How to determine the amount involved in virtual currency pyramid scheme crimes

Author: Lawyer Liu Zhengyao

In recent years, the number of crimes involving virtual currency-related organizations and leading pyramid schemes has increased significantly in virtual currency-related criminal cases, and even in the entire cybercrime. Especially since the joint release of the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" (hereinafter referred to as the "9.24 Notice") by ten ministries and commissions of the State in September 2021, domestic judicial authorities have further intensified their criminal crackdown on the issuance of virtual currency financing (i.e. ICO). Many project parties that issue virtual currency financing mostly adopt the "recruiting people and returning profits" model in their publicity and promotion, which is easy to meet the constituent elements of pyramid scheme crimes in my country's criminal law. In addition, some local judicial authorities are very enthusiastic about "generating income" in cracking down on currency-related pyramid schemes. These factors have jointly led to a "small leap" in the number of currency-related pyramid schemes.

As a web3 criminal defense lawyer, the author has noticed that many judicial authorities are shockingly rough in handling currency-related pyramid schemes, such as the most important determination of the amount involved.

I. Importance of Determining the Amount Involved in Pyramid Scheme Crimes

 According to the Opinions on Several Issues Concerning the Application of Law in Handling Criminal Cases of Organizing and Leading Pyramid Scheme Activities jointly issued by the Supreme People's Court, the Supreme People's Procuratorate and the Ministry of Public Security in November 2013 (hereinafter referred to as the "Opinions"), the elements of the crime of pyramid schemes have always required that the number of people involved in pyramid schemes in the pyramid scheme organization be more than 30 and the level be more than 3. At this time, there is no direct requirement for the amount involved.

However, when a suspect/defendant is accused of pyramid scheme crime, one thing that needs to be considered is whether the circumstances involved meet the standard of "serious circumstances". For those who do not meet the standard of "serious circumstances", the sentence is generally less than five years; for those who meet the standard of "serious circumstances", the sentence needs to be more than five years.

At this time, the importance of the amount involved is revealed: according to the provisions of the "Opinion", if a pyramid scheme organization "directly or indirectly collects a total of more than 2.5 million yuan in pyramid scheme funds paid by participants in pyramid scheme activities", it belongs to the circumstances of pyramid scheme crime in my country's criminal law.

Therefore, it is very important to determine the amount involved in pyramid scheme crime, which is related to the length of sentence that the suspect/defendant may be sentenced to in the future.

II. How to determine the amount involved in currency-related pyramid scheme cases

However, my country does not recognize that USDT is equivalent to legal tender. In my country's current regulatory approach to virtual currencies, virtual currencies are at most treated as virtual commodities.

For pyramid schemes involving currency, even if the suspects/defendants have the purpose of "defrauding others of their property" in pyramid schemes, they are all defrauding others of their virtual currencies. In simple terms, it is to defraud others of their mainstream virtual currencies by issuing worthless air coins. But in this crime model, how to calculate the amount involved (legal currency)?

In current judicial practice, there are several approaches:

First, the amount involved in the case is determined by the amount of cash realized from the disposal of the virtual currency involved in the case. However, the disadvantage of this approach is that in some cases, the virtual currency seized by the judicial authorities is not entirely the virtual currency involved in the case. For example, when the suspect/defendant speculates in cryptocurrencies with his own legal funds, the virtual currency purchased or the virtual currency earned is often seized by the public security organs in one go. The logic of the public security is also very simple: if you say that a certain part of the virtual currency is legally held, then please produce evidence. This is actually the wrong reversal of the burden of proof borne by the prosecution in the criminal case to the suspect. Based on the actual position of the suspect in the criminal case, the suspect basically has no ability and conditions to prove the legality of a certain part of the seized virtual currency;

Second, the amount involved in the case is determined by judicial appraisal opinions or price evaluation reports. The opinions issued by third-party appraisal/evaluation agencies have a certain "professional halo" and are directly used as evidence by judicial organs in practice. However, in virtual currency cases, there is a forbidden zone that appraisal and evaluation agencies cannot cross: we currently do not allow any agency to provide price determination services (i.e. pricing services) for virtual currency transactions, and there are no exceptions to this prohibition. In a case represented by the author, the appraisal agency directly equated USDT with US dollars, multiplied the number of USDT involved in the case by 7.3 (the exchange rate of US dollars against RMB), and directly determined the amount involved in the case. The bravery of the operation is impressive;

Third, the amount involved is determined according to the market price of virtual currency. There are cases that directly determine the amount involved based on the market trading price of the virtual currency involved in the mainstream exchange. This practice is no longer a question of whether it is reasonable, but directly belongs to illegal activities. Reason: The "9.24 Notice" stipulates that "foreign virtual currency exchanges providing services to residents in my country through the Internet are illegal financial activities", so judicial authorities are not allowed to visit foreign virtual currency exchanges at all, let alone use the virtual currency transaction prices shown above as the basis for the verdict;

Fourth, the purchase price of the virtual currency involved is used as the amount involved. In currency-related pyramid schemes, ordinary investors use RMB to purchase mainstream currencies such as USDT, and then use USDT to exchange for other virtual currencies. In the above-mentioned determinations of the amount involved, the starting point is the amount of USDT purchased by the investor as the amount involved (such as disposal and realization is actually to exchange all the virtual currencies involved into USDT before disposal and realization, and appraisal or evaluation is also directly based on the 1:1 relationship between USDT and the US dollar as the pricing basis, and the market price of virtual currency is also based on USDT as a reference basis). Few judicial authorities pay attention to the source of currency-related cases, that is, how much RMB did the parties use to participate in the project involved?

The author believes that the most reasonable solution to calculate the amount involved is to prove how much RMB the pyramid scheme participants invested in the pyramid scheme project. In fact, strictly speaking, as long as the party completes the exchange of RMB-virtual currency, then in principle he has completed the investment behavior of virtual currency. According to the provisions of the "9.24 Notice", if the investment behavior of virtual currency in my country violates public order and good morals (in practice, as long as the investment in virtual currency is determined by the judicial authorities to violate public order and good morals), the investment behavior is not protected by law. At this time, the party takes this virtual currency to exchange for another virtual currency, which is completely out of the scope of Chinese law. Civil law does not protect it, and criminal law should not ask about it. After all, even if USDT, which claims to be a "stable currency", does not have any national sovereignty endorsement, it is entirely possible that Tether will suddenly go bankrupt tomorrow. In this case, it is estimated that no one will recognize the value of USDT anymore.

Even if the judicial authorities recognize that USDT has actual value (which can be expressed as USDT belonging to the property under the criminal law), the amount involved should be determined by the amount of RMB invested by the parties, rather than the other way around.

III. Conclusion

Although virtual currencies represented by Bitcoin have been around for more than fifteen years, it is enough for a newborn baby to become a teenager/girl. But this morning light is like a moment for the naturally lagging judicial activities. Therefore, the vast majority of judicial staff do not understand virtual currency at present. At the same time, with our country's strong regulatory policy on virtual currency, the closed currency circle environment in the mainland is indeed difficult to attract general audiences. This further leads to the judicial authorities' understanding of the attributes of virtual currency to remain on the surface and ignore its essence.