Overseas crypto projects frequently “run away”. How can domestic investors protect their rights?

Since May, the crypto asset circle has been in turmoil, and news of overseas project parties "running away" has been reported frequently. Just a few days ago, another project on the BSC chain was suspected of running away: Stable Magnet Finance, a stablecoin exchange automatic market maker, took away $22 million from users. Blockchain security company PwckShield said that the SwapUtils code of StableMagnet Finance has not been verified and is inconsistent with the main Swap contract. The amount of money that this project ran away was as high as $22 million, or nearly 200 million yuan.

In fact, it is not uncommon for overseas projects to scam and then run away with the money. According to Bloomberg, the founder of the overseas cryptocurrency investment platform Africrypt has lost contact and 69,000 coins on the platform have been lost. Bitcoin (currently worth $2.3 billion) was moved and no one knows where it went . There is also a major runaway event in the history of cryptocurrency - BitClub Network is known as one of the largest cryptocurrency Ponzi schemes. The platform used marketing advocates and very questionable marketing strategies to attract funds. In the end, the scam leader took away approximately $722 million from investors in December 2019.

The nature of Bitcoin and other cryptocurrencies in my country

On May 5, the official WeChat public account of the Shanghai High People's Court, "Pujiang Tianping", published a case about Bitcoin in the "Case Reference Book" column. The Shanghai High Court analyzed that there are many disputes in the academic community regarding the legal recognition of Bitcoin, and the essence of these disputes is to find the basis for recognition from the traditional civil rights theory. However, under the discussion of multiple theories, it is impossible to legally recognize Bitcoin, so the answer is sought from judicial practice. "In judicial practice, the court, in line with the attitude of judicial pragmatism, does not make a direct judgment on the legal nature of virtual property. Because it has a certain economic value and conforms to the property attribute, it is protected by the legal rules of property rights. " The Shanghai High Court pointed out in the case analysis that in trial practice, the people's courts have formed a unified opinion on the legal positioning of Bitcoin and recognized it as virtual property .

Bitcoin and other cryptocurrencies are protected

At present, there are no legal regulations on the nature of Bitcoin. There are only two departmental regulations: the "Notice on Preventing Bitcoin Risks" issued by the People's Bank of China, the Ministry of Industry and Information Technology, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission on December 3, 2013, and the "Announcement on Preventing Token Issuance and Financing Risks" issued by the People's Bank of China, the Central Cyberspace Affairs Commission, the Ministry of Industry and Information Technology, the State Administration for Industry and Commerce, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission on September 4, 2017. According to the above regulations, Bitcoin is a virtual commodity rather than a legal currency, and does not have the same legal status as currency . Financial institutions and other institutions are not allowed to engage in the exchange of Bitcoin and legal currency. From the perspective of regulations, China currently only denies the currency nature of Bitcoin and affirms its virtual commodity nature , but it does not mean that Bitcoin is confirmed to be virtual property. These are two different concepts.

From the perspective of judicial practice, the People's Court usually defines Bitcoin as virtual property. Although Bitcoin and other "tokens" and "virtual currencies" do not have the legitimacy of currency, they have the value, scarcity, exclusivity, and disposability required of property as the object of rights, and should have the legal status of virtual property and be given the same legal protection .

If an overseas platform runs away, can domestic investors protect their rights?

Of course, crypto assets are more than just virtual currencies. Due to its explosive development since 2021, NFT has become an indispensable part of the current crypto asset circle. At least at present, China does not have laws, regulations, and administrative orders specifically targeting NFTs, and there is no clear characterization of enterprises. Transactions involving NFTs are not illegal. In addition, many DeFi projects and DAOs do not necessarily involve virtual currency transactions. When considering their legitimacy and rights protection paths, we need to discuss them on a case-by-case basis .

Cryptocurrency

China has always been very strict in its crackdown on virtual currencies such as Bitcoin. In September 2021, the Supreme People's Procuratorate, the Ministry of Industry and Information Technology, the Ministry of Public Security, and the Ministry of Market Supervision issued the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation", which clearly stated that virtual currencies such as Bitcoin and Ethereum do not have the same legal status as legal currencies: related business activities are illegal financial activities; overseas virtual currency exchanges providing services to residents in China through the Internet are also classified as illegal financial activities. The "Notice" also made it clear that there are legal risks in participating in virtual currency investment and trading activities. Any legal person, non-legal person organization or natural person who invests in virtual currency and related derivatives and violates public order and good morals shall have the relevant civil legal acts invalid, and the losses caused by this shall be borne by themselves; those suspected of disrupting financial order and endangering financial security shall be investigated and dealt with by relevant departments in accordance with the law.

It can also be clearly concluded from this that if Chinese citizens invest in virtual currency, the relevant civil legal acts will be deemed invalid . In other words, if overseas encryption platforms "run away", it will be difficult for Chinese citizens as investors to use Chinese laws to protect their legitimate rights and interests.

NFT, DeFi and other crypto asset projects

As mentioned earlier, current transactions involving NFT projects in China are characterized differently from virtual currencies and are not illegal. Although the legal nature of NFT is not clear, it does not prevent it from being protected by law as a valuable property in judicial practice and administrative enforcement.

At present, a considerable number of investment projects involving crypto assets are operated overseas, and project owners generally choose to go overseas in person and conduct business in countries and regions where regulatory norms are more suitable for operating projects. This makes it risky for Chinese citizens to invest in overseas crypto asset projects. On the one hand, the booming overseas crypto asset circle does bring wealth and opportunities, but on the other hand, it also creates a breeding ground for criminal activities such as fraud, pyramid schemes, and gambling . So, how should Chinese citizens deal with fraud when they encounter fraud in overseas NFT, DeFi, DAO and other projects?

First of all, we need to clarify one point: does Chinese criminal law have jurisdiction over crimes committed overseas against Chinese citizens? The answer is: yes .

1. Protection and Jurisdiction

According to Article 10 of China's Criminal Law [Protective Jurisdiction]: "This Law may be applied to foreigners who commit crimes against the state or citizens of the People's Republic of China outside the territory of the People's Republic of China, if the minimum sentence prescribed by this Law is imprisonment of more than three years, except where the crime is not punishable under the law of the place where the crime was committed."

Accordingly, when the project personnel who commit fraud are foreigners, China's judicial organs can obtain jurisdiction over criminal acts against Chinese citizens abroad in accordance with the provisions of protective jurisdiction, and Chinese citizens as victims can request relief and protection from Chinese judicial organs . However, in fact, due to the complexity of such transnational crimes (there are great difficulties in obtaining evidence and enforcing the law), it often requires the coordinated enforcement of foreign judicial organs, and it is not easy to protect the rights of victims.

2. Territorial jurisdiction

Due to the particularity of blockchain applications such as virtual currency and NFT, there are precedents in China's judicial practice that treat them as some kind of computer data for protection . The act of hacking into other people's computers to steal Bitcoin may be evaluated as the crime of illegally intruding into computer information systems. Then, crimes against virtual currency and NFT may be classified as " crimes committed using computer networks ."

For such crimes committed using computers, according to Article 2 of the Interpretation of the Supreme People's Court on the Application of the Criminal Procedure Law of the People's Republic of China, for crimes directed against or mainly committed using computer networks, the crime location includes the location of the server used for network services used to commit the crime, the location of the network service provider, the location of the compromised information network system and its manager, the location of the information network system used by the defendant and the victim during the crime , as well as the location of the victim when the crime was committed and the location where the victim's property suffered losses , etc.

Therefore, in the crime of fraud, even if the perpetrator is located overseas and targets or mainly uses computers to commit fraud, as long as (1) the location of the information network system used by the defendant or the victim is in China, or (2) the location of the victim when the crime is committed or the place where the victim's property is damaged is in China, China's judicial organs can pursue the criminal liability of the fraudster based on the principle of territorial jurisdiction .

(III) Personal jurisdiction

"Chinese people don't cheat Chinese people" has been a hot word in recent years, which reflects a fact to a certain extent: many of the fraud, pyramid schemes, gambling and other crimes against Chinese citizens on overseas networks are committed by Chinese citizens. The only difference from traditional domestic telecommunications fraud is that the criminals have moved the battlefield of the crime from China to abroad .

For crypto asset project owners who are mainly responsible for fraudulent activities and whose main responsible personnel are Chinese, according to Article 7, Paragraph 1 [Personal Jurisdiction] of the Chinese Criminal Law: " This law shall apply to any crime committed by a citizen of the People's Republic of China outside the territory of the People's Republic of China , but if the maximum sentence prescribed by this law is a fixed-term imprisonment of not more than three years, the person may not be prosecuted." Generally speaking, the amount of fraud crimes involving crypto assets is relatively large, and even according to local laws, the maximum sentence for the crimes they have committed (note that this refers to the maximum sentence that may be imposed for a specific crime, not the actual sentence) is more than three years. China's judicial organs have jurisdiction over such crimes committed by citizens of the country abroad against Chinese citizens .

In addition, in recent years, criminal activities have increasingly shown a trend of internationalization and globalization. China has increasingly frequent criminal judicial mutual assistance with different countries, and has achieved remarkable results in international recovery of stolen goods and fugitives. Old people in the currency circle should all know that a few years ago, a pyramid scheme gang that used virtual currency mining investment as an excuse specifically committed crimes against Chinese citizens abroad, causing tens of billions of losses to Chinese citizens. Finally, the actual controller of the gang was captured in a Pacific island country with the joint assistance of international criminal justice and was finally extradited back to China. It can be said that the national border is no longer a protective umbrella for crime, and the protection of the personal safety, legal property and other rights of Chinese citizens is no longer empty talk .

In conclusion:

Although it is not impossible to protect rights, it is certainly not an easy task . Due to overseas operations, the operators of these platforms are relatively hidden. They evade crackdowns by regulatory authorities by frequently changing website domain names and server addresses, and taking measures such as online diversion and offline transactions. The registered places, offices and business areas of their operators are often different. Consumers are often unable to determine the identity of the operators, and it is difficult to recover property losses once they occur .

Consumers and investors should take the initiative to enhance their awareness of risk prevention and self-protection, and not blindly follow the trend and participate in related speculative activities . If any institution is found to be involved in such illegal financial activities, they should report it to the relevant regulatory authorities or the China Internet Finance Association in a timely manner. If any of them are suspected of committing illegal crimes, they should report the case to the public security organs in a timely manner.