Case analysis: Is the purchase of mining machines recognized by Chinese law?

As we all know, virtual currency investment is often linked to financial business, and my country has not yet established financial licenses related to virtual currency. Therefore, such investment business is often associated with crimes such as illegal business operations. The criminal law risks of mining machines and their related businesses mainly occur in irregular business promotion behaviors, and the sale of mining machines themselves is not directly prohibited by law. However, a case that came into effect recently broke the cognition of the Sister Sa team. This article aims to analyze the causes and consequences of this case for readers to learn and discuss together.

Basic facts

Plaintiffs Zhou and Chen met defendants Zhang Jia and Zhang Yi through the introduction of a third party Cao. On June 22, 2018, Zhou transferred RMB 72,000 to Zhang Jia through a bank transfer, and Zhang Jia later delivered the above amount to Zhang Yi. After receiving the amount, Zhang Yi helped the plaintiffs purchase 8 mining machines of a certain chain on a certain trading platform and registered them under the name of plaintiff Chen.

At the end of June and the beginning of July 2018, it took 600 virtual currencies and 400 ores to buy a certain chain mining machine on a certain trading platform, and each coin and ore cost about 15 yuan (later the price of coins and ores fell). The money paid by the plaintiff to the defendant Zhang Jia was used to purchase the mining machine.

As the price of the virtual currency fell, the plaintiff sued the defendant in court on the grounds that the defendant promised to guarantee profits, and demanded that the defendant return the purchase price of the mining machine plus interest.

Case Focus

In terms of public information, the Sajie team believes that there are three main focuses of this case:

First, whether the act of purchasing mining machines to obtain virtual currency is protected by law;

Second, whether the sale of mining machines involves criminal offenses;

Third, whether the defendant’s promise of profits affects the characterization of the case.

The Court’s Opinion and Judgment

The trial of the case went through three stages:

First, the lawsuit was dismissed.

In the Civil Ruling No. (2019) Su0381 Minchu 2338 of the Xinyi Municipal People's Court of Jiangsu Province, the court held that the defendant's behavior was suspected of constituting the crime of illegal business operation and should be transferred to the public security organs for investigation, so it ruled to dismiss the prosecution.

Second, the first instance civil instance.

Since the aforementioned ruling did not involve the substantive trial of the case, the two plaintiffs sued the court again and initiated the first instance procedure. In the first instance judgment, the People's Court of Xinyi City, Jiangsu Province stated in the Civil Judgment No. (2020) Su0381 Minchu 1508: Coins and minerals are a kind of virtual currency and do not have the same legal status as currency. Although citizens' investment and trading in such illegal items are personal freedoms, they are not protected by law. In addition, considering that the two plaintiffs did not provide evidence to prove that the defendant had committed a fault sufficient to cause damage to the plaintiffs, the plaintiffs' claims were not supported.

In addition, the first instance court still insisted on suggesting that both parties report the case to the police.

Third, the second civil instance stage.

The plaintiff was dissatisfied with the judgment of the first instance court and appealed to the Intermediate Court. The Intermediate People's Court of Xuzhou City, Jiangsu Province pointed out in the Civil Judgment No. (2021) Su03 Minzhong 490: The subject matter of the transaction between the two parties was neither traditional currency nor legal virtual currency, and the transaction was suspected of being a crime. The judgment of the first instance court was not improper, and the appeal was finally dismissed.

Case Analysis

Looking at the three different effective legal documents, the court's views can be divided into two aspects. First, transactions involving virtual currency are not protected by law. Second, the defendant's sale of mining machines is suspected of illegal business operations.

On the one hand, regarding the view that the subject of the transaction is an "illegal object", Sister Sa's team quoted the reasoning part of the first-instance judgment document of this case to analyze its logical structure.

The court held that, according to the provisions of the "Notice on Preventing Bitcoin Risks" and the "Announcement on Preventing Token Issuance and Financing Risks", virtual currency is not currency, and the coins and minerals in this case are virtual currencies. The plaintiff and defendant's transaction of such illegal items is not protected by law.

In this regard, Sister Sa’s team holds a different view: the fact that coins and minerals are virtual currencies does not mean that they are illegal. Here, the argument of the first instance court is slightly insufficient. In the first article of the “Notice on Preventing Bitcoin Risks” implemented in 2013, “Correctly Understand the Attributes of Bitcoin”, the notice clearly stipulates that “Bitcoin should be a specific virtual commodity, which does not have the same legal status as currency, and cannot and should not be circulated and used as currency in the market”. By extension, virtual currency is indeed illegal as currency, but as a specific virtual commodity, it should be protected by law.

In the opinion of Sister Sa’s team, the coins and ores in this case were mined by the plaintiff through the purchase of mining machines, and the plaintiff’s holding of virtual currency did not make the coins and ores play the role or function of “currency”. Therefore, these coins and ores should be classified as specific virtual commodities and cannot be presumed to be illegal.

On the other hand, regarding the defendant’s promise of profits and sales of mining machines, the court held in its ruling that such behavior was suspected of illegal business operations, while the second-instance judgment did not describe the crime, only stating that it was suspected of a crime. Considering that it is reasonable for the civil judgment to discuss the criminal composition of the crime, we will not delve into it here.

Regarding the defendant's behavior, the Sajie team believes that selling mining machines for buyers to use and obtaining virtual goods called coins and ores does not constitute a crime. However, when the defendant packages the mining machines with concepts such as investment and income and turns them into financial products at the actual level, it may be suspected of illegal business operations. Whether to pursue the defendant's upstream depends on whether such promotion models were made by sales staff without authorization.

In addition, if the virtual currency involved in this case quickly hits the limit down, and there are fictitious facts such as no application scenarios and no use of blockchain technology, it may constitute the crime of fraud. In judicial practice, it is not uncommon for air coins to be convicted of fraud.

Risk Warning and Suggestions

In any case, the Sajie team respects the judgment documents that have res judicata. Although my country is not a country of case law, in practice, searching and referring to similar cases is also part of the work of the trial authorities. The case that has just come into effect is bound to have a certain impact on the judgments of similar cases: the validity of legal acts involving virtual currency may be denied by the trial authorities.

Based on this case, if you want to obtain judicial protection, the Sajie team believes that when engaging in the mining machine sales business, you need to pay attention to the following points:

1. When promoting, do not associate the purchase of mining machines with financial terms such as income and investment;

2. The virtual currency mined by the mining machine should preferably be the mainstream virtual currency that is defined as a specific virtual commodity in regulatory documents;

3. No exchange channels are provided for virtual currency and legal currency or stablecoin.

Final Thoughts

Friends often ask the SAJI team whether there are any cases to refer to for a certain type of behavior. However, in the field of the cryptocurrency industry, which has not been included in the regulatory system through normative documents, different judgments for the same case occasionally occur. As for the legal issues involved in this case, there are also similar civil cases with virtual currencies and mining machines as the subject matter, and the judgment documents support their property nature. Therefore, what we can do more is to summarize and judge the logic of the judgment documents, and conduct objective legal analysis while understanding the tendency.

The above is today’s sharing, thank you readers!