Legal provisions for losses caused by purchasing digital currency financial products: bear the risk yourself

1. Digital currency is not recognized as legal

A few years ago, a digital currency player came to us for consultation because of problems with the platform and wanted to file a criminal report to protect his rights. However, after listening to him and asking me questions, I found that his path to rights protection might not be that simple.

First of all, the legality of digital currency is not recognized in China in the form of departmental regulations . If one wants to protect rights through civil means, one faces the embarrassing situation of invalid civil actions. It is possible to protect rights through criminal means because the tight shackles surrounding the platform, such as illegal fund-raising, fundraising fraud, illegal operation, and fraud, have never been loosened.

However, criminal reports must comply with the principle of legality. In other words, the behavior of the perpetrator must match the corresponding crime in the criminal law . You cannot hold the perpetrator criminally responsible for fraud just because the perpetrator is engaged in illegal business. This is absolutely not allowed. In the previous article, it was also mentioned that if the crime reported is not correct during the criminal report process, the police will most likely kick your report out.

In the consultation on this matter, the client also conducted quantitative trading of digital currency and purchased digital currency financial products while trading digital currency on the platform. When I heard the client said he bought digital currency financial products, my heart skipped a beat. I thought my money might be gone.

Why do you say that? In the consultation of this client, he stated that when he purchased the digital currency financial product of the platform, the platform promised him a fixed return. After the one-year maturity of the financial product, he will get a fixed return worth the return (for example, an annualized return of 12%). We all know that since it is a financial product, there must be both returns and risks. There is the possibility of making money by purchasing financial products, and there is also the possibility of losing money by purchasing financial products. In any case, the rate of return of purchasing financial products cannot be a fixed value. The rate of return with a fixed value is called bank deposits and bonds, but the rate of return of deposits and bonds cannot be compared with that of financial products. So some people's eyes light up when they see that financial products promise fixed returns, but ask yourself, is it really such a good thing?

2. If a fixed rate of return is promised, can the money be recovered?

Why is it said that if a financial product promises a fixed rate of return, once something goes wrong, you may not get any money back?

First, let’s take a look at the first article of the “Judicial Interpretation on Illegal Fundraising”* (Legal Interpretation [2010] No. 18, amended by Legal Interpretation [2022] No. 5):

Any act of absorbing funds from the public (including units and individuals) in violation of the national financial management laws and regulations shall be deemed as "illegally absorbing public deposits or absorbing public deposits in disguised form" as provided for in Article 176 of the Criminal Law if the following four conditions are met at the same time, unless otherwise provided for in the Criminal Law:

(1) Raising funds without approval from the relevant departments in accordance with the law or by using legal business methods;

(2) Publicizing to the public through media, promotion meetings, leaflets, mobile phone text messages, etc.;

(3) Commitment to repay principal and interest or provide returns in the form of currency, physical objects, equity, etc. within a certain period of time;

(IV) Raising funds from the general public, i.e., non-specific individuals in society.

Did you see that the third item of Article 1 of the judicial interpretation specifically emphasizes that the promise to repay the principal and interest within a certain period of time is an important component of the crime of illegal fund-raising.

At the same time, Article 2, Item 8 of this judicial interpretation also specifically emphasizes virtual currency transactions, and the specific legal provisions are as follows:

Anyone who commits any of the following acts and meets the conditions set forth in the first paragraph of Article 1 of this Interpretation shall be convicted and punished for the crime of illegally absorbing public deposits in accordance with Article 176 of the Criminal Law:

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(8) Illegally absorbing funds through online lending, investment in shares, virtual currency transactions, etc.;

You see, the Supreme People's Court and the Supreme People's Procuratorate have already thought of this situation. It is also possible that digital currency financial products constitute illegal fund-raising.

Speaking of this, we are brought up with the important point in the title: why in illegal fund-raising cases, the victims ultimately have to bear the risks themselves?

Before 2021, investors who illegally raised funds were still considered victims in criminal cases. Since they were victims and had suffered financial losses, there would definitely be a ruling in the verdict that the victims’ losses would be reimbursed. In other words, the victims’ compensation was guaranteed by a court ruling. However, after 2021, this situation changed.

On May 1, 2021, the State Council promulgated and implemented the "Regulations on Preventing and Dealing with Illegal Fund-raising", Article 25 of which stipulates:

Illegal fund-raisers and illegal fund-raising assistants shall return the funds raised to the fund-raising participants. The process of returning the funds shall be supervised by the leading department for handling illegal fund-raising.

No unit or individual may obtain economic benefits from illegal fundraising.

The losses incurred due to participation in illegal fund-raising shall be borne by the participants themselves.

The third paragraph of this article clearly stipulates that the losses incurred due to participation in illegal fund-raising shall be borne by the fund-raising participants themselves. Since the regulations promulgated by the State Council are administrative regulations and part of the broad legal system, after the regulations come into effect, the procuratorates and courts of various places must take the regulations into consideration when handling illegal fund-raising cases. Therefore, the victims were renamed "investors", and the treatment they enjoyed after the name change was also very different from before.

3. Investment is risky, so be cautious when entering the market

Investment is risky, so be cautious when entering the market. This sentence is also applicable to all digital currency players, especially when purchasing digital currency financial products, you should pay special attention to the type that promises fixed returns. You may not earn a penny in the end, and you may lose the little money you worked hard to earn.