Virtual currency trading is classified as illegal fundraising, and there are several issues that practitioners must pay attention to

Author: Xu Cihua, Blockchain Daily

Recently, the Supreme People's Court issued the "Decision on Amending the 'Interpretation on Several Issues Concerning the Application of Law in the Trial of Criminal Cases of Illegal Fundraising'" (hereinafter referred to as the "Latest Judicial Interpretation"), which will take effect on March 1, 2022.

The latest judicial interpretation refines and explains Article 176 of the Criminal Law concerning the crime of illegal absorption of public deposits and Article 192 concerning the crime of fundraising fraud, with the eighth clause of the second article explicitly stating that virtual currency trading constitutes the crime of illegal absorption of public deposits.

"The landing of regulatory measures is not surprising." Pan Ting, a lawyer at Rongfu Law Firm, told a reporter from Blockchain Daily that since the release of the "Notice on Further Preventing and Dealing with Risks of Virtual Currency Trading Speculation," the judicial interpretation related to virtual currency trading has been anticipated.

After the implementation of the new judicial interpretation, the reporter from Blockchain Daily interviewed several professional lawyers regarding which behaviors are permissible and which are not, as well as the difficulties in the implementation process.

ICO, IEO, and IGO are all illegal behaviors

Lawyer Pan Ting stated that the primary focus of this judicial interpretation is on ICOs (Initial Coin Offerings, which originate from the concept of Initial Public Offerings in the stock market, referring to the initial issuance of tokens by blockchain projects to raise general digital currencies like Bitcoin and Ethereum). Such behaviors are the key targets of the "Latest Judicial Interpretation," including various forms of ICOs, whether it be IEOs (where exchanges serve as fundraising platforms to issue (sell) tokens to users of that exchange) or IGOs (Initial Game Offerings, a crowdfunding form using blockchain technology similar to ICOs or IEOs). Regardless of the name changes, the essence remains illegal absorption of public deposits.

Pan Ting further explained that before the implementation of the "Latest Judicial Interpretation," filing cases related to ICOs was a challenge. If the project party raised funds in fiat currency, it was usually relatively simple for law enforcement to file a case. However, if the project party raised funds in virtual currencies like ETH or USDT, filing a case was akin to a difficult journey. However, with the implementation of the "Latest Judicial Interpretation," it is believed that the difficulties in filing cases will gradually change.

Lawyer Pan Ting pointed out, "Gamefi project parties should not harbor any illusions; although the form of chain games is novel, the essence of IGO is still illegal absorption of public deposits."

"Next is wealth management. For example, locked savings, staking, Lunchpad, etc., are basically all within the jurisdiction of the latest judicial interpretation," Pan Ting stated.

"The new judicial interpretation on illegal fundraising will be implemented, and illegal absorption of funds through methods such as online lending, investment shares, and virtual currency trading will be recognized as conditions for conviction of illegal absorption of public deposits. This is a new requirement to fill regulatory and legal gaps and to combat related illegal activities, as well as a new summary of judicial practices and new forms of crime." Li Ya, a partner at Zhongwen Law Firm, told Blockchain Daily.

Lawyer Li Ya stated that behaviors involving virtual currency trading, whether OTC trading, cryptocurrency trading, DeFi, Gamefi, or airdrop activities, cannot be judged solely based on the business model; one needs to unveil the essence of these activities.

Li Ya further explained that as long as the four characteristics of the crime of illegal absorption of public deposits—illegality, publicity, inducement, and sociality—are met, and they do not meet the conditions for the pilot application of corporate compliance reform, they may involve the crime of illegal absorption of public deposits.

Are previous token issuance project parties safe?

It is noteworthy that whether the latest judicial interpretation has retroactive effect on previous token issuance project parties is also a focus of concern in the cryptocurrency circle.

"If the original project continues to this day, then such illegal or criminal behavior belongs to a continuous state, and it will definitely apply to the new judicial interpretation," Li Ya stated.

Li Ya explained that the principle of retroactivity in China's criminal law is "from the old and lighter," meaning that it follows the standard of "beneficial to the defendant." Similarly, for behaviors that occurred before the implementation of the new judicial interpretation, if there was already a relevant judicial interpretation at the time of the behavior, it will be handled according to the judicial interpretation at that time; however, if applying the new judicial interpretation is beneficial to the criminal suspect or defendant, the new judicial interpretation will be applied.

Will NFT platforms be affected?

2021 is known as the year of NFTs, and many domestic internet companies launched their own digital collectibles platforms (NFT platforms). Will NFT platforms be affected by the "Latest Judicial Interpretation"?

Lawyer Pan Ting stated that conventional NFT platforms and transactions are not within the regulatory scope of the "Latest Judicial Interpretation" and the "Notice on Further Preventing and Dealing with Risks of Virtual Currency Trading Speculation."

Pan Ting pointed out that "conventional" NFT platforms and transactions, if the project party or platform engages in fundraising from unspecified objects or price manipulation by issuing a large number of NFTs, still involve criminal offenses.

However, Pan Ting also mentioned that digital collectibles platforms like Alibaba's Whale Probe and Tencent's Huanhe, which do not have secondary market trading and use private chains with transactions conducted in RMB, have very low legal risks.

Difficulties in Conviction

Regarding the difficulty of classifying virtual currency trading as illegal fundraising behavior, Lawyer Li Ya believes there are three main aspects:

First, virtual currency trading crimes are often closely related to technological and financial innovations, and precise legal identification of criminal methods is needed when defining crime and non-crime.

Second, virtual currency trading crimes may involve blockchain and other related technical issues, requiring investigators to have a certain understanding of relevant professional knowledge.

Lastly, virtual currency trading crimes often utilize networks, blockchain, and other technological tools, and involve numerous participants, making it very difficult for investigators to collect evidence and secure proof.