I Author: Attorney Shao Shiwei

1

Frequent Occupational Crimes in the Web3 Industry

In our representation of criminal cases in the Web3 industry, we have also handled several typical cases of "project insiders misappropriating company assets." Although the following two cases have been redacted and the content edited, the issues they illustrate are not uncommon in the industry.

In the first case, a partner used company assets for cryptocurrency speculation without authorization, ultimately depleting the account.

Two partners, A, responsible for technical development, and B, responsible for external financing, had been running a project for many years and generating substantial profits. They agreed that, after covering daily expenses like employee salaries, they would only provide a monthly living allowance, with the remaining funds remaining in the project account.

One day, when B requested a share of the profits, A informed him that the millions of yuan in project profits in his account had already been used for cryptocurrency speculation and had been completely lost. B was furious and declared he would sue A for embezzlement. In the second case, a technician copied the company's quantitative trading system before leaving and used it for personal profit. While employed, the employee was a core developer of the quantitative trading system and was deeply involved in the development of the company's quantitative strategies and trading systems. This trading system generated significant investment returns for the company's clients. Before leaving, the technician stole the company's trading system source code, subsequently formed a startup team, and used the strategy in live trading, profiting. After discovering the anomaly, the company initiated criminal prosecution, intending to pursue both the charges of trade secret infringement and embezzlement. Although the specific circumstances of these two cases differ, they both point to a common phenomenon in the Web3 industry: In a context of blurred team boundaries, highly centralized technical control, and a lack of project compliance mechanisms, project assets are often vulnerable to internal misappropriation, and the boundaries of criminal liability are often difficult to define.

2

Is it difficult to hold those responsible for embezzlement accountable in the Web3 industry? What's the problem?

Frankly, compared to traditional industries, the number of embezzlement crimes in the Web3 industry is actually quite high, and the amounts involved are often higher. So why are there so few official investigations and reports on these cases?

When handling these cases, we most often encounter the following practical issues:

1. Domestic policy orientation

Since the release of the "94 Announcement" and the "924 Notice," the entrepreneurial environment in the Web3 industry, especially those involved in financial-related businesses, has been under high pressure.

Typical cases should serve as warnings and educational tools, providing a reference for project owners seeking to protect their rights. However, the positioning of these cases is inconsistent with current mainstream policy orientations.

Even though concepts like stablecoins and RWAs have been hotly discussed in China recently, everyone knows these haven't truly taken root in mainland China.

So it's hard to imagine the Supreme People's Court and the Supreme People's Procuratorate one day publishing a case report about how domestic police helped a project recover losses and recovered tens of millions in virtual currency—it sounds a bit unbelievable.

2. Judicial personnel lack understanding of these types of cases.

For most grassroots investigators, the most common cryptocurrency cases they encounter are typically those involving "using virtual currency for money laundering" and "constitute aiding and abetting or concealing information."

As for what the Web3 project itself does, many people genuinely struggle to understand.

You might say you're working on a public blockchain, DeFi, quantitative strategies, or domain names...they might not understand at all.

The terminology isn't clear, the business model isn't clear, and the nature of the activity is even more difficult to determine.

If you ask them to judge whether this is a "criminal offense" or an "internal company dispute," they'll likely just wave their hands—they don't understand, and naturally, they won't file a case.

3. Rather than resorting to public authority, project owners prefer private remedies.

Because China classifies virtual currency-related businesses as illegal financial activities, project owners and Web3 entrepreneurs often feel a strong sense of stealing: servers are set up overseas, employees work remotely, and daily communication and collaboration are "ephemeral." If you ask them to file a police report in China, their first concern is whether they might be "forced into action."

Therefore, they often prefer to negotiate with the infringer, find a mutually acceptable intermediary to mediate, and facilitate a settlement. Filing a police report is their last resort.

4Early "compliance risk control" regarding jurisdiction actually created obstacles to rights protection

In the article "Can projects going overseas avoid Chinese jurisdiction? Compliance misconceptions Web3 entrepreneurs must avoid," Attorney Shao mentioned: A compliance misconception often overlooked by Web3 entrepreneurs and practitioners is that as long as a project is registered overseas and its servers are deployed overseas, it is "naturally compliant." However, when victims seek to sue and defend their rights, they often encounter a series of practical obstacles:

• Many Web3 projects lack formal corporate structures in their early stages, leaving fund management in a gray area of "founder wallets," "developer holdings," and "agent custody." So, is this considered company property or personal property?

• If a Web3 project is primarily operated by a non-profit organization like a BVI or foundation, can the individuals involved in the case be charged with crimes such as embezzlement under Chinese criminal law?

• Partners may be located abroad, but generally speaking, Chinese police will not arrest individuals across borders. Or, if employees are distributed across offices and lack labor contracts or cooperation agreements, and are paid in tokens, how can their employee status be defined and whether this constitutes "job-related conduct"?

Until these practical issues are resolved, it will be impossible to determine who will handle the case, let alone initiate the investigation process.

5. Practitioners' Disapproval of Their Own Work

The Web3 industry's "high risk, high freedom, and high growth" are precisely its most attractive features.

Many practitioners who have switched from traditional industries choose to enter Web3, some because of the high salaries, while others simply go all-in after making money trading cryptocurrencies.

From the cases Lawyer Shao has handled, we can see that this industry is still in a period of unchecked growth. We've seen quantitative teams assign a recent graduate to manage hundreds of millions of yuan in user funds, with no oversight, leading to the loss of all funds within a few days. We've also seen technicians embezzle millions of yuan in project assets and then completely withdraw from the team.

Many people don't actually consider themselves "employees," and they don't distinguish between actions that fall within their job responsibilities and those that cross the line. They value income and liquidity more, care about how much money they can make and whether they can quickly cash out, and are not sensitive to the boundaries of power and responsibility.

With this mentality, the risks of asset transfer and abuse of authority will naturally be much higher.

Even among practitioners in the industry, there are many people who are full of impetuousness and do not recognize their own value. The most intuitive way to speak is to look at the picture.

(Image source: Xiaohongshu - Web3 Developer Industry Communication)

3

Legal Advancement: Web3 Practitioners Should Not Suffer from "Survivor Bias"

1More Case-Handling Units Are Using Blockchain Technology to Solve Cases

Although embezzlement cases in the Web3 industry have long faced an awkward situation in China regarding rights protection, it is not clear whether the case will be handled properly. However, domestic judicial personnel are gradually gaining a deeper understanding of virtual currencies and the Web3 industry. More and more judicial officers have begun actively learning about virtual currencies and blockchain, and are using these methods in handling such cases.

For example, Feng, the executive at the short video company mentioned above, embezzled 140 million yuan from the company. He also transferred and concealed the funds through eight overseas cryptocurrency trading platforms and coin mixing services. However, law enforcement relied on blockchain analysis to track the cross-border flow of funds, and the suspect ultimately returned 92 bitcoins, helping the victim recover over 89 million yuan.

Another example is a case of embezzlement heard by the Nanshan Court in Shenzhen. The defendant, a development engineer responsible for blockchain project development and testing, exploited his position to modify the company's blockchain project code and secretly transferred company-owned tokens to a wallet under his control, cashing out approximately 1 million yuan. The court ultimately sentenced him to two years in prison.

2. Virtual currency trading platforms are also gradually deepening their cooperation with domestic law enforcement agencies.

As Attorney Shao noted in "Are Virtual Currency Transactions Truly Anonymous? How Do Police Track Fund Flows and Identify Suspects?" As mentioned in the article, mainstream exchanges (such as Binance, OKX, and Bitget) have publicly published on their official websites, out of compliance and regulatory considerations, rules for obtaining evidence from domestic and international law enforcement agencies, as well as dedicated channels for cooperating with mainland police. Law enforcement officers can email the exchange a letter of assistance, requesting the suspect's registration information, facial photos, financial information, deposit and withdrawal transactions, wallet locations for various currencies, fiat currency transactions, crypto-to-crypto transactions, contract transactions, login IP addresses, MAC addresses, and other device information. For example, the Xuhui Court sentenced a former Huobi employee for embezzlement. The employee installed a backdoor in the virtual currency wallet software to obtain user private keys, intending to use these keys to illegally obtain users' virtual currency. Solving this case also relied on the platform's cooperation. Justin Sun responded to the case, saying, "From the outset of the investigation, our company actively cooperated with relevant departments in conducting various investigations and evidence collection efforts, assisting the police in quickly solving the case."