From Wild Growth to Orderly Compliance: The Evolution of Virtual Currency Disposal in Legal Cases
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From Wild Growth to Orderly Compliance: The Evolution of Virtual Currency Disposal in Legal Cases
Never has there been anything like Bitcoin that has left the law so perplexed.
Navigating Web3 tides with focused insightsBy Liu Yang
On November 27, 2020, a criminal judgment document circulated online, igniting the crypto community and attracting significant attention from traditional legal professionals—even drawing curiosity from those outside the legal field. Yes, this was the PlusToken case, potentially one of the largest pyramid schemes in history by value involved.
Just how massive was it? According to the second-instance criminal ruling in the PlusToken case: "The PlusToken platform collected 314,211 bitcoins, 9,174,201 ether, 928,280,240 XRP, 117,450 Bitcoin Cash, 96,023 Dash, 11,060,162,640 Dogecoins, 1,847,674 Litecoins, and 51,363,309 EOS coins from members." Furthermore, "According to valuation by Yancheng City Price Bureau Appraisal Center, using the lowest market prices between May 1, 2018, and June 27, 2019, these eight cryptocurrencies totaled RMB 14,XXX,XXX,8037.50." Those "XXXX" placeholders make the actual amount ambiguous.
At current market values (as of writing), the bitcoins alone would be worth about USD 37 billion. Just Dogecoin and XRP together are nearly USD 5 billion (and not even at their peak valuations).
Back to the main point: The appellate ruling noted, "Regarding the disposal of confiscated assets: The evidence shows that Chen Bo applied to Yancheng Public Security Bureau requesting authorization for Beijing Zhifan Technology Co., Ltd. to legally sell and convert into cash the digital currencies seized by public security organs, with all proceeds treated as restitution funds." This became the core reason the case attracted widespread attention—crypto enthusiasts worried whether such a huge volume of virtual currency would crash the market; legal practitioners questioned whether such disposal methods were lawful; people outside the legal sector sensed an opportunity for quick wealth. Thus, for the first time, the issue of disposing seized virtual currencies entered public consciousness.
Having long defended clients in cryptocurrency-related criminal cases, I had encountered asset disposal issues even before the PlusToken case. Back then, there were no standardized procedures. Some law enforcement agencies extracted suspects and forced them to sell coins on exchanges themselves; others required family members to do so on behalf of suspects, or allowed suspects to appoint third-party companies to liquidate holdings. After PlusToken, entrusting third-party firms became mainstream—but in every scenario, questions remained about the voluntariness of the suspect’s involvement.
We might call this phase “Third-Party Disposal 1.0.” In this model, third-party companies typically worked with large OTC desks, which absorbed the virtual assets and later resold them across various markets. The OTC desks earned spreads on conversions, while third-party firms charged service fees.
Here's how they made money: Suppose the agreed-upon service fee was 15%. A third-party company receives virtual assets worth 100 yuan from judicial authorities, sells them via OTC channels, and returns only 85 yuan to the authorities—the remaining 15 yuan being immediate profit, which could be substantial. Why so high? Third parties justified the rate citing price volatility and trading slippage.
Whether individuals, families, or third-party firms using OTC desks handled disposals—was any of it legally grounded? Not entirely without basis. On September 4, 2017, seven departments including the PBOC issued the Announcement on Preventing Risks Associated with Token Issuance Financing. Paragraph three tightened oversight over token financing trading platforms, stating clearly that from the date of publication, no so-called token financing exchange shall conduct exchange services between fiat currency and tokens or "virtual currencies," buy or sell tokens/virtual currencies as central counterparties, or provide pricing or intermediary services for tokens or "virtual currencies."
Careful reading reveals that the 9/4 Announcement regulates only token financing trading platforms—not individuals. Hence, relying on OTC traders to monetize assets wasn’t technically illegal.
But problems still arose. Given that handling seized virtual currency remained a niche business with outsized profits, illicit practices emerged: corruption and embezzlement by investigators, third-party firms gambling away judicially held assets in speculative trades, OTC dealers deliberately funneling illicit funds into designated accounts (knowing the accounts couldn't be frozen anyway), and many OTC traders themselves targeted by cross-jurisdictional law enforcement due to dirty money links. Overall, it was chaotic.
In 2021, as crackdowns intensified across China, disposal companies sprouted like mushrooms after rain. As I once described in an article:
The scythes now outnumber the韭菜(chives).
Then came a pivotal event in September 2021 that reshaped the landscape: On September 15, ten departments including the PBOC released the Notice on Further Preventing and Managing Risks of Virtual Currency Trading Speculation, known historically as the “924 Notice.” It declared: Activities related to virtual currencies constitute illegal financial activities. Strict bans apply to all such operations—including converting fiat and virtual currencies, exchanging between virtual currencies, acting as central counterparty in virtual currency trades, providing information intermediation or pricing services, token issuance financing, and virtual currency derivatives trading—all suspected of unauthorized securities offerings, illegal futures operations, or fundraising without approval—and must be thoroughly banned and legally abolished.
Compared to the 9/4 Announcement, the prohibited acts under the 924 Notice lack defined subjects. While the earlier announcement targeted specific platforms, the new notice applies universally—no entity or individual may engage in these activities, whether corporate, institutional, or personal.
Thus, the old method of third-party firms organizing domestic OTC networks became unviable.
If domestic execution was blocked, take it overseas—the birth of Third-Party Disposal 2.0. Now, every disposal firm’s pitch deck prominently featured “overseas disposal” as a key selling point. But was it truly offshore? Not necessarily.
In reality, most transactions continued via internal offsetting within China. Only the final fiat payments returned through overseas channels—though the source of these funds often bore no real link to actual foreign dispositions. At the time, there was no requirement for remitted funds to match the exact proceeds from overseas sales. Whether the money actually originated from abroad became unverifiable.
I have good reasons for saying this: First, several individuals in southern provinces were investigated by out-of-province police on charges of “illegal disposal.” Second, some disposal firms consulted me on compliant approaches, admitting frankly: “After those few got arrested, everyone stopped operations.” Third, judicial bodies accepted only foreign exchange settlement slips as proof—regardless of authenticity. And those few who got arrested? They were precisely the ones capable of producing such documents.
The 2.0 era brought other changes: (1) Service fees dropped sharply. With growing volumes of seized crypto nationwide and increasing transparency amid fierce competition among disposal firms, fees fell below 10%, with reports of as low as 4%. (2) Local governments began participating directly, putting disposal contracts up for public bidding, with commissions from discipline inspection, political-legal committees, finance bureaus, and others supervising the process. (3) Fees shifted to a two-line fiscal system: previously, a third party kept 15 yuan from every 100 yuan converted; now, they must return the full 100 yuan to government coffers, with pre-agreed fees paid separately through official fiscal channels.
During this period, established early-generation third-party (or intelligence-assisted) disposal firms withdrew from direct operations, instead subcontracting packages to multiple teams—both to create legal firewalls and improve operational efficiency.
Finally, in 2024, the Supreme People's Court stepped in, listing “Research on the Disposal of Seized Virtual Currencies” as a major judicial research topic for the year. The research group includes institutions and judicial bodies from Beijing, Chongqing, and Shenzhen. I was fortunate enough to participate in partial surveys in Beijing and Chongqing. While detailed findings cannot be disclosed, based on publicly available press releases, let us discuss what defines Third-Party Disposal 3.0.
Prior to this phase, uncertainty around proper disposal methods caused another temporary halt in operations. Rumors spread widely that the total value of seized virtual currencies awaiting disposal across Chinese jurisdictions is staggering. Then Hong Kong emerged as a potential compliance pathway.
For example, Beijing recently announced its successful experience routing disposal through the Beijing Property Rights Exchange via Hong Kong. Other regions are similarly exploring compliant routes through Hong Kong. From my analysis, despite differing details, all approaches follow a common underlying formula.
First, compliant disposal cannot happen without SAFE (State Administration of Foreign Exchange) and domestic banks. Any inbound foreign exchange must be registered with SAFE and repatriated through banking channels—thus involving Hong Kong–based banking institutions. Second, per Hong Kong banking rules and licensed exchange requirements, Hong Kong banks cannot open accounts directly on trading platforms. Therefore, a local Hong Kong–based entity authorized to hold exchange accounts is essential. Third, after the entity disposes of the seized crypto on a compliant platform, proceeds go to a Hong Kong bank account. That entity files SAFE registration and transfers the converted funds back to mainland banks.
Beyond this framework, interchangeable components exist—whether companies or exchanges—they aren't indispensable elements.
Hence, I propose the following recommendations: (1) Provincial-level judicial authorities should serve as the primary disposal entities for seized virtual digital assets. (2) Under leadership from higher-level departments, provincial judicial organs should establish “green channels” with head offices of state-owned banks, opening dedicated accounts for seized virtual currency disposal and authorizing the bank headquarters to handle liquidation. (3) State-owned bank headquarters should leverage Hong Kong or other legally permissible overseas branches to complete compliant offshore disposal of seized virtual currencies.
In short, minimize unnecessary intermediaries, return disposal profits to the state, and maximize operational efficiency.
Recently, the People's Court Daily published an article titled “Disposal of Criminal Case-Related Virtual Currencies: Challenges, Innovation, and Judicial Responsibility,” which stated: "We may explore entrusting qualified third-party institutions, under filing and supervision by the PBOC, SAFE, and other relevant departments, to dispose of virtual currencies in overseas jurisdictions where such activities are legal—such as Hong Kong—through compliant, licensed trading platforms. After conversion into legal tender at market prices, funds can be repatriated following procedures outlined in SAFE’s 'Letter Concerning Opening Foreign Exchange Accounts and Handling FX Transactions in International Judicial Activities by People’s Courts.'"
Hopefully, based on thorough research into regional practices and findings from expert task forces, the Supreme People's Court—the superior body behind People's Court Daily—will soon issue standardized guidance to fully regulate the disposal of seized virtual currencies.
Finally, repeating my oft-quoted line:
"Never has any single thing perplexed the law as much as Bitcoin."
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