Original author: Liu Zhengyao - senior lawyer at Shanghai Mankiw Law Firm

Although since the promulgation of the “9.24 Notice” (Notice on Further Preventing and Dealing with Speculation Risks of Virtual Currency Transactions) and the “Notice on Regulating Virtual Currency “Mining” Activities” in mainland China in 2021, regulatory authorities’ investment in virtual currency Regulations on cryptocurrency and mining activities have been further tightened, but it is undeniable that there are still a large number of active investors in mainland China engaged in virtual currency mining activities and the mining investment activities behind them. Some institutions predict that there are still 20 % of the Bitcoin mining power is in China (I don’t know if it’s true or not, it’s for reference only). (Extended reading: 2023 Bitcoin Mining In-Depth Report: Miners’ Survival and Preparation for the Imminent Halving》

This also explains why even in mainland China, which is subject to strict supervision, there are still a constant stream of currency-related civil and commercial disputes and criminal cases. Among them, one of the more representative cases involves raising funds to invest in virtual currency mining. How should the final loss be evaluated legally?

We have encountered many similar consultations in practice. Some clients have even been investigated by the police, and some have been criminally charged by the victims. This kind of information constitutes the opportunity for writing this article: When raising funds to invest in virtual currency mining, does the promoter commit a criminal offense after losing money?

Before giving a conclusion, we must clarify the following three questions:

01 Judgment of the legality of fund-raising

Fund-raising in the field of virtual currency investment is mostly in the form of private placement. Therefore, before starting to judge the legal nature of virtual currency investment and investment losses, Lawyer Liu reminds you that you need to first determine the legality of the private placement.

Whether private placement is legal needs to be judged from four aspects:

(1) Judgment of legality

For private equity, whether it is legal or not is mainly judged based on the Interim Measures for the Supervision and Administration of Private Equity Investment Funds (hereinafter referred to as the Measures) of the China Securities Regulatory Commission. As long as it complies with the Measures, it is certainly not legal in terms of legality. Legal obstacles.

However, in reality, it is more of an atypical legal appearance of fund-raising behavior based on a relationship of trust between relatives and friends (that is to say, the law does not have clear and direct provisions, and it is not a common fundraising behavior in practice). The core factor in judging whether these ever-changing and colorful fund-raising activities are legal is to judge whether the fund-raising behavior clearly violates the laws and regulations of the country, as well as the prohibited fund-absorbing behaviors clearly stipulated in the field of financing management laws. As long as the above regulations are not violated, Generally speaking, it belongs to the area of ​​freedom that can be done without prohibition by law.

In addition to meeting the requirements of legality, several other aspects need to be considered:

(2) Whether to raise funds publicly

Our country currently has relatively high standards for public fundraising requirements and conditions; relatively speaking, the threshold for private equity is not high, but since it is a private equity, it cannot raise funds publicly. If it is made public, at least it will result in administrative penalties for violating the Regulations on Preventing and Dealing with Illegal Fund-raising of the State Council, and at worst, it may be suspected of illegal fund-raising crimes. Common publicity methods include the media, the Internet, promotion meetings, leaflets, mobile phone text messages, etc.; in addition, even if no deceptive means are used to falsely promote the publicity, it may still be deemed as illegal fund-raising.

(3) Whether there is a commitment to guarantee principal and interest

Legal and compliant private placements cannot promise to guarantee principal and interest, but for private placements similar to the atypical legal appearance mentioned above, or even loan investment behavior between relatives and friends, one party promises to return the principal and interest. It does not necessarily violate the mandatory provisions of the law. If you want to completely isolate legal risks, Lawyer Liu suggests that whether it is a private placement or a fundraising behavior with the appearance of a private placement, the fundraiser must not make any commitment to guarantee capital and interest.

(4) Whether the fundraising target is specific

What needs to be noted here is that public fundraising must not be conducted from the public. That is to say, the target of fundraising must be specific, and fundraising must be limited to limited and specific individuals, such as relatives, friends, colleagues, or other legal parties. between organizations, institutions, and specific people.

02 Can the funds raised be invested in virtual currency mining?

After the legality of fundraising is resolved, whether the money raised can be invested in virtual currency mining depends on two situations:

The first is mining investment before September 3, 2021, which is valid in principle; the second is mining investment after September 3, 2021, which is invalid in principle.

That is to say, before September 3, 2021, investing in the virtual currency mining business is an investment activity that is not expressly prohibited by the state. At this time, even if there is a loss in the investment, it should be in accordance with the Investment Agreement or Partnership Agreement or other similar agreements or an agreement to determine whether the sponsor will bear legal liability. If according to the investment agreement, the loss is a complete market risk, and the sponsor has given sufficient risk warning, it is difficult for the sponsor to be criminally held accountable by the judicial authorities.

If the investment activity occurs after September 3, 2021, because the relevant national departments issued the Notice on Rectifying Virtual Currency Mining Activities on that day, in practice, the court will generally consider that the investment in the virtual currency mining contract is due to If the contract is invalid due to violation of the mandatory provisions of the state, the legal consequences of the invalidity of the contract are: if it has not been performed, the performance will be terminated; if it has been performed, depending on the performance and the nature of the contract, the parties may request restoration to the original status or take other remedial measures, and have the right to request compensation for losses. (Based on the 2023 Minutes of the National Court Financial Trial Work Conference (Draft)).

03 After investing in mining losses, does the fund-raising initiator commit a crime of fraud?

If an investment in virtual currency mining results in losses, can an ordinary investor report the case to the public security agency as a victim? If the police accept the case, will they file a case on suspicion of fraud?

Lawyer Liu believes that for investment in virtual currency mining activities before September 3, 2021, even if losses occur, in principle, investors should still resolve disputes through civil legal channels. Of course, if the sponsor uses investment in virtual currency mining to defraud other people’s property, there is no real investment behavior in fact, and there is indeed the possibility of constituting a crime of fraud; for investment in virtual currency mining activities after September 3, 2021, If investors suffer losses, because civil remedies are limited, it is not ruled out that rights defenders will be inclined to choose criminal prosecution. At the same time, because virtual currency mining has been clearly prohibited at the national regulatory level after September 3, 2021, virtual currency mining will The fund-raising behavior of currency mining investment promoters carries greater legal risks and attracts the attention of public security agencies, which causes the promoters to bear the risk of criminal prosecution and even criminal crackdowns in addition to general commercial risks.

From the perspective of lawyer defense, whether the fund-raising promoter has committed a crime of fraud or other crimes should be judged strictly in accordance with legal provisions.

Taking the crime of fraud as an example, it must at least be judged whether the investment sponsor has the subjective purpose of illegal possession; whether there is an objective behavior of fabricating facts and concealing the truth; whether the victim fell into a wrong understanding and disposed of the property based on the wrong understanding, and ultimately suffered property losses. loss. Only when the above conditions are strictly met, the investment sponsor may be guilty of fraud. In addition, even if there are disputes, they should be handled as civil and commercial disputes.

However, in practice, the public security organs’ case-handling ideas do not strictly follow the lawyers’ defense ideas. It can even be said to be the complete opposite. It is undeniable that most public security organs still have obvious preconceptions in the current case handling process. Once a criminal case is filed, the public security organs are less likely to accept the suspects defense during the investigation. If the suspect has objective evidence, It’s okay to prove innocence, but if the suspect cannot provide strong evidence to prove that he has no intention of “fraud”, then in the eyes of the public security organs, the suspect’s logical and self-consistent defense will be pale, and most suspects will eventually succumb. Under the powerful offensive of the public security organs.

04 Mankiw lawyer’s advice

Even in todays China, blockchain, web3.0 and other technologies are still technologies encouraged and supported by the state. Token is a very important component of blockchain technology, and virtual currency is the most common token. The form of expression, mining is an indispensable part of generating virtual currency. Therefore, even if mainland China strictly regulates and prohibits virtual currencies, mining activities are still difficult to stop, which will inevitably involve mining investment. Under the current situation where national regulators prohibit virtual currency mining, although investing in this project is not protected by law, as long as the initiator does not have the purpose and behavior of fraud, it should not constitute a crime of fraud.

As for the victim who wants to use criminal means to protect his rights, even if the victim is blameless, the public security organs rash intervention in circumstances that clearly do not constitute a crime is obviously intervening in civil disputes with criminal means. Suspicion, for the public security organs, this is a minor violation, a moderate violation, and a serious crime of dereliction of duty. Therefore, even in the law, we must uphold the principle of Give to God what is God, and to Caesar what is Caesars, and let civil matters belong to civil matters, and criminal matters belong to criminal matters.

Special statement: This article is an original article by Shanghai Mankiw Law Firm. It only represents the personal views of the author of this article and does not constitute legal consultation or legal opinions on specific matters.