[Industry Encyclopedia] Regulations may be introduced within 3 months to combat all forms of crimes using digital currency

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Preface

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The previous article on how to carry out special crackdowns on digital currency acceptors (OTC) has received strong responses in the WeChat groups of law enforcement personnel in various places. Many of the author's classmates, seniors, and juniors hope to analyze the types of crimes involving digital currency and give targeted crackdown suggestions. Today, the author will classify and analyze the types of crimes that may be involved in digital currency. If there is anything wrong, please correct me.

Law enforcement basis

First of all, let’s make one thing clear. Apart from using digital currency to commit traditional crimes, all supervision of digital currency is currently at the stage of policy, regulation and system restrictions, and there are no relevant judicial interpretations or laws and regulations specifically applicable to crack down on such cases.

However, similar P2P cases went from extensive financial innovation in 2011, to the beginning of regulatory supervision in 2015, and then to the Supreme People's Court's judicial interpretation in 2019 to a complete ban. It only took four years from regulatory supervision to a complete halt.

Digital currency and P2P are very similar in form, both of which use new models to quickly attract users who have no risk resistance to participate with high returns. Therefore, Lianshen Technology believes that both will go through the process of disorderly development in the early years, to the constraints of rules and regulations, and then to the supervision of laws and regulations. Gradual supervision can effectively curb collective financial risks and maintain financial stability.

Therefore, based on the development history of P2P and the frequency of the introduction of regulations and systems in the field of digital currency, Lianshen Technology predicts that the first judicial interpretation that clearly stipulates that digital currency can be criminally cracked down on will be issued within 3 months. Subsequently, relevant laws and regulations will be issued one after another to include a series of behaviors such as token financing, sales, and transactions into the supervision and crackdown sequence until comprehensive supervision is implemented.

The form of digital currency

OTC Acceptance Broker

As mentioned in the previous article of Lianshen Technology, if domestic users want to participate in digital currency transactions, they need to exchange RMB for digital currency through over-the-counter acceptance dealers before they can enter on-site transactions to exchange various types of digital currencies.

Therefore, the types of crimes commonly involved in OTC are:

Knowingly assisting in accepting illegal proceeds (money laundering);

On March 19, 2021, the Supreme People's Procuratorate and the People's Bank of China jointly released 6 typical cases of combating money laundering crimes, including a criminal case of money laundering using Bitcoin. The defendant Chen knew that Chen Haibo was investigated by the public security organs for suspected fund-raising fraud and fled, but still transferred the illegal proceeds to criminals through digital currency. According to the judgment of the Pudong New Area People's Court of Shanghai (2019) Hu0115 Criminal First Instance No. 4419, the defendant Chen was convicted of money laundering and sentenced to two years in prison and a fine of RMB 200,000.

ChainAudit, WeChat Official Account: ChainAudit [Enforcement Case] ​​How to Crack Down on Cryptocurrency Acceptors (OTC) with Judicial Precedents

Failure to conduct a thorough identity review of the counterparty (crime of assisting in information network criminal activities).

On May 12, 2021, the People's Court of Xihu District, Hangzhou, tried a case of suspected illegal business operations and aiding information network criminal activities. The defendants included 12 people including Zhao Dong, a big shot in the cryptocurrency circle. Zhao Dong is a well-known "OTC acceptor" in the circle.

ChainAudit, WeChat Official Account: ChainAudit [Enforcement Case] ​​How to Crack Down on Cryptocurrency Acceptors (OTC) with Judicial Precedents

Among them, there is a high possibility that over-the-counter acceptance merchants (OTC) will constitute the crime of illegal business operations in the future, but the specific details still need further judicial interpretation.

2

On-site trading intermediary

After users obtain Tether (USDT) that can be used for on-site transactions through an OTC acceptance intermediary, they can use the on-site transaction intermediary to participate in transactions between digital currencies. The transaction format is the same as that of stocks, with buy/sell orders and K-lines.

Representative entities of this type include: Huobi, Ouyi, Binance, etc.

Common types of crimes targeting this type of exchange:

Deliberately manipulating prices to cause losses to users (fraud).

Transactions in the form of spot, futures, and options deliberately manipulate market prices, causing users to lose money and obtaining corresponding profits for themselves. This is a typical "pig killing scheme" and a type of fraud.

Willfully failing to cooperate with law enforcement in their investigation (abetment).

After the criminal suspect's illegal gains flow into an exchange, the exchange refuses to cooperate with the law enforcement agency's investigation without reason.

At present, most of the exchanges that provide matching transactions mainly used by Chinese users have actual personnel in China, but the servers and business licenses are in foreign countries. This form of operation does not currently involve illegal activities, but as Lianshen Technology predicted earlier, there is a high possibility that such activities will be illegal operations in the future.

Recently, official media’s voices have also been mainly directed at this type of digital currency exchanges.

Therefore, when law enforcement agencies in various places come into contact with such exchanges, it is recommended to collect the following evidence to lay the foundation for subsequent crackdowns:

Evidence and testimony of the company's actual operating personnel engaged in digital currency exchange business in the country;

Evidence that the exchange conducts foreign exchange, options, and futures trading for Chinese users;

The exchange proactively provides evidence of access from mainland China IP addresses using multiple domain names.

If law enforcement agencies are unable to contact exchanges during the actual case handling process, they can contact Lianshen Technology through the WeChat public account [Legal Assistance]. We will help law enforcement agencies get in touch with relevant exchanges.

3

Mining

Mining is a term used in the digital currency industry. It refers to the act of not purchasing digital currency directly, but making contributions to the network by purchasing mining machines similar to computers, thereby obtaining digital currency given by the network for free. Different digital currencies require different contributions to mine. For example, Bitcoin (BTC) requires the contribution of chip computing power, and Interstellar File System (FIL) requires the contribution of hard disk storage space.

For example, Fishpond, Interstellar Alliance, etc.

Common types of crimes involved in mining:

Virtual computing power without real mining machines (scam).

The presentation form is generally cloud mining. There is only an APP. As long as you recharge in the APP, you will have income every day. There will usually be assets such as gold and physical objects as a backing.

Embezzling computing power (fraud).

The display form is usually to charge fees that exceed the normal market fees under various pretexts, or directly modify the background data and transfer the mining income that originally belonged to the user into their own pockets.

Layered rebates (MLM).

The general form of presentation is that you can get higher mining income by attracting people, and there are more than 3 levels of rebates.

In fact, the mining process itself is not illegal, it is just a process in which users voluntarily contribute their equipment to the network to obtain rewards. However, since digital currency mining consumes huge amounts of electricity, and many mining projects are disguised as data centers and launched in various places, it has greatly affected financial stability. Therefore, Premier Liu He pointed out at the State Council Financial Document Development Committee on May 21, 2021 that Bitcoin mining should be cracked down on.

In the future, mining of any currency, not just Bitcoin, is likely to constitute illegal business operation in China, but the specific details still need further judicial interpretation.

4

Storage Broker

Regardless of the form in which the digital currency is obtained by the user, it can be stored in a storage medium. Generally, storage mediums are divided into cold wallets, hot wallets, and centralized wallets.

For example, imtoken, TokenPocket, Bixin, Renrenbit, etc.

Common types of crimes involved:

Stealing user assets and running away (theft).

This mainly happens in centralized wallets. The assets of users in centralized wallets do not actually belong to the users, but are controlled by the service provider of the wallet, who can shut down the network and power supply and run away at any time.

Provide additional value-added services (help letter).

Since storage intermediaries cannot make profits through storage, they usually advertise in wallets. If a wallet recommends users to participate in some third-party services such as online gambling and pyramid schemes through the homepage or advertising space, and causes losses to users, it is also suspected of aiding and abetting.

Storage intermediaries, like on-site exchanges, provide digital currency trading and exchange services, and currently do not involve illegal activities. However, as Chain Review Technology has predicted, there is a high possibility that such activities will be illegal operations in the future, and it is recommended that law enforcement agencies pay attention to and secure relevant evidence.

5

Coin issuing project party

The project party that issues the token refers to the issuer and actual controller of a certain digital currency. At present, the process of token financing, sales, and trading for the project party only falls within the scope of administrative prohibition and does not involve criminal offenses. The project party has tried to circumvent administrative supervision through various forms such as ICO, IDO, IMO, ISO, DEFI, etc., but as long as the digital currency token is issued and publicly circulated, whether it has raised funds or has been listed on the exchange, it has already constituted an element of administrative supervision.

Recently, CCTV conducted a special report on the behavior of project parties using decentralized exchanges to issue coins. You can view the following video. https://v.qq.com/x/page/a3250tz0c22.html

In the future, Lianshen Technology predicts that all coin-issuing project owners will be involved in illegal operations, regardless of whether they raise funds or make profits. These project owners generally set up fictitious foundations in Singapore, Cayman, etc., but the actual operating entities/profit-making entities/participating entities are all in China.

Summarize

At present, the judicial interpretation for the field of digital currency has not yet been issued, and the detailed rules of the law enforcement agencies have not yet been implemented, but Lianshen Technology predicts that the first batch of boots will land in no more than 3 months.

In fact, all crimes in the field of digital currency have been stored on the blockchain and will not disappear with the termination of their illegal and criminal acts. Blockchain data has long been determined by the Supreme Court to be used as evidence. I believe that criminals are like grasshoppers in autumn, and they will not be able to jump for a few more days.