Can practitioners of encryption constitute the crime of embezzlement?

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 brief article specifically to analyze this issue, aiming to provide references for ordinary employees, executives, and leaders within the cryptocurrency industry, clarify the legal red lines, and jointly build a positive Web3.

1. Analyzing the Criminal Law Composition of Embezzlement

If we look at the crime of embezzlement from the perspective of our country's Criminal Law, it is actually not complicated—employees of companies, enterprises, or other units (subject identity) illegally appropriate the property of their unit by taking advantage of their position, and the amount is relatively large (objective behavior). There are three levels of penalties for embezzlement: for general circumstances, a sentence of up to three years of fixed-term imprisonment; for particularly large amounts, a sentence of more than three years and less than ten years of fixed-term imprisonment; for especially large amounts, a sentence of more than ten years of fixed-term imprisonment or life imprisonment (behavioral consequences).

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

2. The Specificity of the Cryptocurrency Industry

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

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

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

Although the "9.24 Notice" prohibits overseas virtual currency exchanges from providing services to residents in the mainland via the internet, the number of users from the mainland in virtual currency exchanges established by people of Chinese descent still accounts for more than half; there are also some technical and customer service teams from overseas virtual currency exchanges in mainland cities like Shenzhen, Hangzhou, and Shanghai.

Such a scenario is rare in other industries—where national policies declare a certain business illegal, yet that business continues to exist "stably" in the mainland, and even now, judicial authorities will engage in some form of judicial "cooperation" with these companies engaged in illegal financial activities overseas. For example, domestic judicial authorities may apply to overseas virtual currency exchanges for evidence and use the relevant evidence as proof of the criminal suspicion against the accused.

Can employees in the cryptocurrency industry constitute the subject of the crime of embezzlement?

As mentioned above, the perpetrator of the crime of embezzlement must be "staff of a company, enterprise, or other unit." Can an overseas company engaged in "illegal financial activities" (such as a virtual currency exchange), or its domestic branches, controlled companies, etc., be considered a "company, enterprise, or other unit" under the crime of embezzlement?

This brings us to the viewpoint expressed by the official account of the Beijing High Court in the article "Is it possible to 'obtain' virtual currency by taking advantage of one's position? Court: Criminal!": In response to the defense lawyer's argument that the victim (the company) was involved in a project related to virtual currency and should bear the risks without 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 context of cryptocurrency exchanges, if employees of the exchange engage in crimes such as embezzlement, it does not negate the evaluation 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 cryptocurrency exchange or other company in the crypto industry? On the surface, we can determine this based on whether a labor contract has been signed and whether social insurance and housing fund contributions have been made. More importantly, we need to look at whether the company has the functions of managing employees and distributing labor remuneration.

For virtual currency exchanges or other companies in the cryptocurrency industry, it is generally not common to directly hire employees in mainland China under their own name in actual operations. Instead, they may use labor service companies or other controlled companies (which do not engage in cryptocurrency-related business in mainland China) as the labor employment entity. Of course, there is also a more "carefree" Web3 employment model—no labor contracts are signed, and salaries are paid directly in USDT or other tokens. At this point, determining the identity of the victim in the crime of embezzlement is highly controversial in practice. Both the prosecution and the defense can "each display their own skills" to protect their legitimate rights and interests.

The last question is, if the funds and properties involved are virtual currencies, do they constitute corresponding crimes? Taking the crime of embezzlement as an example, if one uses their position to embezzle virtual currencies such as USDT, ETH, BTC belonging to the company, there is likely to be little dispute in practice, because 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 a certain future expected benefit (such as tokens that have not yet been unlocked or listed) constitute the crime of embezzlement? These are all areas of significant controversy and also areas where professional web3 lawyers (whether defending or prosecuting) have great potential.

IV. The Application of the Crime of Bribery by Non-State Staff 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 involving non-state personnel are involved. For example, in the article "Typical Criminal Cases Promoting the Development of the Private Economy" published by the Supreme Court, it mentions the "Shimu Yu case of bribery involving non-state personnel and embezzlement."

Case Summary: Shi Mouyu took advantage of his position to illegally accept a total of 6.08 million yuan in property from other companies during the introduction of cooperative business (virtual currency rewards) between other companies and our company; at the same time, he exploited his position to convert virtual currency into cash through multiple accounts of our company during the virtual currency business conducted in cooperation with the aforementioned two companies, transferring a total of 3.66 million yuan of our company’s property into personal bank accounts under his control.

In the end, Shi Mouyu was convicted by the Haidian District Court of Beijing for simultaneously committing the crimes of bribery as a non-state functionary and embezzlement, receiving a cumulative sentence of 12 years in prison.

Conclusion

In December last year, it was reported that some virtual currency exchanges, represented by Binance, began to strictly investigate internal corruption issues. The employee insider trading incident at Binance that broke out in March this year is actually just a "drop in the ocean" of the crypto industry; due to the fact that centralized institutions in the virtual currency industry cannot be as tightly regulated as traditional financial and securities institutions, incidents of insider trading, collusion with market makers and project parties among crypto industry practitioners have indeed emerged one after another. However, the illegal costs of these incidents are relatively low, and the difficulty of investigation is also quite high (unless some low-level mistakes are made); from the perspective of a defense lawyer, there is also relatively large room for defending crimes related to embezzlement of cryptocurrency positions or non-public bribery.

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