Cryptocurrency in China’s Legal System: Challenges and the Push for Clear Judicial Guidelines
Cryptocurrency—digital assets secured by cryptography and recorded on decentralized networks—has grown from a niche concept into a global financial phenomenon. While these virtual currencies, such as Bitcoin (BTC) and Ethereum (ETH), present new opportunities for financial innovation and cross-border transactions, they also pose serious legal and regulatory challenges. In China, where authorities have tightened restrictions on virtual currency trading and related activities, one pressing issue stands out: how to lawfully handle and dispose of cryptocurrencies seized or involved in legal cases.
Evolving Stance on Cryptocurrency in China
In the last decade, Chinese regulators have taken an increasingly strict approach towards cryptocurrency. Early on, Bitcoin was recognized as a “special virtual commodity,” lacking the status of legal tender. By 2021, a series of official notices and guidelines from the People’s Bank of China and other agencies moved to classify crypto-related transactions as “illegal financial activities.” These rules aim to maintain financial stability and prevent the use of cryptocurrencies for money laundering, fraud, gambling, and other illicit activities.
At the same time, China’s courts and law enforcement agencies face a reality: digital currencies now appear frequently in criminal cases like telecom fraud, pyramid schemes, and cross-border money laundering. Although these assets are not considered legal currency, they hold real-world value and need to be managed, secured, and, in some cases, converted into national currency as part of judicial processes. The absence of a clear, unified approach to judicial disposal of crypto assets creates confusion and poses risks for all parties involved.
The Need for Judicial Disposal Mechanisms
When cryptocurrencies are seized as crime proceeds or as tools used in unlawful activities, Chinese authorities must figure out how to handle them. The standard approaches for dealing with illicit gains—like freezing bank accounts or auctioning off physical assets—do not translate easily to virtual currencies. Crypto is decentralized, can be accessed globally, and its value can shift dramatically from day to day.
The complexity intensifies in criminal cases. Courts may need to return stolen funds to victims, confiscate illegal gains for the national treasury, or compensate investors who fell victim to scams. Without a robust legal framework to guide the disposal of these digital assets, authorities risk scenarios where seized cryptocurrencies lose substantial value due to market volatility, or remain locked up indefinitely because domestic trading platforms have been shut down and direct sales are restricted.
Practical Challenges in Managing Crypto Assets
Identifying Ownership and Control:
Cryptocurrencies are controlled by private keys, not tied to identity in a traditional sense. Unless the suspect cooperates, it can be difficult for law enforcement to confirm the total amount of crypto held or track down all addresses involved. In some cases, crypto is stored on offshore exchanges, which may not be willing or able to assist Chinese authorities.Safekeeping and Security:
Unlike traditional bank accounts, seizing crypto often means obtaining the suspect’s private keys. Handling these keys securely is tricky. If keys fall into the wrong hands or are not properly safeguarded, the assets could vanish. Storing them in a secure, government-controlled wallet is a possibility, but it requires technical expertise and robust cybersecurity measures.Valuation and Timing:
Crypto prices can rise or fall rapidly. Determining a fair market value for a seized asset at the time of disposal is challenging. Should the valuation be pegged to the market rate at the time of the crime, the time of seizure, or the time of liquidation? Choosing the wrong benchmark can lead to disputes and financial losses.Converting Crypto into Fiat Currency:
Since domestic crypto exchanges are banned, direct sales within China are off the table. Some agencies have tried to work with third-party companies who facilitate crypto conversions overseas. But this raises questions about compliance, illicit cross-border currency flows, and whether these third parties meet the necessary legal and security standards.
Local and National Efforts to Address the Problem
Despite the hurdles, recent signs show Chinese authorities are taking steps toward more regulated and transparent handling of crypto assets:
Local Guidelines and Pilot Programs:
Cities like Shanghai and regions like Fujian and Shandong have introduced local guidelines to manage digital assets in criminal proceedings. They focus on codifying procedures for seizing, storing, and possibly converting crypto. These attempts serve as valuable experiments that might inform nationwide policies.Strengthening Cooperation with Overseas Entities:
Since many crypto trading platforms and services are abroad, international cooperation is crucial. By collaborating with foreign regulators and compliant trading platforms that hold proper licenses, Chinese authorities can more safely convert seized crypto into fiat, reduce the risk of money laundering, and bring more transparency to the process.Professional Third-Party Involvement:
Some proposals suggest that specialized agencies, vetted and approved by financial regulators, handle the technical aspects of dealing with crypto. This includes secure storage, valuation services, and regulated liquidation processes. Clear tender procedures, public bidding, and strict oversight can minimize corruption and ensure fair pricing.Drafting Comprehensive Legal Frameworks:
Observers are calling for new national-level judicial disposal guidance. Such a framework would clarify the legal status of crypto in judicial contexts, outline procedures for freezing and managing seized assets, set standards for valuation, and define the qualifications and responsibilities of any third-party agents. By creating a standardized rulebook, China could ensure consistency and fairness across all regions.
Balancing Strict Controls and Practical Needs
While China’s stance on cryptocurrencies remains cautious and restrictive, authorities recognize that a complete ban on all crypto-related activities is not practical, especially when dealing with criminal cases. Law enforcement and the courts cannot simply ignore the existence of these digital assets. Instead, the goal is to strike a balance: enforcing regulations to prevent crime and protect investors, while also establishing legal pathways to dispose of seized crypto assets effectively and transparently.
The International Dimension
Cryptocurrency is inherently global, and China’s struggles reflect a worldwide trend. Countries everywhere grapple with how to treat crypto in their legal systems, how to tax it, and how to prevent its misuse. China’s experience, if carefully documented and regulated, could serve as a model for other jurisdictions. By encouraging international cooperation—exchanging information, best practices, and possibly harmonized regulations—countries can work together to address cross-border crimes that rely on cryptocurrency.
Looking Ahead
As digital finance continues to evolve, new rules, procedures, and technologies will emerge to handle virtual assets more smoothly. China’s push to develop guidelines for judicial disposal of cryptocurrencies shows that even in a restrictive environment, the need for clarity and legal certainty is paramount.
Industry observers anticipate a future where China issues clear instructions on how to manage seized crypto, including vetting third-party agencies, setting valuation standards, and outlining safe disposal methods. Such measures would minimize legal risks, prevent the loss of seized assets’ value, protect victims’ interests, and uphold the integrity of the financial system.
Conclusion
In today’s digital economy, ignoring the legal challenges posed by cryptocurrencies is not an option. China’s attempt to navigate the judicial disposal of seized crypto assets highlights the complexities involved: from ownership verification and secure storage to fair valuation and lawful liquidation. As policymakers craft new guidelines and test new solutions, the ultimate aim is to create a legal environment that maintains financial order, deters criminal activity, and respects the legitimate rights and interests of all parties involved.
The evolution of rules for handling crypto in China’s courts is a work in progress, one that will significantly influence how future cases are managed—and potentially shape best practices around the world.
Footnotes
Criminal Procedure Law of the People’s Republic of China
Regulations on Procedures for Handling Criminal Cases by Public Security Organs, revised in 2020
Provisions on the Management of Property Involved in Criminal Proceedings by Public Security Organs
Several Provisions of the Supreme People’s Court on the Execution of the Property Part of Criminal Judgments
“Guidance on the Disposal of Virtual Currency Involved in Criminal Proceedings,” jointly issued by the Xuhui District People’s Procuratorate and Xuhui District Public Security Bureau in Shanghai on August 29, 2023
Zero One Finance: “2022 China Virtual Currency Judicial Disposal Report”
SAFEIS Security Research Institute data and statistics on virtual currency-related cases in 2023
People’s Court Daily: “Judicial Disposal of Virtual Currency Must be Standardized,” September 3, 2024
Ren Suxian, “Legal Attributes of Digital Currency and Its Judicial Disposal,” in China Prosecutor, 2023, Issue No. 17
Xi Zhehan, “Research on the Disposal of Virtual Currency Involved in Cybercrime Cases,” in Shanghai Law Review, Vol. 10, 2023
“Notice on Further Preventing and Dealing with Risks of Virtual Currency Trading Speculation,” issued jointly by the People’s Bank of China and nine other departments on September 24, 2021
“Announcement on Preventing Risks of Token Issuance and Financing,” issued jointly by the People’s Bank of China and six other departments on September 4, 2017