Compliance Investigation into Judicial Disposition Paths for Virtual Currencies in China
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Compliance Investigation into Judicial Disposition Paths for Virtual Currencies in China
Currently, it is difficult for cryptocurrency judicial disposal operations to be centrally managed by a single government department or agency as some people have predicted or expected, due to significant issues surrounding fiscal jurisdiction and judicial authority.
Navigating Web3 tides with focused insightsAuthor: Liu Zhengyao
1. The Necessity of Judicial Disposal of Virtual Currency
From the perspective of judicial authorities, there are two common approaches to handling virtual currency involved in legal cases: one is disposing of and converting seized virtual currency into fiat money before a court ruling; the other occurs after a criminal judgment becomes effective, when law enforcement or judicial agencies proceed with disposal. Both models have corresponding legal bases, which this article will not reiterate.
We will focus instead on why judicial disposal of virtual currency exists at all.
Prior to 2021, China's regulatory stance toward virtual currency gradually tightened. On September 15, 2021, ten Chinese government departments jointly issued the "Notice on Further Preventing and Responding to Risks Associated with Virtual Currency Trading and Speculation" (commonly known as the "September 24 Notice"), which essentially established China’s official position on virtual currencies from September 2021 onward. Key provisions include:
(1) Virtual currencies such as Bitcoin, Ethereum, and Tether (USDT) are not legal tender and should not, nor can they, circulate as currency in the market; (2) Domestic entities are strictly prohibited from engaging in exchange services between virtual currencies and fiat currency, crypto-to-crypto trading, or providing pricing and information services for virtual currency transactions; (3) Overseas virtual currency exchanges are banned from offering any services to users within China.
As a result, a contradiction arises. In criminal cases involving virtual currencies, the assets in question are typically represented by various types of digital tokens, which are seized as evidence or confiscated property. For cases requiring asset forfeiture—such as those involving pyramid schemes, illegal gambling operations, or unlicensed business activities—the aforementioned "September 24 Notice" prevents courts from directly ordering that seized virtual currencies be turned over to state coffers. Instead, these digital assets must first be converted into fiat currency before confiscation.
However, China also strictly prohibits any individual or entity from conducting conversion between virtual currencies and fiat money. This creates an irreconcilable conflict between the practical need to liquidate virtual currency during judicial proceedings and the domestic ban on such conversions. This fundamental contradiction means that all compliant judicial disposal activities involving virtual currency in China today must take place overseas.
2. Current Common Disposal Models
Based on my practical experience and discussions with various disposal companies, current disposal models can be summarized as follows:
First: Domestic + Overseas Joint Disposal Model. This is currently the most prevalent model. A domestic agency disposal company signs a commission agreement with the judicial authority or suspect, then delegates the actual disposal task to an overseas entity. The overseas entity must comply with local laws and regulations and possess financial qualifications for exchanging virtual currency and fiat money. After completing the disposal, the overseas entity transfers the resulting fiat funds to the domestic agency’s account. The domestic agency then converts the foreign currency into RMB and transfers the proceeds to the judicial authority's account or a designated non-tax revenue treasury account.
Second: Disposal within Domestic and Foreign Free Trade Zones. Some companies operate within Sino-foreign co-developed free trade zones where dual jurisdiction applies, allowing them to circumvent China’s prohibition on virtual currency trading. Ultimately, the disposal process must occur through public auction. Judicial authorities seeking disposal sign contracts with the company and physically bring the virtual currency to the company’s registered location (within the free trade zone) for auction. The highest bidder wins. The disposal company then repatriates the auction proceeds via bank settlement procedures.
Third: Disposal via Overseas Banks. Another model involves direct cooperation with overseas banks authorized to conduct virtual currency-to-fiat exchanges. These banks convert the virtual currency into fiat currency and transfer the funds back into mainland China.
Fourth: Redemption by Overseas Virtual Currency Issuers. In 2023, the Shandong Provincial Finance Department released a document ("Provisional Regulations on the Handling of Confiscated Goods," Finance-Tax [2023] No. 18), stating that law enforcement agencies may negotiate with virtual currency issuers to redeem confiscated tokens, provided the redemption price is no less than 80% of the token’s market value. This has led to a new practice: for centralized virtual currencies like USDT, certain disposal companies now have the capacity to negotiate with Tether Limited to repurchase seized USDT at no less than 80% of their value in fiat currency. The disposal company then settles and repatriates the funds.
3. Exploring Compliant Disposal Models
The judicial disposal of virtual currency has evolved since 2020 (or even earlier) through three phases: Disposal 1.0, 2.0, and 3.0. These stages are defined primarily based on the first model mentioned above. The second, third, and fourth models have not shown clear evolutionary progression.
In the **Disposal 1.0** era, domestic disposal companies directly purchased virtual currency from judicial authorities using RMB. Under the "September 24 Notice," this constituted an illegal financial activity. In the **Disposal 2.0** phase, domestic intermediary disposal companies emerged, shifting actual disposal operations overseas. However, these overseas activities were not necessarily compliant—for instance, some jurisdictions also prohibit virtual currency trading, or sales occurred to private individuals abroad without proper anti-money laundering (AML) or counter-terrorism financing (CFT) checks. Additionally, when converting proceeds into RMB and repatriating funds, companies often disguised the inflows under false pretenses such as goods trade, service trade, or capital account transactions, violating foreign exchange regulations due to lack of genuine transaction backgrounds.
The **Disposal 3.0** era has largely addressed these issues, although certain details still require refinement—such as establishing standardized benchmark prices for virtual currency transactions, obtaining legal opinions from both domestic and overseas law firms, generating verifiable on-chain transaction records for overseas trades, and implementing post-disposal monitoring mechanisms to prevent seized virtual currency from re-entering China.
In summary, the preferred compliant disposal model today remains the domestic + overseas joint approach. However, further improvements are needed to ensure full compliance across foreign exchange procedures, overseas trading legality, legal documentation, and blockchain technical verification. Attorney Liu will discuss these detailed aspects in future articles or videos.
4. Final Thoughts
Currently, it is unlikely—as some predict or hope—that a single national department or institution will centralize the judicial disposal of virtual currency. This is due to complex fiscal and jurisdictional interests. At present, even cases handled at the city or prefecture level are not necessarily reported to provincial authorities, and even if higher-level ministries are aware, they cannot easily intervene and take over local cases. These realities cannot be resolved or explained by any single law or academic treatise. They lie beyond the control or influence of lawyers. All we can do is serve our clients well, ensuring every disposal transaction is lawful, compliant, secure, efficient, and free of unintended consequences.
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