Judicial Disposal of Virtual Money: What Qualifications Does the Disposal Company Need?

Author: Lawyer Liu Zhengyao

Recently, a client consulted with Lawyer Liu. He wanted to engage in virtual currency judicial disposal business but did not know what qualifications are required for this business. After answering this client’s offline inquiries for nearly an hour, we have organized the relevant content into this article for reference by friends with similar needs; it can also assist judicial authorities in the mainland in selecting qualified disposal companies for judicial disposal of virtual currencies involved in cases.

1. Current Status of Judicial Disposal in Mainland China

As the number of criminal cases involving virtual currencies continues to increase, judicial authorities are gaining more understanding of virtual currencies. The professionalism in the judicial disposal of virtual currencies has long moved away from the initial rough model, and judicial authorities in various regions are placing greater emphasis on compliance requirements for judicial disposal. Lawyer Liu occasionally receives inquiries from judicial authorities and disposal companies regarding compliant disposal models.

From what we understand, the overall judicial disposal business in China is still in the “quasi-compliance” era. In the process of representing criminal cases involving virtual currencies, both myself and our team of lawyers have found that there are still many judicial disposals conducted through domestic RMB payment methods. Essentially, this means that domestic entities (individuals or legal persons) are directly purchasing the virtual currencies involved in the case from judicial authorities using RMB, which seriously violates the prohibition on conducting currency exchange business between virtual currencies and fiat currencies within China as stated in the “Notice on Further Preventing and Handling the Risks of Speculation in Virtual Currency Transactions” jointly issued by ten ministries in September 2021 (hereinafter referred to as the “9.24 Notice”). This essentially constitutes “illegal financial activity.”

In addition, there are some disposals that, although conducted overseas, encounter issues when the funds from these overseas disposals enter the country. A common pattern is that the stated purpose of the funds and the actual source of the funds are inconsistent. For example, some disposal companies may use the guise of goods trade, service trade, or capital contributions to convert funds that are actually proceeds from overseas virtual currency disposals into local currency for entry. This also involves issues such as providing false foreign exchange materials to banks.

2. Introduction to Judicial Disposal Models

In the current disposal business, after several years of exploration, we and our partners have developed a disposal model that complies with current domestic regulatory policies. In conjunction with other disposal models available today, we have summarized a relatively compliant path in judicial disposal:

The mainstream model is as follows: The domestic company acts as an agent for disposal and does not directly participate in the exchange of virtual currency and fiat currency. It is only responsible for accepting the commission from judicial authorities, and then entrusts it to an overseas company. The overseas company, under the premise of complying with the local laws and regulations and regulatory policies, conducts disposal on a compliant disposal platform; the funds realized from the disposal are converted and brought into the country through compliant channels, and then transferred by the domestic company to a dedicated fiscal account.

Some companies adopt a parent-subsidiary model, where the offshore parent company is responsible for the actual disposal business. The domestic subsidiary signs a trust agreement with the judicial authorities, and after the offshore parent company completes the disposal on a compliant local virtual currency trading platform, the funds are transferred to the subsidiary by the parent company (cross-border RMB or foreign exchange), and then the subsidiary transfers the disposal funds to the judicial authorities or the financial special account.

There are also disposal companies that carry out auctions overseas, and there are also foreign banks that participate in disposal business in mainland China under the conditions that comply with overseas regulatory requirements; in addition, we have learned that there are also disposal companies that can directly negotiate with Teda Company to recover and dispose of the involved USDT for cashing out, etc.

These disposal modes vary, 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 directly contact Lawyer Liu.

3. Qualification Requirements for Mainland Disposal Companies

Regardless of which disposal plan mentioned above, it currently requires a domestic entity to act as the contracting party with the judicial authority. Of course, in practice, there are instances where overseas companies can directly accept commissions from mainland judicial authorities for disposal. However, based on our team’s interactions with judicial authorities, most of them are reluctant to sign disposal agreements directly with overseas companies (after all, the judicial disposal of virtual currencies is a judicial activity) and prefer to commission domestic agents for disposal (although according to Article 9 of the Government Procurement Law, services “procured for use outside China” can exclude domestic services).

Therefore, based on the Government Procurement Law and other relevant legal provisions, as well as the practical experience our team has accumulated while serving judicial authorities and handling judicial disposal business, we recommend that domestic disposal companies (or other entrusted entities) should at least possess the following qualifications or capabilities:

First, the domestic disposal company has not been involved in any legal disputes. Specifically, this includes but is not limited to any criminal offenses, civil lawsuits as a defendant, enforcement cases, and administrative penalties.

Secondly, the domestic signing entity, foreign exchange settlement entity, and payment entity must be the same entity. It is not recommended to allow the company to lend the “foreign exchange settlement channel” to prevent illegal individuals from using judicial disposal as a pretext for money laundering.

Thirdly, the location of the overseas joint disposal entities allows virtual currency transactions, and the overseas disposal entities have a good system design for anti-money laundering, anti-terrorist financing, and anti-tax evasion, meeting the review requirements of domestic financial institutions for cross-border fund flows.

Fourth, the company involved in the disposal must ensure that the on-chain path of the virtual currency disposed of abroad can be tracked in real time, to ensure that the virtual currency involved in the case cannot flow back into the domestic market (however, due to the globalization of blockchain networks, the decentralization and anonymity of virtual currencies, this is indeed somewhat difficult to operate in practice);

Fifth, law firms that can provide domestic and overseas disposal sites shall issue legal opinions on disposal business, demonstrating that the disposal business complies with the requirements of local laws, regulations, and regulatory provisions both domestically and abroad.

IV. Conclusion

The judicial disposal of virtual currencies involved in cases is a business that is both normal and abnormal: the normal aspect is that this business is essentially a judicial disposal activity related to criminal property; the abnormal aspect is that our country has not publicly acknowledged the property value of virtual currencies in judicial activities (it was only considered a type of “virtual commodity” in regulatory policy documents from 2013 and industry association regulations from 2021, but the conclusion of virtual commodity attributes was not continued in the “9.24 Notice” participated by “Two Highs and One Ministry” in 2021).

In 2024, the Supreme People’s Court publicly conducted a bidding process for research on the judicial handling of virtual currencies. Currently, some units have won the bid and have already begun the research. The model for the judicial handling of virtual currencies has yet to be determined, but we believe that by next year (2026), there should be significant adjustments or changes in the handling business model.