Exclusive interpretation by a former prosecutor: The five most common criminal risks for people in the cryptocurrency world

The author is Huo Yijie, a former staff member of the Procuratorate and current lawyer. This article is exclusively published by Wu Shuo Blockchain

Since 2018, the trend of strict financial regulation has never stopped. In 2019, the cryptocurrency industry experienced ups and downs. In October, the country encouraged the development of blockchain technology. In November, major rectification notices were issued, and the 94 crisis reignited overnight. In December, we thought we could wait for 2020, but at the end of the month, another wave of criminal cases were sentenced. Major think tanks also released data reports on criminal cases in the cryptocurrency industry, which once again sounded the alarm for people in the cryptocurrency industry.

According to reports released by several think tanks and authoritative websites such as China Judgment Documents Network, there were at least 350+ criminal cases involving the cryptocurrency industry in 2018 and 2019, with "blockchain" as the keyword, far exceeding similar civil and administrative cases in the same period. And these are only effective cases, not including cases that have not been judged, judged but not effective, not made public, and not included. We believe that in fact there are far more than this number.

It can be seen that criminal risk is the main risk point and high-voltage line facing the current cryptocurrency circle. Through recent relevant case studies, we have sorted out the five major criminal risks that cryptocurrency people are most likely to be involved in for reference.

Criminal risk 1: Theft - from stealing mining machines to stealing electricity

The first thing I’m going to talk about is theft, which may be something you don’t expect.

According to a recent report released by a think tank, theft accounts for about 40% of criminal cases in the cryptocurrency circle. It mainly involves theft of mining machines and electricity, especially the latter. Among them, Heilongjiang, Anhui, Henan, and Hebei provinces are the areas with high incidence of theft cases, among which electricity theft cases account for almost 50% of the country. This may also be related to the rich resources and loose supervision in Daqing, Heilongjiang and Ma'anshan, Anhui.

As we all know, the PoW consensus mechanism of virtual currency networks such as Bitcoin and Ethereum requires mining machines to mine coins, and the higher the computing power, the greater the probability of mining coins. High returns, high computing power, and high power consumption have spawned a series of mining machine theft cases and electricity theft cases. As the cost of purchasing mining machines gradually decreases, the number of electricity theft cases has increased significantly.

On December 24, the People's Court of Dantu District, Zhenjiang City, tried a major case of "mining machine" stealing electricity for mining. This case is the largest case of theft of state-owned electricity in Jiangsu since the founding of New China. In order to reduce the high electricity cost of running Bitcoin "mining machines", the defendants Lan Moufeng and three others continued to steal state electricity to mine Bitcoin by short-circuiting transformers from March 2017 to May 2019. The defendants Wang Moubin and seven others provided assistance and profited from it. Among them, the principal offender Lan Moufeng was involved in a case of up to 13.781383 million yuan and was sentenced to 13 years in prison and a fine of 300,000 yuan. The other nine defendants were sentenced to prison terms ranging from 3 to 13 years.

The criminal standards for theft vary across the country, with the lowest being just 1,000 yuan. In general, the criminal threshold is not very high, especially in economically developed areas and areas with a high incidence of cases.

As can be seen from the table, the criminal punishment for theft is a basic sentence of less than three years in prison, and the maximum sentence is life imprisonment. Regardless of the sentence, a fine is required as a punishment. The amount of the fine is determined based on the circumstances of the crime, and the maximum can be twice the amount of theft. Even more serious is the confiscation of all property.

In addition, some courts will confiscate the mining equipment involved in the case and turn it over to the state treasury in accordance with the law in their judgment.

The crime of theft may seem minor, but it is basically a multiple blow to the defendant. As the saying goes, if you fail to steal electricity, you have to pay the electricity bill, lose your freedom, pay the fine, and lose your equipment.

Criminal risk 2: Computer-related crimes - virtual currency: property or data?

Computer-related crimes mainly include illegal intrusion into computer information systems, illegal acquisition of computer information system data, illegal control of computer information systems, and destruction of computer information systems, etc.

What does it have to do with the cryptocurrency world? Let’s look at a case first. The case is not complicated, but the process is a little tortuous.

The defendants Liu and Meng lied that they were buying Ethereum. After the victims Zhu, Ni and others transferred 60 Ethereum to Liu's designated wallet, Liu blocked them. Afterwards, Liu and Meng sold the 60 Ethereum and received a total of more than 300,000 yuan.

The procuratorate filed a public prosecution for fraud, and the first instance court changed the verdict to illegal acquisition of computer information system data, sentencing Liu and Meng to three years and ten months in prison and a fine of 40,000 yuan each. The procuratorate filed an appeal on the grounds that Ethereum has property attributes and the case should be charged with fraud. The second instance court did not support it, rejected the appeal, and upheld the original verdict.

This case is a good example of the fact that the judicial authorities have not yet reached a clear conclusion on the nature of virtual currencies. In early judgments, due to the influence of the financialization of the cryptocurrency circle, most judicial authorities tended to identify such crimes as property crimes, and apply theft, fraud and other property crimes. With the popularization of knowledge such as Bitcoin, Ethereum, and blockchain, most judicial authorities have changed their minds and believe that such virtual currencies are generated through a large number of calculations based on specific algorithms. In essence, they are dynamic data combinations, and their legal attributes are computer information system data, which should be treated as computer-related crimes. However, some regions and agencies still believe that they belong to property crimes, especially those involving Bitcoin and Ethereum, two currencies with strong liquidity and widely accepted by the public.

Computer crimes generally do not have a heavy sentence, with the basic sentence being a fixed-term imprisonment of less than three years or less than five years. In other words, if the above case is convicted of fraud, the sentence will go up immediately. Some computer crimes can also be accompanied by a fine.

It is worth noting that all relevant crimes can be established as corporate crimes, that is, the criminal liability of the directly responsible supervisors and other directly responsible persons can be investigated.

Criminal risk three: Organizing and leading pyramid selling activities - brokers who recruit people

Virtual currency projects are usually accompanied by communities, and incorrect methods of attracting people to operate may lead to pyramid schemes. For example, some project owners go to second-, third-, and fourth-tier cities to hold roadshows, lectures, and promotions to attract investment, and then use the names of static and dynamic returns to induce investors who have already fallen into the trap to continue to develop downlines.

On December 24, the "Ubao Coin" case of organizing and leading a pyramid scheme was publicly sentenced in the People's Court of Zhongshan County, Hezhou City. In January 2018, the defendant Wang Moufan gathered Teng Mou and others to create the "Ubao" platform and issue virtual currency Ubao. The platform has more than 170,000 registered members and 470,000 registered accounts. A pyramid-shaped pyramid scheme organization system was formed among members. At the time of the incident, the funds involved were as high as more than 1.17 billion yuan. In the end, Wang Moufan, as the main culprit, was sentenced to seven years in prison and fined 20 million yuan. The remaining 11 people were sentenced to fixed-term imprisonment ranging from one year and six months to seven years.

The main method used by pyramid schemes is the typical broker-type method of deceiving customers. Generally, under the guise of sales and management, participants can only obtain membership qualifications by paying membership fees, purchasing goods and services, etc., and then continue to develop downlines to form a hierarchical system arranged in a certain order. Finally, the salary or reward is calculated according to the number of people developed.

The core problem of pyramid schemes is that they rely on the money of downlines to subsidize uplines, rather than relying on regular commodity and service operations to make profits. They cannot maintain the sustainability of their business activities. Once they cannot continue to develop enough downlines, they will face a break in their capital flow, resulting in losses for many investors.

Once a pyramid scheme has more than 30 members and the number of levels is above level 3, criminal punishment can be imposed. The three levels here include the level of the organizer and the leader themselves, which means that as long as two more levels of downline are developed, the threshold for conviction is relatively low.

Depending on the circumstances of the crime, the sentence can range from less than five years in prison to more than five years in prison, with a maximum of fifteen years in prison. Similarly, no matter what kind of criminal law is used, a fine is required.

It is worth noting that this crime only punishes the organizers and leaders of the pyramid scheme, such as the initiators, planners, coordinators, managers, and also includes publicity and training personnel. The general participants will not be punished, after all, they are also victims.

Criminal risk 4: Illegal absorption of public deposits and fund-raising fraud - cracking down on Ponzi schemes

Funding has always been a high-risk business, which is prone to illegal fundraising crimes. The most typical illegal fundraising in the cryptocurrency circle is the Ponzi scheme, where a dozen pages of white papers and a few pages of PPT can raise a large amount of funds in a few days. For example, the ICO that the government has cracked down on, the relevant financing entities raise funds or virtual currencies such as Bitcoin and Ethereum from investors through illegal issuance and circulation of tokens.

Under the ban, some companies have come up with ICO-like models such as IFO, IEO, and IMO, mistakenly thinking that they can avoid ICO risks. In fact, my country's financial sector has always adopted a "penetrating" regulatory model - no matter how it is packaged or changed, it is necessary to peel off the layers of outer clothing to see the core essence. As long as it meets the four characteristics of illegal fund-raising crimes, it is enough to constitute a crime, mainly suspected of two crimes - illegal absorption of public deposits and fund-raising fraud.

The so-called four characteristics of illegal fund-raising crimes refer to illegality, publicity, inducement and sociality. Simply put, the financing party absorbs funds from the general public without administrative approval and promises to give returns.

The difference between the crime of illegally absorbing public deposits and the crime of fund-raising fraud is that the former does not have the purpose of illegal possession, while the latter does. How to understand it? Simply put, the former is essentially an unlicensed and illegal operation, while the latter is purely a money-making scam.

The thresholds for conviction for the two crimes are slightly different. For the crime of illegally absorbing public deposits, in principle, remember three numbers: 20, 30, and 10. The amount absorbed reaches 200,000 yuan, or the number of people absorbed exceeds 30, or the direct loss is 100,000 yuan. For the crime of fund-raising fraud, the amount reaches 100,000 yuan. The above are the standards for individual crimes. It is worth noting that both of these crimes can be established as corporate crimes, and the standard for conviction is five times that of individuals.

Regarding the prison terms, the sentencing range varies greatly depending on the degree of harm caused by the two crimes.

Criminal risk 5: Fraud - a large-scale catch-all crime

Why is fraud put last? Because it was a relatively popular crime in the early days. When any new concept first enters the public eye, it will always be used by a group of scammers first, and then by a group of investors.

Fraud is a typical case of making money out of nothing. Most people are blinded by money and want to make a fortune under the banner of "blockchain" or "bitcoin". In essence, fraud does not require too much technical content. It only requires the use of fictitious facts or concealment of the truth to induce others to have a wrong understanding and hand over property. For example, using virtual currency trading platforms to trick others into recharging, impersonating virtual currency customer service to falsely claim rebates for recharging, and defrauding money by purchasing or selling virtual currency or mining machines.

On December 23, Taiyuan's first blockchain virtual currency transaction fraud case on the Yunbi platform was cracked, 72 suspects were arrested, more than 300 victims, and the case involved a value of more than 30 million yuan.

It is reported that the suspects added 30 times of false leverage and tampered with the virtual currency trading trend chart until "forced liquidation", making the victims mistakenly believe that the losses were caused by the market decline, and then defrauding money.

Both fraud and fund-raising fraud are fraudulent acts. The core difference between the two lies in whether the fraud targets are specific. Since the targets of fraud are relatively small, the penalties are relatively light. Depending on the amount of fraud and the circumstances of the crime, there are three different prison terms: less than three years, three to ten years, more than ten years or life imprisonment. Regardless of the prison term, a fine is imposed and in the most serious cases, property can be confiscated.

Just like theft, the criminal standards vary from province to province, with the lowest being 3,000 yuan. It should be noted that once telecommunications fraud is involved, the criminal threshold will be lower and the crackdown will be more severe.

In 2020, "regulation" must be the main theme. Only by operating in compliance and guarding against criminal risks can we go further and better.

Author: Lawyer Huo Yijie

Areas of expertise: Internet finance compliance, criminal risk prevention and control, criminal defense

He has worked in the Shanghai Procuratorate for many years, mainly responsible for Internet-related and financial cases. He has presided over many platform company fundraising cases, transnational fraud cases, network platform packet capture software negative proposals, and large Internet company data crawling cases.

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