New Trends in the Judicial Disposal of Virtual Money: The "Wenzhou Model" of Judicial Disposal

Introduction

The judicial disposal of virtual currencies involved in cases is no longer a niche business; more and more people are aware of, understand, and even begin to participate in this business. Especially since the Beijing Municipal Public Security Bureau's Legal Affairs Team officially announced the judicial disposal of virtual currencies involved in cases this year, there has been a noticeable increase in judicial disposal work across the country in the second half of the year.

In fact, helping judicial authorities to dispose of and realize the frozen virtual currencies involved in cases has been done by some people as early as around 2018. However, at that time, there was no "9.24 Notice" ("Notice on Further Preventing and Handling the Risks of Virtual Currency Trading and Speculation") that prohibited any entity from engaging in the exchange of virtual currencies and fiat currencies in mainland China. Therefore, domestic over-the-counter (OTC) traders could assist judicial authorities in converting the involved virtual currencies into fiat currency.

However, since the "9.24 notice", no entity is allowed to engage in the exchange of virtual currencies and fiat currencies in the mainland. Therefore, facing the "accumulated" virtual currencies, judicial authorities have no way to proceed. Some disposal companies have begun to build a joint disposal model that combines domestic and overseas operations (the author first saw the introduction of this model in a paper by Suzhou Economic Investigation Team Leader Di Kechun); of course, there are other parallel models in practice, including the most primitive model of directly disposing of and cashing out within the territory (although the "9.24 notice" defines engaging in the exchange of virtual currencies and fiat currencies within the territory as illegal financial activity).

On August 8th, Wenzhou News Network published an article titled "How Do Virtual Currencies Turn into Cash? Lucheng Court Solves the Difficulty of 'Digital Realization' Execution," which introduced a model adopted by the Lucheng Court in Wenzhou City for the disposal and realization of the virtual currencies involved in the case. The author of this article refers to it as the "Wenzhou Model."

1. Background Introduction

According to the article, in a criminal case involving virtual currency adjudicated by the Lucheng District Court in Wenzhou City, the defendant Liu used illegal means to transfer tens of thousands of virtual currencies from the victims, including Yang. After the criminal judgment took effect, the court enforcement bureau found that it was impossible to directly convert the virtual currencies involved in the case into fiat currency within the country.

The enforcement officers from the court contacted the Cyber Security Division of the Lucheng Public Security Bureau, "In accordance with the latest deployment requirements from the Supreme Court and the Ministry of Public Security regarding the exploration of the disposal of virtual currencies involved in criminal cases, we will study the disposal plan together." The Lucheng Public Security Bureau reached out to the Third Research Institute of the Ministry of Public Security, which assisted in selecting mature professional disposal agencies and signing a disposal entrustment agreement.

Ultimately, the disposal and conversion of the virtual currency involved in the case was completed with the help of a licensed exchange. After deducting service fees, the remaining converted funds were transferred through an independent account of the public security to the court's special account for the funds involved in the case. A total of approximately 50,000 RMB was disposed of and converted, consisting of 6,000 USDT, 2,700 TRX, and 0.8 BNB.

(Image source: Wenzhou News Network, URL as shown in the screenshot)

2. Analysis of the "Wenzhou Model"

According to the news introduction, the general outline of the "Wenzhou model" is as follows: after the conclusion of a criminal case, the court's trial chamber transfers the case to the court's enforcement bureau for execution. The enforcement bureau then contacts the local public security agency's cyber security team. At this point, it is not clearly stated whether the virtual currency involved in the case is held by the public security agency or has been transferred to the court's enforcement bureau. Based on my practical experience, it is more likely still held by the public security agency.

(Image source: Wenzhou News Network)

The local Public Security Bureau's Cybersecurity Division commissioned the Third Research Institute of the Ministry of Public Security (hereinafter referred to as "the Third Institute"), which then selected a specialized disposal company and signed a委托处置 agreement. The disposal company, relying on a licensed exchange, completed the disposal and monetization. After deducting the disposal handling fee, the disposal funds were first transferred to the Public Security Bureau's account, and then from the Public Security Bureau to the court's special account for the case.

In this article, we can see that, unlike the previous "North Exchange Model," where the Technical Support role was played by a department of the Ministry of Public Security, in the Wenzhou model, it seems that a direct commission was given to three departments, which then selected the disposal companies? If the article's expression is consistent with objective facts, the role of the three departments here is equivalent to that of an intermediary.

The author checked the official websites of three institutions, which are positioned as application-oriented research institutions directly under the Ministry of Public Security.

(Image source from the official website introduction of the Third Research Institute of the Ministry of Public Security)

The news report also mentioned that after selecting three disposal companies, the entrusting agency and the disposal companies signed an entrustment agreement, but it did not specify whether the agreement was signed by the court or the police and the disposal companies. My personal judgment is that it was signed by the police, because the final disposal funds were first transferred to the police account, and then from the police account to the court account. Logically, the disposal company should have signed a contract with the police before transferring the disposal funds to the police's account.

The last point is that the Wenzhou model relies on licensed exchanges to handle cashing out abroad, but it is not particularly clear whether this "licensed exchange" refers to virtual currency exchanges or other licensed institutions.

3. Introduction to Judicial Disposal Business Model

Since June of this year, Director Luo Wenlong and I have shared the defense and judicial handling practices of criminal cases involving virtual currencies at the headquarters of Zhi Heng Law Firm and several branch offices, as well as at industry seminars related to virtual currencies.

Currently, in addition to the domestic + overseas joint disposal model, there are actually various parallel models as shown in the figure below. In fact, there are still some places that adopt the most primitive model of buying coins from the public security bureau through domestic OTC for disposal.

IV. Conclusion

Few legal activities can provoke as much controversy, both theoretically and practically, as the judicial disposal of virtual currencies. This is closely related to the overall regulatory policies on virtual currencies in mainland China. For a technology that regulators dislike but cannot completely ban (yes, in the author's view, the entire virtual currency is merely a facade, with the underlying technology represented by blockchain), it is better to facilitate rather than block.

After the United States passed the Genius Act, Hong Kong also attempted to open up Web3 to a certain extent, such as implementing a stablecoin issuance system with a Hong Kong特色 model. This is actually a reflection of different political systems' attitudes towards the emerging phenomenon of virtual currency.

Satoshi Nakamoto once replied in an email: "If you don't believe me or don't understand me, I don't have time to convince you, sorry."