Analysis of Judicial Identification of Crimes Related to Virtual Money

Recently, a legal expert discovered some "hidden rules" or path dependence issues in the standards of conviction when researching criminal cases involving Virtual Money in the judicial organs' handling of such cases. This article will explore how to determine whether certain common coin-related behaviors constitute a crime in judicial practice.

I. Case Overview

In April 2020, the Zhejiang Provincial High Court made a judgment on a fundraising fraud case, determining that "the act of soliciting investments in the name of Virtual Money trading, developing downlines through pyramid schemes, and attracting investments by utilizing the concept of blockchain while actually manipulating prices for profit" should be classified as a fraud-related crime, rather than the lighter offenses of organizing and leading pyramid schemes or illegally absorbing public deposits.

The case involves various business models such as issuing coins, promotional marketing, market manipulation, and ICOs. The special aspect of the case is that the main perpetrator, Xia, and others were initially sentenced to probation by the Hubei Zhongxiang City Court for organizing and leading pyramid schemes, but later the Hangzhou Intermediate Court revoked the original judgment, changing it to a conviction for fundraising fraud and sentencing them to life imprisonment. The Zhejiang High Court rejected the appeal and upheld the judgment of the Hangzhou Intermediate Court.

The huge differences in the judgments of the two courts have sparked research interest in the conviction logic of crimes related to coin pyramid schemes and fraud.

2. Common Types of Coin-related Crimes and the Logic of Criminalization

( the legality of Virtual Money transactions )

Since the announcement issued by seven ministries in September 2017 to prevent the risks of token issuance and financing, conducting token issuance within China has been regarded as "an unapproved illegal public financing activity", suspected of illegal fundraising and other criminal activities. Public promotion conducted under the name of "Virtual Money" is considered non-compliant and even illegal.

Even virtual money issued by overseas platforms is considered to have no actual economic value due to the lack of national recognition and can only exist as a virtual concept.

In the case of Xia XX, the court found that the total amount of the virtual money it issued was not fixed, and that it expanded the capital scale through the free distribution of tokens, and then artificially inflated the price, which constitutes a typical Ponzi scheme. Therefore, the issuer ( and the seller ) in the virtual money trading were identified as violating the law, but it was not clearly stated whether ordinary participants ( and buyers ) were violating the law.

( Two ) Main Types of Coin-related Crimes

Common crimes involving coins include:

1. Fraud-related crimes ( Fraud, Contract Fraud, Fundraising Fraud )
2. Pyramid Scheme Crime
3. Establishing Casino Crimes
4. Crime of Illegal Business Operations

The essence of fraud crimes is to illegally occupy and deceive others out of their property. Pyramid scheme crimes use fictitious projects as a gimmick, forming a multi-level structure with a rebate mechanism. The crime of opening a casino related to coins is commonly found in certain businesses of virtual money exchanges. The crime of illegal operation mainly involves using virtual money as a foreign exchange tool or for illegal payment settlement.

( Three ) The logic of conviction for crimes involving coin.

Taking pyramid scheme crimes and fundraising fraud as examples:

1. The elements constituting pyramid scheme crimes:

   • Set threshold to attract participants
   • Use the number of participants as the basis for rebates
   • The organization has reached more than three levels and has more than thirty people.
   • The purpose is to deceive participants for their property.

2. The essence of fraud-related crimes:

   • The perpetrator deceives the victim into forming a false impression.
   • The victim disposes of their own or another person's property
   • Ultimately leading to the impairment of property rights holders.
   • The actor obtains the property of others

In virtual money fraud cases, although air coins have no value, they can be used as a tool to exchange for mainstream coins. Fundraising fraud and contract fraud are special types of fraud, with the elements of fraud being the same as those of ordinary fraud.

3. Conclusion

Although investing in Virtual Money is not explicitly prohibited, relevant authorities have considerable leeway in interpreting behaviors that are "suspected of undermining financial order and endangering financial security." The understanding and enforcement of related regulations may vary among law enforcement and judicial bodies in different regions, which is particularly evident in cases involving Virtual Money. Investors should fully recognize the associated risks and participate in activities related to Virtual Money with caution.