"Post-00s" college student sentenced to 4 years and 6 months for selling native dogs, retraction of liquidity constitutes fraudulent behavior?

Author: The Paper

"Post-00s" college student Yang Qichao issued a virtual currency abbreviated as BFF on an overseas public blockchain, and faced imprisonment due to withdrawing liquidity. The prosecution accused him of issuing fake virtual currency, leading others to be misled into recharging 50,000 USDT. After Yang Qichao quickly "withdrew his investment," others lost 50,000 USDT, constituting the crime of fraud. On February 20, 2024, the People's Court of Nanyang High-tech Industrial Development Zone in Henan found Yang Qichao guilty of fraud, sentencing him to 4 years and 6 months in prison and imposing a fine of 30,000 yuan.

On May 20, 2024, the case was heard in the Nanyang Intermediate People's Court for the second instance. The Paper learned that during the second trial, Yang Qichao's defense lawyer continued to plead not guilty on his behalf.

The defense argued that the virtual currency issued by the defendant Yang Qichao had a unique and unalterable contract address, and there was no so-called "fake currency." Both the defendant and the complainant were experienced players in the cryptocurrency space, having long engaged in virtual currency trading activities, and had a clear understanding of the risks involved in speculating on virtual currencies. Furthermore, the platform allowed liquidity to be added or withdrawn at any time, and the defendant's actions did not violate platform rules. Additionally, the BFF coins held by the victim appreciated in value after the incident due to increased liquidity, and if traded, could be exchanged for more USDT than before, indicating that the victim did not incur any losses.

Relevant lawyers noted that in the context of China's legal policies not yet recognizing the legality of virtual currencies and the principle that "investment losses in virtual currencies are borne by the investor," this case, which was prosecuted as a criminal case due to the withdrawal of liquidity after issuing virtual currency, is the first of its kind in the country.

The case in the Nanyang Intermediate Court for the second instance

Fraud Case Triggered by "Withdrawing Liquidity"

Born in 2000, Yang Qichao was a senior student about to graduate from a university in Zhejiang before the incident. Out of interest, he got involved in virtual currencies during his college years.

In early May 2022, he noticed a DAO community organization called Blockchain Future Force (abbreviated as BFF) that was promoting and warming up for the issuance of a decentralized virtual token. The issuance was scheduled for May 2 of that year.

On that day at 4:41:46 PM (Beijing time), out of curiosity, Yang Qichao created a digital virtual currency called "Blockchain Future Force" (abbreviated as BFF) on the Binance Smart Chain. At 4:57:25 PM, he added liquidity of 300,000 BSC-USD and 630,000 BFF to the virtual currency he issued.

In decentralized virtual currency trading, the "liquidity pool" is a key factor. First, liquidity providers (users) need to deposit a "token pair" (in this case, the token pair is BFF and BSC-USD) into a smart contract to create a liquidity pool, and through an automated market maker (AMM), set the token pair ratio based on mathematical functions, allowing the two tokens to be exchanged, thereby changing the ratio and allowing investors to seek arbitrage opportunities.

At the same second Yang Qichao added liquidity, Luo purchased 85,316.72 BFF coins by exchanging 50,000 BSC-USD. Just 24 seconds later, Yang Qichao withdrew liquidity from the BFF coins, obtaining 353,488.115 BSC-USD and 508,069.878 BFF coins. This withdrawal of liquidity caused the BFF coins in the liquidity pool to depreciate significantly, and Luo was only able to exchange 81,043 BFF coins for 21.6 BSC-USD.

This act of withdrawing liquidity was referred to as "withdrawing investment" in the indictment. Several cryptocurrency players indicated that withdrawing liquidity is a common arbitrage method in virtual currency trading, which can lead to significant price fluctuations in virtual currency exchanges when liquidity is low, allowing for tenfold or hundredfold profits. Conversely, the virtual currencies held by the losers may depreciate significantly. Therefore, if the issuer withdraws liquidity shortly after adding it, it is viewed as "unethical." Yang Qichao, however, stated, "I just took back what the big brother cut from me; I have also been cut."

However, there are no rules on public chains regarding "whether or not to withdraw" or "how long to wait before withdrawing." Whether investors choose to exit at a loss or wait for new liquidity to come in and appreciate before exchanging depends on individual judgment and choice.

Luo chose to seek compensation from the issuer.

Issuing and trading virtual currencies are both anonymous, making it generally difficult to find the issuer. Coincidentally, Luo traced Yang Qichao through a mutual WeChat friend. Luo requested Yang Qichao to refund his losses, but was refused.

On May 3, 2022, Luo reported to the Nanyang Public Security Bureau High-tech Industrial Development Zone Public Security Branch, claiming he was defrauded of over 300,000 yuan (equivalent to 50,000 USDT) in virtual currency investment. Soon after, the police opened a criminal case for suspected fraud and arrested Yang Qichao in Hangzhou, Zhejiang, in November of that year.

PancakeSwap platform rules allow liquidity to be removed at any time.

Dispute Over "Being Defrauded" and "God-level" Speculators

Fraud is defined as the act of illegally occupying property with the intent to deceive and obtain a large amount of public or private property. During the trial, the prosecution and defense had starkly different views on whether the virtual currency issued by Yang Qichao was real or fake, and whether Luo fell into a misunderstanding.

The Nanyang High-tech Industrial Development Zone People's Procuratorate accused: Defendant Yang Qichao created a fake BFF coin with the same name and promotional materials as the virtual currency issued by Blockchain Future Force, using 300,000 USDT as bait to lure the victim Luo into recharging 50,000 USDT. After Luo recharged, Yang Qichao withdrew a total of over 350,000 USDT, including his own 300,000 USDT, defrauding Luo of 330,000 yuan.

In the defense lawyer's view, first, although the virtual currency issued by Yang Qichao shares the same name as Blockchain Future Force, this does not prove it is a fake BFF coin, as Yang Qichao's BFF coin has a unique and unalterable contract address and can be exchanged normally. There are many coins with the same name on virtual currency platforms. In this case, before Yang Qichao issued the BFF coin, several other entities had already issued multiple coins with the same name. In fact, Blockchain Future Force did not issue BFF coins; it issued BFFT and BFFA coins.

"Buying virtual currency requires first verifying the contract address, which is somewhat similar to a website; it is a string of letters and numbers that serves as a key, is unique and unalterable, and is the core element for identifying different virtual currencies," said a blockchain finance expert who wished to remain anonymous. "The threshold for issuing virtual currencies has become extremely low today. Anyone can issue coins at any time because the code is open source; anyone can copy the code to issue coins. For example, there are many virtual currencies that copy Bitcoin, and it is very common to see coins with the same name, hype coins, and imitation coins." The expert also noted that in 2021, due to endorsements from Elon Musk, Dogecoin surged, leading to the issuance of thousands of virtual currencies named after various animals on platforms, making speculation on coins a trend.

Did Luo's action of recharging 50,000 USDT to exchange for BFF coins indicate he fell into a misunderstanding?

In the defense lawyer's view, Luo is an experienced player and should have a clear understanding of the speculative nature and risks of virtual currency trading. He stated in his testimony: "Generally, when a new coin is issued, whoever buys it first will see their coins appreciate as others buy in." "The downside is that there is no regulation; anyone can issue virtual currencies on the platform, which carries investment risks."

Transaction records show that Luo bought BFF coins at the exact second Yang Qichao added liquidity, which "could not possibly be achieved through manual operation but was completed automatically through a script, without involving any manual verification or identification process," the defense lawyer said.

However, Luo denied that he had pre-written a script to buy automatically.

Case materials indicate that when reporting to the police, Luo claimed he purchased the coins on his phone in a supermarket parking lot in Nanyang High-tech Zone through the PancakeSwap virtual currency trading platform, stating, "If I could buy the virtual currency in the first batch, as more people buy, the price would rise, and there would be significant appreciation when sold." However, the legal opinion provided by Luo's lawyer stated that Luo operated on a computer.

An anonymous senior cryptocurrency insider analyzed that virtual currencies can only be traded after the issuer adds liquidity. Manually purchasing virtual currencies involves multiple steps, such as connecting a wallet, entering the coin name, specifying the exchange amount, choosing which coin to exchange, and inputting the contract address, which requires at least five or six steps and cannot be completed in one second.

This insider explained that there is a practice in the cryptocurrency space called "rushing the dog coin." "Dog coins" often refer to investing in virtual currencies on decentralized public chains that usually lack formal promotion and white papers. Those who enter early may see tenfold or hundredfold returns, but if they withdraw late, they may suffer significant losses due to insufficient liquidity. In fact, there are individuals known as "crypto snipers" who pre-write scripts to buy newly issued virtual currencies and quickly withdraw once they appreciate. These individuals are also referred to as "hair pullers," which is synonymous with "cutting leeks."

After reviewing Luo's transaction records, the aforementioned cryptocurrency insider found that he made multiple trades within extremely short time frames of 6 seconds, 9 seconds, 12 seconds, and 18 seconds, with the fastest holding for only 6 seconds before selling everything for a significant profit, indicating "such operations are extremely professional and belong to the god-level in the cryptocurrency space."

BFFA virtual currency issued by Blockchain Future Force

No Protection for Virtual Currency and Criminal Accountability

Another contentious point during the trial was whether the lost virtual currency should be considered property protected by criminal law.

The public security authorities had informed Luo at the outset of the case that, due to prohibitive national laws, there were no institutions in the country capable of assessing the value of the involved USDT coins. The first-instance court also stated that, given the current inability to assess the price of Tether and other virtual currencies in China, it could not determine the specific amount involved in this fraud case.

Luo's loss amounted to 50,000 USDT. USDT, known as Tether in Chinese, is a virtual currency pegged to the US dollar and can generally be exchanged at a 1:1 ratio with the dollar. However, since USDT cannot be used directly on the Binance Smart Chain, it must be exchanged through a cross-chain bridge into the commonly used BSC-USD on the Binance Smart Chain, and then BSC-USD can be exchanged for other virtual currencies on the chain. After multiple exchanges and conversions between BSC-USD and USDT, USDT and the dollar, and the dollar and the yuan, the prosecution accused Yang Qichao of defrauding Luo of 330,000 yuan.

The first-instance court held that "according to relevant policies in China, this virtual currency does not possess monetary attributes, but in real life, due to its stability, it can be traded on many international trading platforms and bring economic benefits, its property attributes cannot be denied," thus recognizing the conversion of the involved 50,000 USDT into its RMB value as a sentencing factor.

The defense lawyer argued that according to current laws and regulations in China, virtual currency investment activities are not protected by law, and both parties are engaged in illegal financial activities. Even if investors incur losses, they should not be legally protected. The first-instance court's determination was seen as "indirectly supporting the exchange transaction between virtual currencies and legal tender," which contradicts national legal provisions.

As early as December 3, 2013, the People's Bank of China, the Ministry of Industry and Information Technology, and the three major regulatory commissions for banking, securities, and insurance issued a notice on "Preventing Bitcoin Risks," clearly stating that "Bitcoin does not have the same legal status as currency and cannot and should not circulate as currency in the market." On September 4, 2017, the People's Bank of China and six other ministries issued a notice on "Preventing Risks of Token Issuance Financing," stating that "the essence of token issuance financing is an illegal public financing activity that has not been approved," and "there are multiple risks associated with token issuance and trading, including false asset risks, operational failure risks, and investment speculation risks, which investors must bear on their own."

On September 15, 2021, the People's Bank of China, the Supreme Court, the Supreme Procuratorate, and ten other departments issued a notice on "Further Preventing and Dealing with Risks of Virtual Currency Trading and Speculation," clarifying that "any legal person, unincorporated organization, or individual investing in virtual currencies and related derivatives that violate public order and good customs will have their relevant civil legal actions deemed invalid, and any resulting losses will be borne by them; those suspected of disrupting financial order and endangering financial security will be investigated and dealt with by relevant departments in accordance with the law."

Additionally, in the "Guiding Case No. 199" released by the Supreme People's Court on December 27, 2022, the court confirmed that in this case, "the arbitration ruling ordering the respondent to compensate for the equivalent of Bitcoin in US dollars, which was then converted into RMB, constitutes indirect support for the exchange transaction between Bitcoin and legal tender, violating national regulations on financial supervision of virtual currencies and undermining public interest, thus the people's court should rule to revoke the arbitration ruling."

The Paper found that a civil case published on the official website of the Nanyang Intermediate Court also mentioned that "the USDT digital currency involved in this case is a virtual currency similar to Bitcoin. According to notices and announcements issued by the People's Bank of China and other departments, virtual currencies are not issued by monetary authorities, do not possess attributes such as legal tender and compulsion, and are not true currencies in the real sense, do not have the same legal status as currency, and cannot and should not circulate as currency in the market. Citizens' investments and transactions in virtual currencies are not protected by law."

The related controversial topics have also sparked academic debate. On May 16, 2024, the People's Court Daily published a theoretical article titled "Analysis of the 'Criminal Law Property Theory' of Virtual Currencies," authored by Associate Professor Ye Zhusheng from the School of Law at South China University of Technology, who argued that "recognizing virtual currencies as property under criminal law violates the principle of unity of legal order." His reasoning is that "both China's civil law and financial policies do not protect activities related to virtual currencies, do not encourage, and even discourage activities related to virtual currencies, while civil law generally recognizes virtual currency activities as invalid civil legal actions for violating public order and good customs. If criminal law protects virtual currencies as property, it indirectly guarantees the safety of virtual currency transactions and promotes activities such as virtual currency trading, which contradicts the goals of civil law and financial policies."

Furthermore, the defense lawyer pointed out that transaction records show that Luo exchanged back 21.6 BSC-USD coins in less than 7 minutes and subsequently made three separate "bottom-fishing" purchases of the BFF coins issued by Yang Qichao. Yet, Luo later reported to the police that he had been defrauded. By the time of the trial, the BFF coins issued by the defendant had appreciated significantly due to increased liquidity, and Luo's wallet ending in 3A22 still held 72,381.7198 BFF coins, which could be exchanged for 64,065.7134 USDT, "regardless of whether virtual currencies are considered property, in terms of the increase in the quantity of USDT alone, Luo has not incurred any losses."

The first-instance judgment stated, "As for whether the victim later bought or sold the BFF coins, and whether the coin still shows value according to the trading rules of the PancakeSwap platform, this does not affect the establishment of Yang Qichao's crime of fraud." During the first-instance trial, the judge explicitly required that Luo could not engage in buying or selling before the judgment became effective.

In the second instance, the defense lawyer stated, "This case is essentially an investment behavior in virtual currencies, not a criminal act. Similar to stock trading, investing in virtual currencies is a process where the price of virtual currencies fluctuates with the amount of liquidity. Whether one makes a profit or a loss depends on the timing of buying and selling. It now appears that throughout the process of investing in BFF coins, Luo did not lose 'money'; rather, he made a 'profit.' The logical starting point of this case is trading losses, but if the victim could clearly trade back for more virtual currencies, how can this be considered fraud?"