Can encryption practitioners constitute the crime of embezzlement?

From the actions of top exchanges like Binance and OKEx, the future crackdown on internal corruption will only intensify.

Written by: Liu Zhengyao

Introduction

Recently, I encountered two consultations regarding practitioners in the cryptocurrency industry who may be suspected of embezzlement crimes. Therefore, it is necessary to write a short article specifically to analyze this issue, in order to provide reference for ordinary employees, executives, and leaders among practitioners in the cryptocurrency industry, clarify legal red lines, and collectively build web3 in a positive direction.

I. Analysis of the Criminal Composition of Embezzlement

From the perspective of our country's Criminal Law, the crime of embezzlement is not actually complicated—staff members of companies, enterprises, or other units (subject identity) illegally occupy the property of their unit for personal use by utilizing their position (objective behavior), with a relatively large amount involved. There are three tiers of penalties for embezzlement: for general circumstances, imprisonment for less than three years; for amounts that are enormous, imprisonment for more than three years but less than ten years; for amounts that are particularly enormous, imprisonment for more than ten years or life imprisonment (consequences of the act).

According to relevant judicial interpretations, the filing standard for the crime of embezzlement in office is 30,000 yuan, which is still a very low threshold.

2. The Specificity of the Cryptocurrency Industry

Since the "9.4 Announcement" ("Announcement on Preventing the Risks of Token Issuance Financing") in 2017, all projects for issuing virtual currency financing (coin financing) in Mainland China have been halted, and some virtual currency exchanges operating in Mainland China have moved out of China; after the "9.24 Notice" ("Notice on Further Preventing and Disposing of Risks of Virtual Currency Trading Speculation") in 2021, all business activities related to virtual currency in Mainland China have been classified as "illegal financial activities," and virtual currency exchanges have completely lost the legal basis for compliant operations in Mainland China, all moving overseas.

Other business activities involving virtual currencies, such as the exchange of virtual currencies for fiat currency, the exchange of virtual currencies among themselves, acting as a central counterparty for buying and selling virtual currencies, and providing pricing and information intermediary services for virtual currency transactions, are also prohibited in the mainland.

Currently, relatively safe cryptocurrency startups in China are generally blockchain projects (not involving coin issuance), virtual currency wallet companies, etc.

Although the "9.24 notification" prohibits overseas virtual currency exchanges from providing services to mainland residents via the internet, the number of mainland users in virtual currency exchanges founded by individuals with Chinese backgrounds still accounts for more than half; there are also some overseas virtual currency exchanges' technical teams and customer service teams in mainland cities such as Shenzhen, Hangzhou, and Shanghai.

This scenario is rare in other industries—national policies declare a certain business illegal, yet in reality, this business still exists "stably" in the mainland, and even now, judicial authorities may engage in some form of judicial "cooperation" with these companies involved in illegal financial activities abroad. For instance, domestic judicial authorities may apply for evidence from overseas virtual currency exchanges and use the relevant evidence as proof of the criminal allegations against the suspects.

3. Can employees in the coin industry be the subject of embezzlement?

As mentioned above, the perpetrator of the crime of embezzlement must be a "worker of a company, enterprise, or other unit." If it is an overseas company engaged in "illegal financial activities" (such as a virtual currency exchange), can its branches in the country or its controlled companies be considered as a "company, enterprise, or other unit" for the crime of embezzlement?

This brings us to the viewpoint expressed in the article "Is it acceptable to 'obtain' virtual currency by taking advantage of one's position? Court: Criminal!" published by the official account of the Beijing High Court: In response to the defense lawyer's argument that the victim (the company) is involved in a project related to virtual currency and should bear the risk themselves, thus not entitled to legal protection, the court held that the risks associated with virtual currency transactions and the nature of the company's (victim's) project do not affect the legal evaluation of the defendant's (suspected criminal) actions based on established facts and relevant legal provisions.

In simple terms, in the business scenario of virtual currency exchanges, if the employees of the exchange engage in criminal behavior such as embezzlement, it will not be evaluated based on whether the exchange's own business is legal or illegal in the mainland.

Another question is, how can we prove that Zhang San or Li Si is an employee of a certain virtual currency exchange or other company in the crypto industry? On the surface, it can be judged by whether a labor contract has been signed, whether social insurance and housing fund have been paid, etc. More importantly, it is to see whether the company has management and control functions over the employees and whether it distributes labor remuneration.

For virtual currency exchanges or other companies in the cryptocurrency industry, it is generally not common practice to directly employ staff in the mainland under their own name; they may use labor service companies or other controlling companies (which do not engage in coin-related business in the mainland) as the entity for labor employment. Of course, there is also a more "free-spirited" web3 employment model — not signing any labor contracts and directly paying wages in USDT or other tokens. At this point, how to determine the identity of the victim in cases of embezzlement is highly controversial in practice. Both the prosecution and the defense can "display their skills" to protect their legitimate rights and interests.

The last question is, if the funds or properties involved are virtual currencies, do they constitute corresponding crimes? Taking the crime of embezzlement as an example, if someone embezzles USDT, ETH, BTC and other virtual currencies belonging to the company by taking advantage of their position, there may not be much dispute in practice, as it has become a consensus in judicial theory and practice that these mainstream virtual currencies have property attributes; however, what if the embezzled tokens are issued by the company itself? Or does embezzling some future expected benefits (such as tokens that have not yet been unlocked or listed) constitute the crime of embezzlement? These are highly controversial areas and also fields where professional web3 lawyers (whether defending or prosecuting) have great potential.

IV. The Applicability of the Crime of Bribery by Non-State Personnel in the Cryptocurrency Industry

For some cryptocurrency practitioners, there may be a legal scenario where both the crime of embezzlement and the crime of bribery by non-state staff are involved. For example, in the article "The Supreme People's Court Releases Typical Criminal Cases to Promote the Development of the Private Economy" published by the Supreme Court, it mentions the "Shi Mouyu non-state staff bribery and embezzlement case."

Case Summary: Shi Mouyu, by taking advantage of their position, illegally accepted a total of 6.08 million yuan in assets from other companies in the process of introducing cooperation business (virtual currency rewards) between those companies and the company; at the same time, by leveraging their position, in the virtual currency business carried out in cooperation with the aforementioned two companies, converted virtual currency into cash through multiple accounts of the company and transferred it to their personal bank account under their control, illegally appropriating company assets totaling 3.66 million yuan.

Ultimately, Shi Mouyu was judged by the Haidian District Court of Beijing to simultaneously constitute the crimes of bribery by a non-state staff member and embezzlement, with multiple sentences to be served concurrently, resulting in a fixed-term imprisonment of 12 years.

Conclusion

In December last year, it was reported that some virtual currency exchanges represented by Binance began to strictly investigate internal corruption issues. The insider trading incident involving Binance employees that broke out in March this year is actually just a "drop in the ocean" for the cryptocurrency industry. As centralized institutions in the virtual currency industry cannot be strictly regulated like traditional financial and securities institutions, events such as insider trading by cryptocurrency practitioners and collusion with market makers and project parties are indeed rampant. However, the legal costs of these incidents are quite low, and it is relatively difficult to investigate (unless some basic mistakes are made). From the perspective of defense lawyers, there is also relatively more room for defending crimes of embezzlement involving coins or non-public bribery.

However, judging from the actions of top exchanges like Binance and OKEx, the future crackdown on internal corruption will only intensify. Coupled with the increasingly stringent regulatory compliance for the web3 industry in countries and regions such as Singapore and Hong Kong, Lawyer Liu believes that the internal compliance development of virtual currency exchanges and other sectors of the crypto industry will continue to converge and even evolve with traditional internet companies.