Real case: illegal fund raising! BTC is money?

A legal case explaining whether the act of absorbing bitcoin will be characterized as absorbing public deposits.

Real case: illegal fund raising! BTC is money?

In the past, according to the “Notice on Preventing the Risk of Bitcoin” in 13 and “Announcement on Preventing the Risk of Token Issuance and Financing” in 17, Bitcoin and other virtual currencies are not issued by the monetary authority, do not have monetary properties such as legal compensation and compulsory, do not have the same legal status as money, and cannot and should not be used as money in circulation in the market. Therefore, virtual currency “banks” or “investment and financial platforms” that only absorb virtual currency can escape from the crime of illegal public deposit taking. In addition, only stable coins such as USDT, which are anchored to fiat currencies, have a greater chance of being considered currency or funds.

However, in a real case at the end of last year [(2020) Zhejiang 0329 Criminal Court No. 136], this “golden rule” was broken.

I. Brief description of the case

(A) Fact 1: “pass bank” project

In 2019, Gao Mou and others used an offshore server to set up a “pass bank” investment platform, claiming to store mainstream “virtual currency” wealth management, promising to deposit and withdraw, without locking positions, with a static return of one thousandth to eight thousandths of a percent daily interest, etc. The company’s model is to absorb bitcoin, ethereum and other virtual currencies from the public. In June of the same year, the virtual currency of the platform could not be withdrawn. In July of the same year, the platform forcibly converted the depositors’ mainstream currencies into TB assets. Thereafter, the platform was closed and could not be logged in.

The defendant Lin and others used the “pass-through bank” platform as the backbone to encourage the public to deposit virtual currency into the “pass-through bank” by offering high returns on investment in the platform, and by recommending investors to receive rebates. “pass bank”. According to the statistics of the people who have reported the case so far, by the propaganda of Lin Mou and others, a total of 59 people have absorbed virtual currency worth more than RMB 15 million. By the chain asset tracking investigation and analysis found that virtual currency worth RMB 673.659 million topped up to Lin’s wallet address.

(ii) Fact 2: DGU and BAC projects

From 2017 to 2018, the defendant Lin was introduced to the DGU and BAC projects by others, and without the approval of the relevant authorities, he introduced the DGU and BAC projects to others by “word of mouth” on the pretext of helping others to invest their money, and induced a number of victims to invest a total of approximately RMB 5 million by offering high returns as bait.

(III) Judgment Result

Without the approval of the relevant authorities, the defendant Lin absorbed funds from the public in the name of investing in virtual currencies, using high returns as bait and disrupting the financial order by a huge amount. His behavior constituted the crime of illegal absorption of public deposits. After the crime, he voluntarily surrendered and confessed his crime truthfully, so he turned himself in.

Second, bitcoin → funds ← deposit: a two-way run

If we look at the context alone, the fact that Lin was guilty of unlawfully absorbing public deposits by absorbing bitcoin and other virtual currencies is a direct equivalent of bitcoin and other virtual currencies as “deposits”, which seems to be beyond the general public’s knowledge. However, in fact, in light of the transmutation of the meaning of “deposit” in the crime of illegal public deposit and the trend of Bitcoin and other mainstream virtual currencies becoming a payment and settlement tool, it is not difficult for the court to make such a determination.

(1) Deposit → Funds

In 1995, private financing and lending had already emerged, diverting a large amount of user savings from banks. As we all know, deposit business is the “lifeline” of banks. Therefore, in order to protect the franchise of commercial banks to take deposits, the National People’s Congress issued the Decision on Punishing Crimes against the Financial Order, which created the crime of illegal public deposit-taking in Article 7.

In 1998, various kinds of illegal fund-raising activities had emerged in China, so the State Council issued the Measures for the Suppression of Illegal Financial Institutions and Illegal Financial Business Activities, which included “illegal public deposit-taking” as an “illegal financial business activity” and for the first time The State Council therefore issued the “Measures for the Suppression of Illegal Financial Institutions and Illegal Financial Business Activities”, which classifies “illegal absorption of public deposits” as an “illegal financial business activity” and for the first time defines the concept as “the activity of absorbing funds from unspecified objects without the approval of the People’s Bank of China and issuing certificates promising to repay capital and interest within a certain period of time. Since then, the object of the crime of illegal public deposit has changed from “deposits” to “funds”, and the judicial interpretation of the Supreme Court on illegal fund-raising in 2010 and the Regulations on Prevention and Disposal of Illegal Fund Raising this year both follow the term “funds”. The term “funds” is used. With the support of the term “funds”, the crime of illegal public deposit-taking was once considered as a “pocket crime”.

In order to limit the limits of the expansive interpretation from deposits to funds, scholars have often worked on the definition of “deposits,” proposing “credit funds,” “potential deposits,” and “demand deposits. “demand deposits” and so on. These definitions may be broad or narrow, but there is a consensus that deposits must have some connection with the business of commercial banks, whether they are already part of the business or potentially part of the business. According to the scholars’ perspective, virtual currencies such as Bitcoin cannot be part of China’s banking business at this stage, and therefore cannot be the target of illegal public deposit-taking.

(2) Bitcoin → Funds

The views of scholars cannot replace the judgment of judges in practice. As mentioned above, it is only a departmental regulation that denies the monetary properties of bitcoin. The object of the crime of illegal public deposit is clearly defined as “funds” in several regulatory documents, and there is no specific definition of “funds” in the regulatory documents. As long as the virtual currency meets the relevant characteristics of funds, it may be recognized as funds by judges in practice.

In fact, virtual currencies such as Bitcoin do represent a physical investment by the public and can be commonly exchanged in the secondary market with fiat and other virtual currencies, while a growing number of countries and commercial institutions are recognizing them in various ways as payment instruments. For example, the U.S. SEC considers virtual currencies paid for by investors to be “money” under the Howey Test, and the U.K. FCA has issued a “Guide to Cryptocurrency Assets” that recognizes that tradable pass-throughs such as Bitcoin and Litecoin can be used to buy and sell goods and services without going through a bank, among other things. In a nutshell, bitcoin and other virtual currencies are already like the elephant in the room, and the judge’s determination of “money” is not rigid.

Third, a flash in the pan or will there be a class case effect?

According to the team’s current search, the case is an isolated example of a direct characterization of the act of absorbing bitcoin as a public deposit. Although China is not a case law country, we cannot rule out the possibility of a class case effect forming next. Nevertheless, the following three issues need further consideration.

(i) Amount determination

The different amounts of illegal public deposits determine the level of penalty. Since the funds are generally stable, if the funds absorbed are foreign currencies or stable coins, there will be no problem in converting them into RMB to calculate the amount. However, for fluctuating coins such as Bitcoin, the value of which varies greatly over a period of time, the price of fluctuating coins at the time of purchase by the victim and the price of fluctuating coins at the time of the crime may be very different, and the different ways of determining the amount may lead to “different sentences for such cases”.

(2) The problem of recovery

According to Article 5 of the Opinions of the Supreme Court, the Supreme Prosecutor and the Ministry of Public Security on Several Issues Concerning the Application of Law in Handling Criminal Cases of Illegal Fund Raising in 2014, the funds illegally absorbed from the public are illegal proceeds. The interest, dividends and other returns paid to the participants of the fund raising with the absorbed funds, as well as the agency fees, benefit fees, rebate fees, commissions, commission and other fees paid to the persons who helped absorb the funds should be recovered according to the law. However, due to the data-based nature of Bitcoin and other virtual currencies, full ownership can be retained by keeping the private key, and it is likely that the e-wallets hosted are far away from overseas, which poses high technical requirements for the traditional means of seizure, seizure, freezing, and other means of recovery.

(iii) Adaptation of crime and punishment

The case was decided last year, when Amendment XI to the Criminal Law had not yet been introduced, so although the defendant absorbed 15 million RMB worth of virtual currency, he was still sentenced within the range of 3 to 10 years of imprisonment. After the introduction of the amendment, the crime of illegal absorption of public deposits has been set up in the category of “particularly large amount”, which will be sentenced within the range of 10 years or more of fixed-term imprisonment. Although the amount of “especially huge” is yet to be officially explained, I am afraid it is not difficult to reach considering the throughput of the coin circle. In this way, the crime of illegal public deposit is expected to become another heavy sentence of more than 10 years of fixed-term imprisonment in the coin circle, and how to coordinate with the past cases (illegal operation, etc.) is also a problem to be considered.

Written at the end

Since China has not yet defined virtual currencies in the form of laws and regulations, the characterization of virtual currencies in individual cases still depends on the discretion of judges. Therefore, we suggest that financial platforms that only absorb virtual currencies should not use the two departmental regulations as a “get-out-of-jail-free card”, but should carefully assess the risks associated with illegal fundraising on their platforms and do a good job of compliance related to illegal fundraising.

That’s all I have to share today, thanks to the readers!

PS: the nature of BTC in criminal law, there are commodities, data, funds and other views, China is not a case law country, this judgment can not represent the tendency and attitude of all the authorities handling the case, please consult the reader’s discretion after consulting legal professionals!

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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