Judicial disposal of virtual currency: What qualifications are required for a disposal company?

Author: Lawyer Liu Zhengyao

Recently, a client consulted Lawyer Liu. He wanted to do virtual currency judicial disposal business, but he didn't know what qualifications were required to do this business. After answering this client's offline consultation for nearly an hour, we organized the relevant content into this article for reference by friends with similar needs; at the same time, it can also help mainland judicial authorities select qualified disposal companies in the judicial disposal business of virtual currency involved in the case.

1. The current situation of judicial disposal in the mainland

With the increasing number of criminal cases involving virtual currency, judicial authorities have a better understanding of virtual currency. The professionalism in the judicial disposal of virtual currency has long been freed from the extensive model of the original stage. Judicial authorities in various places have attached more and more importance to the compliance requirements of judicial disposal. Lawyer Liu also receives consultations from judicial authorities and disposal companies on compliance disposal models from time to time.

As far as we know, the domestic judicial disposal business is generally still in the "quasi-compliance" era. In the process of representing criminal cases involving virtual currencies by myself and our team of lawyers, we found that there are still many judicial disposals that are based on the domestic RMB payment model. This is essentially a domestic subject (natural person or legal person) directly purchasing the virtual currency involved in the case from the judicial authorities in RMB, which seriously violates the "Notice on Further Preventing and Dealing with Virtual Currency Trading Speculation Risks" jointly issued by ten ministries and commissions of the State in September 2021 (hereinafter referred to as the "9.24 Notice"), which prohibits the exchange of virtual currency and legal currency in China, which is essentially an illegal financial activity.

In addition, although some disposals are carried out overseas, problems arise when the funds from overseas disposals enter the country. The common pattern is that the declared name of the funds is inconsistent with the actual source of funds. For example, there are disposal companies that settle foreign exchange for funds that are actually foreign virtual currency disposal funds in the name of goods trade or service trade, capital, etc., which will also involve providing false settlement materials to banks and other issues.

II. Introduction to Judicial Disposal Model

In the current disposal business, after several years of exploration, we and our partners have explored a disposal model that conforms to the current domestic regulatory policies. Combined with other current disposal models, we have summarized the more compliant paths in the current judicial disposal:

The mainstream model is: domestic companies, as disposal companies, do not directly participate in the exchange of virtual currency and legal currency. They are only responsible for accepting the entrustment of judicial organs, and then entrusting them to overseas companies. Under the premise of complying with local laws, regulations and regulatory policies, overseas companies will dispose of them on a compliant disposal platform; the funds after disposal and realization are settled in the country through compliant channels and transferred to a special fiscal account by domestic companies.

Some companies adopt a parent-subsidiary model, with the overseas parent company responsible for the actual disposal business, and the domestic subsidiary and the judicial organ signing a commission agreement. After the overseas parent company completes the disposal on the local compliant virtual currency trading platform, the parent company transfers the funds to the subsidiary (cross-border RMB or settlement), and the subsidiary then transfers the disposal funds to the judicial organ or a special fiscal account.

There are also disposal companies that conduct auctions overseas, and there are also overseas banks that directly participate in the disposal business in mainland China under the conditions of complying with overseas regulatory requirements; in addition, we understand that there are also disposal companies that can directly negotiate with Tether to recycle and dispose of the USDT involved in the case.

These disposal models are numerous and the compliance points are different. In this article, we will not discuss which method is the most compliant. Friends who have this need can also contact Lawyer Liu directly.

3. Qualification requirements for mainland disposal companies

No matter which of the above disposal plans, at present, a domestic main company is required to be the contracting entity with the judicial authorities. Of course, in practice, there are also overseas companies that can directly accept the entrustment of mainland judicial authorities for disposal. However, based on the contact between our team and judicial authorities, most judicial authorities are reluctant to sign disposal agreements directly with overseas companies (after all, judicial disposal of virtual currency is a judicial activity), but prefer to entrust domestic disposal entities (although according to Article 9 of the Government Procurement Law, "services purchased for use outside China" do not need to purchase domestic services).

Therefore, according to the relevant legal provisions such as the Government Procurement Law, as well as the practical experience accumulated by our team in judicial disposal business for judicial authorities and disposal companies, we recommend that domestic disposal companies (or other entrusted entities) at least need the following qualifications or capabilities:

First, the domestic disposal company is not involved in any legal disputes. Specifically, it includes but is not limited to any criminal offense, civil lawsuits and enforcement cases as defendants, administrative penalties, etc.;

Second, the contracting entity, foreign exchange settlement entity, and payment entity in China must be the same entity. It is not recommended that the disposal company lend the "foreign exchange settlement channel" to prevent criminals from laundering money in the name of judicial disposal;

Third, the location of the overseas joint disposal entity allows virtual currency transactions, and the overseas disposal entity has a good anti-money laundering, anti-terrorist financing, and anti-tax evasion system design to meet the domestic financial institutions' review requirements for cross-border capital flows;

Fourth, the disposal company needs to ensure that the on-chain path of the virtual currency disposed of overseas can be tracked in real time to ensure that the virtual currency involved cannot be circulated back to the country again (but based on the globalization of the blockchain network, the decentralization and anonymity of virtual currency, this is indeed difficult to operate in practice);

Fourth, Writing in the End

The judicial disposal of the virtual currency involved in the case is a business that is both normal and abnormal: what is normal is that this business is essentially a judicial disposal activity of criminal property involved in the case; what is abnormal is that my country has not currently publicly recognized the property value of virtual currency in judicial activities (only in the 2013 regulatory policy documents and the 2021 industry association regulations, virtual currency is considered a "virtual commodity", but the "9.24 Notice" in 2021 involving the "two highs and one ministry" did not continue the conclusion of the virtual commodity attributes).

In 2024, the Supreme People's Court publicly launched a research project on the judicial disposal of virtual currencies. At present, some units have won the bid and have begun research on the project. The model of the future judicial disposal of virtual currencies has not yet been determined, but we believe that the model of the disposal business should be greatly adjusted or changed by next year (2026) at the latest.