Frontline court police call for regulatory legislation on virtual currencies

Recently, Sun Guanjun, the Chief Judge of the Taiping People's Court and a Senior Judge of Level 4, collaborated with Wei Yuzheng, a judicial police officer from the Judicial Police Brigade, to write an authoritative article titled "The Validity of Virtual Currency Transactions." Upon publication, the article sparked widespread attention and discussion across various sectors of society.

The article delves into the core issues surrounding the validity of virtual currency transactions and clearly states that in order to better adapt to the rapid development of the digital economy era, China urgently needs to accelerate the improvement of the relevant legal and regulatory framework to ensure the healthy and orderly development of the virtual currency transaction sector.

Author Biography

Sun Guanjun, male, born in February 1970, a member of the Communist Party of China, with a bachelor's degree, currently serves as the Chief Judge of the Taiping People's Court in Shuangyang District, Changchun City, and is a Senior Judge of Level 4.

He joined the Shuangyang District People's Court in Changchun City in 1994, serving successively as a clerk, assistant judge, judge, deputy chief judge of the Pinghu People's Court, deputy chief judge of the civil division, deputy chief judge of the criminal division, chief judge of the Sheling People's Court, and chief judge of the Taiping People's Court, working continuously on the front lines of adjudication. He has received honors such as the Mediation Expert of the Changchun Intermediate People's Court and possesses rich experience in adjudication.

Wei Yuzheng, male, born in October 2000, graduated from Jilin Judicial Police Vocational College, and joined the judicial police position at the Shuangyang District People's Court in June 2024, currently assisting at the Taiping People's Court.

Both authors are frontline workers in the judicial system. According to statistical data, in 2023, the total number of cases involving virtual currency crimes in China was 428, a decrease of 88.9% compared to 2022. However, the amount involved surged to 430.719 billion yuan, approximately 12.36 times that of 2022. In the first half of 2024, money laundering cases accounted for a major proportion of domestic virtual currency cases solved. For instance, a virtual currency money laundering case solved by the police in Xingguo, Jiangxi, highlights the severity of such criminal activities. Additionally, although the Lantian Ge Rui case has been unresolved for seven years, there are still 61,000 bitcoins to be recovered, further underscoring the complexity and long-term nature of virtual currency crime cases. The "2023 Shanghai Financial Prosecution White Paper" was released on June 12, 2024, specifically pointing out the potential risks of using "virtual currency" for cross-border asset transfers. A review of the white papers published by the Shanghai prosecution over the past three years shows that illegal financial crimes have always been a key focus of the judicial authorities' crackdown, and such black and gray industries have gradually formed a scaled industrial chain. Using virtual currency for disguised currency exchange and fund payment settlement to achieve cross-border asset transfers has become a key issue of ongoing concern for judicial authorities across the country. Since the beginning of this year, the People's Court of Wusongqi has concluded a total of 49 cases involving crimes such as fraud, aiding information network crime activities, and concealing criminal proceeds, involving 75 individuals. At the same time, the court has also severely cracked down on illegal fundraising activities disguised as private investment and financing intermediaries, equity crowdfunding, and virtual currency. This series of data indicates that there are numerous judicial cases involving virtual currency, with diverse types of crimes and significant amounts involved. However, the legal validity of virtual currency transactions remains highly controversial in both legal and academic circles, making it difficult for judicial authorities to strictly apply relevant legal provisions during trials, leading to inconsistent judgments in similar cases. Against this backdrop, legal professionals and academic experts jointly call for the acceleration of the improvement and optimization of the relevant legal and regulatory framework in China, aimed at effectively addressing the urgent demands and challenges posed by the rapid development of the digital economy regarding the legal validity of virtual currency transactions and other core issues.

I. Definition of Virtual Currency

As an emerging medium of exchange and investment tool, virtual currency has gradually emerged in the wave of the digital economy. It is referred to by various names such as internet currency and digital currency, and is a product born under the "internet social form." People establish or participate in communities based on common needs, forming a shared credit value system, which lays the foundation for the birth of virtual currency. Well-known types of virtual currencies, such as Bitcoin and Tether, have attracted significant attention in the market. Their emergence provides new options for people's transactions and investments.

Characteristics and Differences from Traditional Currency

Virtual currency significantly differs from traditional currency in several aspects. Functionally, virtual currency does not possess all the functions of traditional currency, such as a measure of value, means of circulation, means of storage, means of payment, and world currency. However, in specific virtual environments, it can serve as an equivalent for purchasing virtual goods or services, and in some platforms, it can even be exchanged for legal tender. Compared to traditional currency, the issuance mechanism of virtual currency is also entirely different. Traditional currency is issued and managed by central banks, with its quantity and value determined by the government. In contrast, virtual currency is generated and managed through encryption technology, with its issuance quantity and value depending on market supply and demand and algorithmic rules. For example, Bitcoin is generated through decentralized blockchain technology, with no centralized issuer, a limited total supply, unrestricted use across regions, and anonymity. In terms of value stability, traditional currency is usually backed by the government, possessing relatively stable value, despite factors such as inflation and exchange rate fluctuations. The value of virtual currency, however, is influenced by market supply and demand, leading to significant price volatility. The virtual currency market is susceptible to speculative sentiment and market manipulation, increasing investment and usage risks. Furthermore, virtual currency differs from traditional currency in terms of transaction transparency, acceptability, and security. Virtual currency transactions are based on blockchain technology, with transaction information publicly recorded on the blockchain, achieving transparency in transactions, allowing anyone to view and verify the validity of transactions. However, virtual currency also faces issues such as hacking, loss of private keys, and risks associated with trading platforms, necessitating users to enhance the protection of their personal information and assets. The security of traditional currency primarily relies on the security measures of central banks and financial institutions, such as password protection, anti-counterfeiting technology, and legal protection. In summary, virtual currency demonstrates unique advantages in specific areas, yet significant differences remain compared to traditional currency. However, there is currently no clear definition regarding the differences in legal validity between the use and investment of virtual currency and legal tender, which undoubtedly poses severe challenges for frontline legal practitioners and has sparked extensive debate and discussion in academic circles.

II. Controversy over the Legal Status of Virtual Currency

Clear Negative Attitude in Policies and Regulations

China has clear regulations regarding the legal status of virtual currency. The "Notice on Preventing Bitcoin Risks" issued by the People's Bank of China and four other ministries in 2013 only pertains to Bitcoin and does not cover other virtual currencies. On September 4, 2017, the People's Bank of China and seven other ministries issued the "Announcement on Preventing Risks of Token Issuance Financing," stating that token issuance financing is an unauthorized illegal public financing activity suspected of various illegal and criminal activities. On September 15, 2021, the Supreme People's Procuratorate and seven departments issued the "Notice on Further Preventing and Handling Risks of Virtual Currency Trading Speculation," reiterating that virtual currency does not have the same legal status as legal tender, lacks legal compensation, and should not and cannot circulate as currency in the market. These policies and regulations clearly indicate China's negative stance on virtual currency trading, and the trading behavior of virtual currency is not protected by monetary law.

Diverse Voices in Academia

In academia, there are differing views on the legal status of virtual currency. Some scholars argue that virtual currency, as an emerging phenomenon, has not yet been clearly defined in legal terms and should not be universally deemed illegal. Scholars point out that the data attributes of virtual currency are merely carriers, while its property attributes are its essence, possessing certain property characteristics that can be exchanged as equivalents in specific environments, thus deserving legal protection. For instance, some scholars believe that virtual currencies like Bitcoin, through blockchain technology, achieve decentralized transactions, possessing certain innovation and value. At the same time, with the continuous development of blockchain technology, the application scenarios of virtual currency will become more extensive, and its legal status urgently needs clarification. However, there are also opposing views among scholars. They argue that virtual currency trading poses significant financial risks and social harms, and if left unchecked, it will severely disrupt financial order and social stability. The high anonymity of virtual currency trading makes it easy to become a tool for illegal activities such as money laundering, terrorism financing, and fraud. Due to the lack of a centralized regulatory mechanism, tracking and controlling virtual currency transactions becomes extremely difficult, especially for transactions conducted in anonymous networks, where law enforcement agencies can hardly trace the actual trading parties. Therefore, virtual currency trading behaviors should be strictly prohibited and combated through legal means.

III. Determining the Validity of Virtual Currency Trading Contracts

Legal Provisions Consistent with the Civil Code

Article 4 of the "Notice on Further Preventing and Handling Risks of Virtual Currency Trading Speculation" states: "Any organization or individual investing in virtual currency and related derivatives that violates public order and good customs shall have their relevant civil legal acts invalid." This aligns with the relevant provisions of China's Civil Code. Public order and good customs, as a legal principle, play an important normative role in civil activities. Due to the potential risks and impacts on financial order, virtual currency trading is deemed to violate public order and good customs, resulting in the invalidity of relevant civil legal acts.

Case Support for the Invalidity of Contracts

In judicial practice, there are numerous cases supporting the view that virtual currency trading contracts are invalid. For example, in the 199th case of the 36th batch of guiding cases published by the Supreme People's Court, the court determined that the exchange and trading between virtual currency and legal tender violated social public interests, thus ruling the contract invalid. In this case, the amount of virtual currency was substantial and used for investment and financial management, which negated the legality of the contract. The parties requested to convert the virtual currency to the market price in USD and then convert it to RMB, which amounted to a disguised exchange of virtual currency, and the court naturally could not support this. Additionally, in the case of Hu Xingrui vs. Wang Gang regarding a sales contract dispute, after the state issued clear regulatory policies prohibiting "mining" activities, the Bitcoin "mining machine" sales contract signed by the parties was deemed an invalid contract violating public order and good customs. Bitcoin does not have the same legal status as China's legal tender, and the "results" produced by "mining" activities do not constitute legal tender and lack actual value support, and the risks arising from the production and trading of virtual currency are prominent, harming social public interests. In the case of Mingde Rong Company vs. Mingxin Company regarding a sales contract dispute, the "mining machine" sales appeared to be a typical sales transaction, but based on the context of the contract signing and performance, the actual purpose of entering into the "mining machine" sales contract was to engage in "mining" activities for computer virtual currency, which constitutes investment in virtual currency behavior, violating public order and good customs, leading the court to rule the sales contract invalid. After the contract is declared invalid, the seller should return the payment to the buyer. In another case, Xie vs. Chengdu Xiaomifeng Computing Technology Co., Ltd. regarding a commission contract dispute, the court held that virtual currency does not possess legal compensation and cannot circulate as currency in the market. Activities such as investing in, trading, and providing services related to virtual currency are considered illegal financial activities, violating public order and good customs, rendering the relevant civil legal acts invalid, and any investment risks and losses arising therefrom are borne by the investors themselves, with no legal protection. In the case of Fengfu Jiuxin Company vs. Zhongyan Zhichuang Company regarding a service contract dispute, both parties signed an agreement for "mining" on behalf of each other, and due to the adverse impact of producing virtual currency through specialized "mining machines" on China's industrial structure optimization and energy conservation and emission reduction, as well as the prominent risks arising from the production and trading of virtual currency harming social public interests, this agreement was deemed invalid, and thus the related property rights should not be legally protected. In the case of Zhong vs. Wu regarding a sales contract dispute, it was determined that online virtual currency does not have the same legal status as legal tender, and citizens' investment and trading in virtual currency disrupt the national financial management order, constituting a violation of public order and good customs, and thus are not protected by law. The parties formed a de facto sales contract relationship, but the act of trading virtual currency lacks legality and is not protected by law in China. These cases fully demonstrate that virtual currency trading contracts may be ruled invalid in various circumstances, further clarifying the legal risks and uncertainties associated with virtual currency trading.

IV. Regulatory Dilemmas

Lagging and Uncertainty of Legal Regulation

Virtual currency trading poses risks of being conducted through illegal means such as "VPN" and "dark web," which not only violate China's legal provisions but also bring significant legal risks to both parties involved in the transaction. Due to the current lag in legal regulation, the crackdown on these illegal trading activities is limited, leading to a certain degree of chaos in the virtual currency trading market. The decentralized and anonymous characteristics of virtual currency make it challenging for both parties to fulfill their contractual obligations. For example, during the trading process, the inability to identify the trading counterpart makes it difficult to establish trust between the parties. Additionally, the severe price fluctuations of virtual currency may lead one party to suddenly change their mind during the transaction, resulting in the failure to complete the trade. Furthermore, the irreversibility of virtual currency transactions also poses challenges for both parties. Once a transaction is completed, if one party defaults, the other party will find it difficult to recover funds through traditional means. This is because the transaction records of virtual currency are stored on the blockchain and are difficult to alter, but this also means that once a problem arises, finding an effective solution becomes challenging.

Tools for Illegal Activities

The anonymity of virtual currency makes it susceptible to being used as a tool for illegal activities such as money laundering, terrorism financing, and fraud. Wen Xinxiang, director of the Payment and Settlement Department of the People's Bank of China, stated that the anonymity of virtual currency makes it easier to be used as a tool for laundering illegal criminal transactions. In the "crypto circle," it is not uncommon for criminals to engage in illegal fundraising, fraud, and other activities using virtual currency. For example, the People's Court of Xiangcheng District in Huaibei City, Anhui Province, publicly ruled on a major cross-border telecom fraud case packaged as virtual currency, sentencing 79 defendants for fraud. This criminal gang often "targets" economically capable clients, promoting the appreciation potential of virtual currency products through live broadcasts and WeChat groups, enticing clients to continuously increase their investments, and ultimately manipulating the virtual currency to plummet, defrauding victims of their assets. Due to the lack of a centralized regulatory mechanism, tracking and controlling virtual currency transactions becomes extremely difficult, especially for transactions conducted in anonymous networks (such as the dark web), where law enforcement agencies can hardly trace the actual trading parties. The anonymity, difficulty of tracing, and borderless characteristics of virtual currencies like Bitcoin also make them ideal channels for criminals to launder money. The Supreme People's Procuratorate and the People's Bank of China have previously disclosed a typical case of money laundering involving virtual currency. The defendant, Chen Mouzhi, laundered money into Bitcoin after his ex-husband Chen Moubo fled abroad due to suspected fundraising fraud, allowing Chen Moubo to squander the funds abroad, amounting to over 900,000 yuan.

Challenges in Judicial Practice

In judicial practice, cases involving virtual currency trading are often ruled as invalid contracts, as virtual currency trading violates mandatory financial management regulations or public order and good customs, and thus is not protected by law. Disputes arising from virtual currency trading often result in judgments for the return of property or compensation at a discounted value, but specific operations face numerous challenges. Firstly, the value of virtual currency is difficult to measure. The price of virtual currency fluctuates significantly, and there are price differences across different trading platforms, making the choice of appropriate evaluation standards crucial. Additionally, preventing conflicts of interest and data manipulation during the evaluation process to ensure the authenticity and reliability of the evaluation results is also an important challenge faced by judicial authorities. Secondly, how to restore the original state after the trading behavior is deemed invalid is also a challenge. The irreversibility of virtual currency makes it difficult to restore the original state through traditional means once a transaction is completed. In terms of clarifying and distributing funds, it is essential to reasonably allocate the proceeds from liquidation to ensure that the rights and interests of all stakeholders are properly handled, which involves legal, economic, and social considerations, and its complexity should not be underestimated. Furthermore, the cross-border nature of virtual currency adds complexity to the legal regulation of its trading behavior, often involving the laws of multiple countries and regions. Different countries and regions have varying legal provisions regarding virtual currency, which poses significant difficulties for judicial practice. When dealing with cross-border trading disputes involving virtual currency, it is necessary to consider the legal provisions of different countries and regions and coordinate the interests of all parties, which is a very complex process. In Conclusion

The construction of the legal and regulatory framework for virtual currency trading is a key link in ensuring the healthy operation of the market and the development of the digital economy, and its importance is self-evident, directly related to the core interests of participants and the robust advancement of the entire digital economy ecosystem.

Given that the digital economy is in a period of vigorous development, virtual currency trading, as an undeniable market force, its regulation and development are crucial for the stability of the entire economic system.

Therefore, accelerating the improvement of the relevant legal and regulatory framework is not only an inevitable requirement for maintaining market order and protecting the legitimate rights and interests of investors but also a necessary measure to provide solid legal support for innovative practices in the digital economy field.

Currently, the construction of the legal and regulatory framework for virtual currency trading is urgent. We call on relevant departments to keenly capture social concerns, take swift action, and formulate policies and measures that are both practical and forward-looking, to jointly promote the healthy and sustainable development of China's digital economy on a legal track.