Recently, Lawyer Liu (web3_lawyer) has been organizing and studying criminal cases involving virtual currencies. After reading a lot of cases, it is easy to summarize the "implicit judicial rules" of judicial organs when handling currency-related cases, or to put it more legally, the path dependence problem in the scale of conviction.
In this article, we will talk about how to determine whether an act constitutes a crime in judicial practice for some common currency-related crimes.
In April 2020, the Zhejiang Provincial High Court issued a criminal judgment on a fund-raising fraud case involving Xia Moumou and others ((2020) Zhejiang Criminal Final No. 9), which stated that "using the name of virtual currency trading to solicit investment from the public, and using pyramid schemes to develop downlines, using blockchain technology to promote to the public to attract investment, but actually manipulating prices to make profits, should be characterized as a fraud crime, rather than the lighter crime of organizing and leading pyramid schemes or illegally absorbing public deposits."
One case focuses on business models or scenarios such as coin issuance, publicity and promotion, marketing, and ICO.
The interesting thing about this case is that Xia and others were sentenced by the Zhongxiang City Court of Hubei Province for organizing and leading pyramid selling activities ((2013) E Zhongxiang Criminal First Instance No. 188), and probation was applied. However, on December 3, 2019, the Hangzhou Intermediate Court revoked the judgment of the Zhongxiang City Court of Hubei Province, and Xia was directly sentenced to life imprisonment by the Hangzhou Intermediate Court for the crime of fund-raising fraud . Xia and others were of course dissatisfied with the judgment and appealed, but the Zhejiang High Court rejected the defendant's appeal and upheld the judgment of the Hangzhou Intermediate Court. What exactly caused the difference between the judgments of the two courts to be so large? The difference from probation to life imprisonment is simply "heaven" to hell.
This involves the study of the conviction logic of pyramid schemes and fraud crimes that are common in the cryptocurrency world. 
3. Common currency-related crimes and their logic of conviction
1. Are virtual currency-related transactions illegal?
The court held that since the joint release of the Notice on Preventing Risks of Token Issuance and Financing (the “9.4 Notice”) by seven national ministries in September 2017, token issuance in China is essentially “unauthorized illegal public financing” and is suspected of illegal fundraising and other criminal activities. Public publicity in the name of “virtual currency” is non-compliant and even illegal.
Even if virtual currencies are issued on overseas platforms, they can only be circulated on the Internet. If they are to be realized in the end, they still need to be exchanged for legal tender in circulation. The issuance of virtual currencies has not been recognized by the state and has no circulation value. They can only exist as virtual concepts without actual economic value.
In the case of Xia Moumou and others, the total amount of virtual currency issued by the parties was not fixed. The perpetrators used platform data to give away platform tokens free of charge based on the number of downlines developed by participants, thereby expanding the scale of funds and the number of participants. The platform then used artificial means such as pulling up the market to keep the token price rising, creating a false prosperity and constantly luring new investors into the game. In essence, it is a Ponzi scheme.
Therefore, in this case, in the view of the Hangzhou Intermediate People's Court and the Zhejiang High People's Court, the issuer (seller) in the virtual currency transaction is definitely violating regulations and laws, but it is not clear whether ordinary participants (buyers) are violating laws and regulations.
2. Common types of currency-related crimes
Common currency-related crimes include fraud crimes (fraud, contract fraud, fund-raising fraud), pyramid schemes, casino operations, illegal business operations, etc.
For fraud crimes, their essence requires the perpetrator to defraud other people's property (including mainstream virtual currencies with property value) for the purpose of illegal possession; pyramid scheme crimes are divided into project parties (currency issuers) and active participants, using fictitious projects or projects without real business backgrounds as gimmicks, forming a three-layer or higher structure with rebate mechanisms and other characteristics. Its essential feature is that the perpetrator is trying to defraud ordinary participants of their property; currency-related crimes of opening casinos are common in virtual currency exchanges. For example, some common perpetual contracts and virtual currency games may be identified as gambling by judicial authorities, and the platform party will be identified as a casino; there are two situations for currency-related illegal business crimes: one is the foreign exchange illegal business crime involved when virtual currency, especially stablecoins (USDT, USDC), is equated with foreign exchange or used as a tool for exchanging RMB and foreign exchange; the other is the illegal business crime when the perpetrator carries out business payment and settlement activities in the name of virtual currency transactions.
3. The logic of criminalizing currency-related crimes
Here we take the pyramid scheme crime and fundraising fraud crime involved in the case of Xia Moumou as an example to analyze the logic of conviction in currency-related crimes.
The constituent elements of traditional pyramid scheme crimes (the crime of organizing and leading pyramid scheme activities) include at least the following:
First, the perpetrator sets up barriers (paying membership fees, purchasing goods or services, virtual currency, etc.) to attract participants in the name of providing goods, services, or developing platforms or projects;
Second, the number of people developed directly or indirectly is used as the basis for calculating remuneration or rebates;
Third, the pyramid scheme organization must have more than three levels and more than 30 members;
Fourth, the ultimate goal of the perpetrator (project party) is to defraud the participants of their property.
This is just the elements of crime at the legal level. In practice, it is necessary to judge it in specific business scenarios. For example, for a certain currency issuing platform, we need to evaluate whether it constitutes a pyramid scheme crime. We need to examine whether the virtual currency issued by the platform is a worthless air currency and whether there is a threshold for participants to participate (some platforms appear to have zero thresholds for free airdrops, but as the platform grows, ordinary participants still need to replace platform coins with mainstream coins such as USDT to increase the pool funds). As for the three-level and thirty-person conditions, the current judicial practice adopts an extensive evaluation model. The offline wallet addresses developed in the virtual currency platform are easily identified as more than three levels. More than thirty people are generally fixed through witness testimony in practice, even if the evidence in the case may not be supported by the physical evidence of the witness's purchase and investment in virtual currency. As for the last point of "defrauding property", the property value attributes of mainstream virtual currencies have been recognized by most judicial authorities in the mainland. If the platform replaces the mainstream currency of participants with air coins, it is likely to be identified as defrauding others of their property.
In judicial practice, the essence of fraud is that the perpetrator defrauds others of their property. The perpetrator obtains others' property by making the victim misunderstand and dispose of his or her own or others' property, which ultimately causes damage to the property right holder. For the victim, it is an "unconscious self-harm behavior." In virtual currency fraud cases, air coins have no value, but they can be used as a tool for fraud and are used by the perpetrator to replace mainstream coins.
By paying mainstream coins to the scammers, the victims only get air coins that are promised to bring them job promotions a hundred or ten thousand times, which are actually worthless.
The crime of fund-raising fraud and contract fraud are special fraud crimes, and the constituent elements of the fraud part of the two crimes are no different from those of ordinary fraud. Back to the case of Xia Moumou discussed in this article, the main basis for the Hangzhou Intermediate Court and the Zhejiang High Court to change the pyramid scheme crime to the crime of fund-raising fraud is that although Xia Moumou and others induced victims to invest in their platform by setting points, levels and attracting people to rebate, Xia Moumou and others and their platform essentially implemented illegal fund-raising methods, attracting investors to enter the market through virtual currencies that have no actual value, and the platform formed a sedimentation fund pool (mainstream currency). The virtual currency it issued is essentially a tool for speculation and luring victims to make so-called investments that are actually fraudulent. Xia Moumou's behavior is essentially illegal fund-raising.
In addition, Xia and others used the funds raised to purchase real estate, cars, land and commercial insurance, and some of the funds were transferred overseas. The court believed that this behavior also proved that Xia and others had the subjective intention of fundraising fraud.
Therefore, from the case of Xia Moumou's fundraising fraud, we can get a glimpse of the standards and criteria that my country's judicial organs use in practice to judge currency-related criminal cases, especially pyramid schemes and fraud crimes.
As web3 lawyers, we have always advocated that under the current domestic regulatory policies, investing in virtual currencies is not explicitly prohibited. However, it should be noted that even in the "9.24 Notice" ("Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation"), we can draw the conclusion from the provisions of the ten national ministries and commissions that "any legal person, non-legal person organization or natural person investing in virtual currencies and related derivatives, which violates public order and good morals, the relevant civil legal acts are invalid, and the losses caused by this shall be borne by themselves ", and believe that domestic virtual currency investment belongs to the field of citizens bearing their own risks; however, the judicial authorities can also use the second half of the first sentence in the "9.24 Notice": "If it is suspected of disrupting financial order and endangering financial security, the relevant departments shall investigate and deal with it according to law", as the basis for their own law enforcement and even judicial practice.
But to what extent is it considered "suspected of disrupting financial order and endangering financial security"? The right of interpretation is often in the hands of relevant departments, and in practice, the "relevant departments" in Shenzhen and Shanghai may have different understandings from those in a certain place in the central and western regions. Although my country is a unified country of codified law, in practice, the understanding and implementation of a certain regulation may not be exactly the same across the country, at least in the field of virtual currency cases. This phenomenon is very obvious.
