpretations and other regulations aimed at protecting possession, theft, robbery, fraud, and other prohibited items such as drugs constitute relevant property crimes, and virtual currency should naturally become the object of property crimes.
Based on the physical characteristic of computer data as virtual currency, there has always been a practice and viewpoint in judicial practice and theory to convict and punish virtual currency crimes as computer information system crimes. Obviously, this approach abandons the evaluation of the use value and exchange value of virtual currency and has to expand the interpretation of computer information system crimes defined in our criminal law in order to seek a way to criminalize such behaviors, which is suspected of violating the principle of “crime and punishment defined by law”. In a certain case, the accused in the case did not use the illegal means specified in Article 285 of the Criminal Law to illegally invade computer information systems, nor did he carry out acts defined in Article 286 of the Criminal Law to delete or modify the functions of computer information systems. The essence of his behavior was the illegal acquisition of virtual currency, which infringed upon the property rights, not the public order protected by computer information system crimes. Abandoning property crimes and convicting and punishing computer information system crimes is contrary to 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 other people’s virtual currency by fraudulent, theft, robbery, and other illegal means and computer information system crimes should be determined to have a competing relationship between legal provisions, rather than an imaginary competing relationship. For theft of virtual currency, etc., if the amount does not meet the standard for criminal prosecution, it cannot be regarded as a computer information system crime and punished accordingly.
(II) Existing laws and policies do not classify virtual currency as illegal goods
1. Relevant regulations clearly define it as virtual goods. The “Notice on Preventing Bitcoin Risks” (Yinfa [2013] No. 289, hereinafter referred to as the “2013 Five-Department Notice”) jointly issued by 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 in December 2013 clearly stipulates: “From a nature perspective, Bitcoin should be regarded as 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.” Furthermore, other virtual currencies such as Tether that have characteristics similar to Bitcoin, such as “no centralized issuer, limited total supply, unrestricted use, and anonymity,” should also be considered virtual goods. Article 127 of the Civil Code of China states: “If the protection of data and virtual property in the network is provided for by law, it shall be in accordance with its provisions.” It can be seen that classifying virtual commodities such as Bitcoin as virtual property and protecting them is also supported by this open attitude in the Civil Code.
2. Administrative laws and policies do not completely prohibit virtual currency transactions. Article 1, paragraph (2) of the “Notice on Further Preventing and Dealing with the Risks of Speculation in Virtual Currency Trading” (Yinfa [2021] No. 237, hereinafter referred to as the “2021 Notice”) issued by the People’s Bank of China, the Supreme People’s Court, and other ten departments on September 15, 2021, stipulates that virtual currency-related business activities, such as conducting legal currency and virtual currency exchange, exchange between virtual currencies, buying and selling virtual currencies as a central counterparty, providing intermediary and pricing services for virtual currency trading, token issuance financing, and virtual currency derivative trading, are suspected of illegal activities such as illegal issuance of token vouchers, unauthorized public offering of securities, illegal operation of futures business, and illegal fundraising, and are strictly prohibited and resolutely banned in accordance with the law. Regarding this provision, there are two interpretations in judicial practice: one view is that all virtual currency trading activities are considered prohibited illegal financial activities, while another opinion holds that only virtual currency trading activities suspected of illegal issuance of token vouchers, unauthorized public offering of securities, illegal operation of futures business, and illegal fundraising are considered illegal financial activities and are therefore prohibited. The interpretation of “business” refers to the professional work of individuals or institutions. It is obviously inappropriate to define occasional buying and selling transactions as business activities. For example, in a certain case, Li, who sold virtual currency domestically for the first time on behalf of his son, cannot be classified as engaging in business activities based on the existing evidence. Therefore, the author believes that the “2021 Notice” does not classify all virtual currency trading activities as illegal financial activities and prohibit them. Judicial practice must make determinations based on the characteristics of individual cases to determine whether they constitute illegal financial activities that should be prohibited.
Furthermore, from the provisions of Article 1, paragraph (4) of the “2021 Notice,” buying and selling virtual currencies can be considered as “virtual currency investment trading activities.” Only actions that violate public order and good customs are considered invalid, not actions that violate 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 transactions of buying and selling virtual currencies can be deemed invalid due to the harm caused to the country’s financial order and other factors, the virtual currencies themselves are not illegal items.
3. From the perspective of civil trial practice, the disapproval of trading behavior does not deny the legal property attributes of virtual currencies. From 16 final civil judgments involving virtual currency transactions randomly selected from the China Judgments Online since 2022, judicial practice has deemed civil acts related to the production, trading, and investment of virtual currencies as invalid due to violation of public order and good customs. However, the administrative departments have not been involved in the handling of the virtual currencies and transaction amounts involved, nor have they taken measures such as confiscation. Among them, the representative and instructive Supreme People’s Court (2022) Zui Gao Fa Zhi Min Zong 1581 Civil Judgment holds that a software development contract entered into for the purpose of obtaining virtual currencies is invalid due to the damage to the public interest. However, both parties to the contract are at fault for the contract’s invalidity. Therefore, the judgment orders the appellant to return 100,000 yuan of the contract payment to the respondent, rather than confiscating the 100,000 yuan or excluding it from the scope of legal protection. This is consistent with the spirit of the “2021 Notice.” For virtual currency trading activities that do not involve the destruction of financial order and the endangerment of financial security, civil actors bear their own risks and responsibilities. The current legal policies have not yet prohibited such activities, nor have they classified virtual currencies as prohibited items of the same nature as drugs, obscene publications, and controlled knives. Therefore, holding virtual currencies is legal for relevant entities. For example, Lin owns trees, which can be legally owned before obtaining a logging permit, but they cannot be disposed of through logging.
In conclusion, under the current legal policy framework, the virtual currency held by relevant entities in our country is still considered legal property and is protected by law.
2. Handling of the property involved based on its legality
Based on the above analysis, the author believes that for criminal activities involving virtual currency, the property involved should not be uniformly confiscated or returned. Instead, it should be treated separately based on the unified basis of criminal and civil legal order, in order to achieve a balanced protection of personal property rights and the public interest.
(1) Cases where the victim did not engage in any transactions. For example, in cases of theft of other people’s virtual currency, the victim did not engage in any acts or expressions of selling the virtual currency they held. If the defendant illegally obtained the victim’s virtual currency key and stole the virtual currency, the theft infringes upon the victim’s legal property rights to the virtual currency, and the victim did not engage in any acts that violate the national financial order or public morals. In this situation, the defendant should be sentenced to bear the obligation to compensate the victim’s economic losses. For the virtual currency that the defendant has not yet transferred, it should be ordered to be returned to the victim; for the virtual currency that has already been transferred, the criminal amount should be determined and the defendant should be ordered to compensate the victim based on the defendant’s selling price, the victim’s purchase price, the previous buyer’s purchase price, or the recent transaction price of similar virtual currencies involving the defendant or the victim. If it is impossible to determine the selling price or purchase price, etc., since various forms of domestic virtual currency trading platforms have been abolished in our country, there is a lack of corresponding market reference prices. Therefore, the price of the relevant virtual currency should not be included in the criminal amount. However, the criminal behavior should still be recognized.
(2) Cases where the victim engaged in transactions. For criminal activities involving virtual currency such as fraud, robbery, theft, etc., committed by the defendant using the victim’s transaction activities, the victim also bears some responsibility because they engaged in acts that violate public morals, resulting in the infringement of their legal property. When determining the defendant’s obligation to compensate in criminal judgments, attention should be paid to maintaining consistency with civil judgments. In cases where there are multiple virtual currency transactions, an inability to explain the legal source of the virtual currency, and evidence proving that the transactions of virtual currency were carried out for the purpose of committing illegal crimes, the entire illegal proceeds of the defendant can be confiscated and seized without ordering the defendant to compensate the victim. If the aforementioned circumstances are not present, the defendant should be ordered to partially or fully compensate the victim, taking into account the degree of fault on the part of the victim. In cases where partial compensation to the victim is ordered, the remaining amount should be confiscated and seized from the defendant. The seized virtual currency can be legally sold in the international market through special channels, and the funds obtained can be turned over to the national treasury.
