Huo Xiaolu: Will the cryptocurrency industry be considered illegal operations?

Wu said the author   |   Fire Law

Editor of this issue   |   Colin Wu

Recently, some voices in the cryptocurrency circle believe that the crime of illegal business operation can be applied to almost all behaviors, but some lawyers also pointed out that there are many restrictions on the application of illegal operators. So what is the real situation? Huo Xiao, who has worked in the procuratorate for many years and is familiar with the cryptocurrency practice, will explain to you:

Let’s get back to the topic. Recently many people have asked me about my understanding of the “crime of illegal business operation”. Let me just talk about it.

Some of the content is quite professional and confusing, so let me highlight the key points. (1) Can illegal operation be defined as prohibited business areas? (2) How to understand "violation of national regulations"?

First of all, Huo Xiaolu's inherent cognition has always been about the cryptocurrency circle. He thought that illegal operations were too difficult , such as opening an exchange or exporting to domestic sales. He basically didn't pay much attention to this kind of information. Sometimes his peers would talk about the risks of illegal operations, but he basically ignored them. I don't know when the rumors in the circle became more and more intense, especially after the two notices on September 24, saying that it would be too late to run away and illegal operations would be wiped out. Of course, many peers also questioned it.

The most straightforward understanding of the so-called "illegal business operation crime" is that you are doing some business that requires a license, but you don't have a license.

Then the question is, if this business itself is prohibited by the government, that is, it is impossible to have a license, if you do it, will it be considered illegal operation? This has always been a controversial topic in the theoretical and practical circles. Some people say that even violating the regulations to do licensed business can be considered illegal operation, let alone prohibited business areas, and it must be considered illegal. Others say that since it is stipulated that only licensed industries are targeted, the scope of crackdown cannot be arbitrarily expanded and cannot be considered illegal. The jargon is "the modesty of criminal law." At present, in first- and second-tier cities, the mainstream view of judicial organs is the second one, that is, it is believed that there should be no illegal business activities in prohibited business areas. The most direct example is that when the "Criminal Amendment VII" was revised in 2011, the "crime of organizing and leading pyramid selling activities" was separated from the original "crime of illegal business operations" and a new crime was created for punishment. This is also the core value source of Huo Xiaolu's belief that there is no risk of illegal business operations.

Interested friends can search online for precedents. As far as I know, after 1994, no more than one large, medium or small trading platform was convicted and punished for illegal business operations. This is mainly done by district and county courts. This explains a lot of problems. In disguise, it also led to some exchanges and individuals being fearless.

Of course, I still have to say that this only refers to the normal opening of exchanges and other businesses, please avoid trading circles, etc. In addition, peripheral businesses such as OTC, self-media, and technology companies still have a high risk of illegal operations.

After the 924 notice, a new round of anxiety began in the industry. There are even rumors that the two high courts are formulating judicial interpretations to catch all cryptocurrency activities as illegal business operations.

Many people have asked Huo Xiaolu about his opinion. I will briefly talk about it here. Of course, we have to wait for official news on whether it will be released or not.

There are at least 10 judicial interpretations on the crime of "illegal business operation". To some extent, the past judicial interpretations are indeed bringing some prohibited business areas facing serious regulatory pressure into the scope of crackdown. For example, the production of clenbuterol, price gouging during special periods, the production of gambling machines, the operation of pornographic websites, etc. In other words, in practice, judicial interpretations have a certain "lawmaking" function. Therefore, it is indeed possible that under the background of high-pressure supervision and repeated bans on fake overseas cryptocurrency exchanges, some behaviors in the industry will be cracked down on as illegal business operations through judicial interpretations.

Now let’s talk about the second point: how to understand “violating national regulations.”

Some people ask, illegal business operation clearly requires "violation of national regulations", but the 924 notice does not belong to national regulations, does it violate the principle of legality of crime and punishment? In other words, the superior law must be amended before criminal crackdowns can be carried out.

Let's take a look at a case. This was an illegal business case that once shocked the whole country - the skull trading case in Beijing in 2010. The case was very simple. The defendant Ding bought skulls from China and sold them abroad. In the end, the court sentenced Ding to eight years in prison for illegal business.

This case has sparked considerable controversy, focusing on two points. (1) Obviously, skulls cannot be bought and sold, and are prohibited businesses. Can they be convicted of illegal business operations? (2) At the time, only the "Regulations on the Management of the Entry and Exit of Corpses and the Disposal of Corpses" promulgated by the Ministry of Health, the Ministry of Public Security and other nine departments in August 2006 stipulated that "it is strictly prohibited to buy and sell corpses, and it is strictly prohibited to use corpses for commercial activities." However, the above regulations are at a lower level and belong to administrative regulations, not national regulations. The crime of illegal business operations in the criminal law must be "violation of national regulations." Can it be convicted?

Despite the huge controversy, the first and second instance judgments of the Beijing court clearly gave the judicial authorities' response.

In 2011, the Supreme People's Court issued a notice explaining how to accurately understand and apply "national regulations" in the criminal law, clarifying two points. (1) The entities that formulate national regulations are the National People's Congress, its Standing Committee, and the State Council; (2) The legal level is laws and decisions, administrative regulations, prescribed administrative measures, decisions, and orders. It is a bit abstract, but in short, it should be strictly grasped, and acts that violate local laws and regulations or departmental regulations should not be considered "violations of national regulations."

In fact, in practice, in many cases, the defense lawyers put forward the defense opinion of "not violating regulations but not laws", that is, not violating national regulations. Unfortunately, except for a very small number of cases, the courts basically do not accept them. The huge number of administrative laws and regulations and written expressions in my country also confuse many people in the industry.

Back to the circle, although the 924 document cannot be regarded as a national regulation, according to the direction of the document, in addition to the old-fashioned "illegal sale of token tickets, unauthorized public issuance of securities, illegal fundraising and other illegal financial activities", the focus should be on "illegal operation of futures business". Virtual currency exchanges have introduced many talents and business models from traditional finance in the early years, and the largest part of the money they attract is also in derivatives trading.

In mid-October, the second draft of the Futures Law was revised and officially renamed the Futures and Derivatives Law. The law focuses on futures trading, derivatives trading, futures contracts, options contracts and other trading models, and also has clear provisions for cross-border transactions. I believe that when it is officially implemented in the future, there will be more discussions on whether some businesses in the circle are covered. Whether there is a so-called judicial interpretation that clearly targets the cryptocurrency circle at that time is no longer so important.

In addition, as an aside, we also need to pay attention to the Anti-Telecom Network Fraud Law, the draft of which is currently soliciting opinions. As a major way for black industries to transfer assets, virtual currency has long attracted the attention of regulators. Article 22, paragraph 1, item 5 of the draft clearly mentions "virtual currency money laundering", which further demonstrates the determination of regulators to crack down on it. In the future, cryptocurrency traders will inevitably encounter stronger bank risk control and judicial disposal, such as long-term card freezing.