What crime is involved in issuing Dogecoin?

Author: Xiaoza Team

What is a "土狗币" (Tu Dog Coin)? A simple understanding is that it refers to "non-mainstream" cryptocurrencies issued directly by private individuals (individuals, legal persons, or non-legal entities) outside of mainstream cryptocurrencies with large market capitalization and strong liquidity, such as Bitcoin and Ethereum. Most 土狗币 even lack a white paper.

Recently, the Xiaoza team noticed that a certain card-playing news media published an article titled "The First Case of Criminal Charges Related to Virtual Currency Issuance Sparks Controversy: Does Withdrawing Liquidity Leading to Losses in Speculative Trading Constitute Fraud?" The article reported on a post-00s student who was convicted of fraud by our country's judicial authorities after issuing 土狗币 on a certain overseas public chain. To be honest, such criminal cases in the cryptocurrency circle are not uncommon, and it is difficult to say that this is the first case in our country. The Xiaoza team has actually handled several similar cases involving criminal charges due to liquidity withdrawal. Today, the Xiaoza team will discuss whether issuing 土狗币 constitutes a crime and what kind of crime it may involve, in light of recent cases.

Case Introduction

The Xiaoza team reminds everyone that the following content is derived from public information: The suspect in this case, Yang, born in 2000, was a senior student about to graduate from a university in Zhejiang before the incident, and he was also a skilled player in crypto assets. In May 2022, Yang noticed that an overseas DAO named Blockchain Future Force (BFF) was promoting an ICO and announced that it would issue coins on May 2, 2022.

At 4:41:46 PM on May 2, 2022, Yang independently issued a 土狗币 named BFF on a certain overseas public chain, which was the same as the English name of Blockchain Future Force. More than ten minutes later, as a liquidity provider, Yang added 300,000 BSC-USD and 630,000 BFF to the BFF coin project to create a liquidity pool (in simple terms, this means injecting capital to provide market-making for the BFF 土狗币 project). At the same second that Yang added liquidity, Luo directly exchanged 50,000 BSC-USD for 85,316.72 BFF coins.

Twenty-four seconds later, Yang withdrew the liquidity from the BFF coin, receiving a total of 353,488.115 BSC-USD and 508,069.878 BFF coins. This action caused a significant devaluation of the BFF coin, and the 81,043 BFF coins that Luo bought with 50,000 BSC-USD instantly dropped in value to only 21.6 BSC-USD.

After the incident, Luo happened to find out Yang's true identity through a mutual friend and demanded that Yang return the funds. After locating Yang, Luo reported to the Public Security Bureau of the High-tech Industrial Development Zone in Nanyang, Henan Province on May 3, 2022, claiming that he had been defrauded of more than 300,000 RMB (50,000 USDT) in virtual currency investments. The Nanyang Public Security Bureau filed a case for fraud and arrested Yang in November 2022.

Does Yang Constitute Fraud?

With the development of crypto assets, the threshold for issuing coins has become extremely low, and a large number of meme coins, 土狗币, and air coins are flourishing on overseas public chains. The type of project mentioned in the above case is not uncommon. Although such 土狗币 may have elements of "pig butchering" or "cutting leeks," most players in the crypto circle view them as a form of speculative play and financial gambling. In fact, many professional crypto players utilize computer technology and large amounts of capital to engage in arbitrage by buying and selling 土狗币 in a very short time (commonly referred to as "冲土狗").

So, does Yang's behavior constitute fraud? According to Article 266 of China's Criminal Law, fraud refers to the act of defrauding public and private property in a relatively large amount. In judicial practice, the elements for a suspect to constitute fraud are as follows:

1. The suspect has the intention to illegally occupy another person's property;
2. The suspect objectively implements "fraud" behavior, generally involving "fabricating facts" or "concealing the truth";
3. The victim falls into a mistaken belief due to the suspect's fraudulent behavior, disposes of their own property, and suffers property loss.

Based on this, whether Yang constitutes fraud hinges on whether there is evidence proving his intention to illegally occupy the victim's property, whether he implemented fraudulent behavior, and whether the victim fell into a mistaken belief due to Yang's fraudulent behavior.

(1) Perspective of China's Judicial Authorities

In this case, the Nanyang High-tech Industrial Development Zone People's Procuratorate accused Yang of creating a fake BFF coin with the same name as the virtual currency issued by Blockchain Future Force, using 300,000 USDT as bait to lure the victim, Luo, to invest 50,000 USDT. Yang then withdrew a total of over 350,000 USDT, defrauding Luo of 330,000 RMB, which constituted fraud.

It is evident that from the prosecutor's perspective, Yang's act of issuing a fake cryptocurrency with the same name as the Blockchain Future Force DAO is considered a "fraud" act, and the behavior of creating a liquidity pool and then instantly withdrawing funds is seen as a fraudulent act using the fake cryptocurrency as "bait." The victim, Luo, fell into the mistaken belief that Yang would likely operate this crypto asset project for a long time, resulting in financial loss. Therefore, Yang's actions are deemed fraudulent.

(2) Xiaoza Team's Viewpoint

The Xiaoza team believes that the prosecutor's and first-instance judge's view that Yang's actions constitute fraud is debatable. Although the case superficially appears to have the characteristics of fraud, a more objective and accurate evaluation requires a deeper understanding of the gameplay of cryptocurrencies. Overall, based on the following facts, the Xiaoza team does not believe that the actions of the suspect Yang constitute fraud.

We believe that the victim likely did not fall into a subjective misunderstanding; their act of disposing of property may not have been made by themselves but rather by an automated trading program written using computer code. The trading records of the victim, Luo, show that he bought BFF coins at the exact second Yang added liquidity to the BFF project. The Xiaoza team agrees with the viewpoint of the defense lawyer in the first-instance trial that such behavior is highly unlikely to have been achieved by Luo through manual operation, and is more likely the result of an automated trading software specifically written (or purchased) for "冲土狗" arbitrage (regardless of how fast a person is, it is highly improbable for a normal human to complete the purchase of BFF coins within a second, let alone buy coins at the same second liquidity was added without insider information).

According to inquiries from third-party cryptocurrency insiders into Luo's trading records, it was found that Luo had engaged in a large number of investments in 土狗币, and many transactions were completed within seconds or tens of seconds for arbitrage, indicating highly professional operations. It can be reasonably concluded that he is a professional "trader" or "sniper" in the cryptocurrency circle.

Therefore, the Xiaoza team believes that the victim did not actually "get scammed," meaning he did not fall into a mistaken belief due to Yang's actions, and the act of disposing of his own property was not made by him. Thus, Yang's actions do not constitute fraud.

In Conclusion

The Xiaoza team believes that although Yang's actions in the above case may not constitute fraud, the act of issuing 土狗币 itself remains a high-risk behavior that could potentially constitute illegal business operations, illegal fundraising crimes, and gambling-related crimes. Particularly with regard to illegal fundraising crimes, under the continued effectiveness of the 9.4 announcement and the 9.24 notice, ICO activities, whether conducted domestically or abroad, are still likely to constitute the crime of illegally absorbing public deposits as long as the project party is based domestically.