Web3 Legal Education | Who is Responsible for Receiving Stolen Funds When Buying or Selling USDT?

Introduction

Due to the buying and selling of virtual currencies, it is common in practice for bank cards to be frozen. Friends who frequently trade cryptocurrencies often seek to understand relevant legal knowledge themselves, knowing that our country’s policies do not prohibit the buying and selling of virtual currencies. However, many consultees have told me that when they communicate with the authorities to unfreeze their cards, they not only get refused, but sometimes even get scolded harshly. Clearly, they are also victims, and buying and selling virtual currencies is not illegal. Why are they treated as “bad guys” by the public security authorities?

So, why is it so difficult to unfreeze the cards? Lawyer Shao often says, “In the eyes of U Commerce, what you ‘see’ in transactions is only the tip of the iceberg.“ Let’s start with a case study to understand the part above the iceberg (real case, with slight modifications to protect privacy regarding industry and amounts, the rest is real).

01. A “Card Frozen Dilemma” Caused by a Virtual Currency Transaction

Mr. Wang is in the fur business, and trading cryptocurrency is just an occasional hobby for him. One day, as usual, he posted an order to sell USDT on the exchange, and someone contacted him to buy it. However, the buyer seemed to be a novice and was not very skilled at operating, so the two exchanged WeChat contacts. The buyer, named Xiao Yu, patiently guided Xiao Yu step by step until the transaction was completed. Later on, Xiao Yu became proficient in trading, and the two got along well, with Xiao Yu frequently buying USDT from Mr. Wang.

However, Mr. Wang was curious why someone who seemed like a newcomer to the cryptocurrency world had such a large demand for USDT. He asked her why she needed to buy so much USDT and kindly warned her not to be deceived. But Xiao Yu explained that she and a few friends were pooling their investments together. Although she might not understand much herself, her friends were more knowledgeable, so Mr. Wang shouldn’t worry. She also assured Mr. Wang that the money she transferred to him each time was from her own salary and even showed him her salary records.

After confirming that Xiao Yu’s funds were legitimate and that she indeed transferred the money herself each time, Mr. Wang felt reassured. However, he continued to remind her to buy less and to invest cautiously to see if the project could be profitable, rather than investing all of her funds into one project at once.

Over the course of three months, the two completed about a dozen transactions, with Mr. Wang receiving a total of 600,000 RMB from selling USDT. One day, Mr. Wang discovered that his bank card had been frozen. After contacting the bank, he learned that it was because of a report filed by Xiao Yu. Mr. Wang tried to contact Xiao Yu, but she never responded to any messages.

The police informed Mr. Wang that the victim, Xiao Yu, had reported being defrauded. The reason was that Xiao Yu met someone online who, after becoming familiar with her, introduced her to a virtual currency investment project and showed her profits. Believing it to be true, Xiao Yu expressed interest, and the person asked her to buy USDT from an exchange and transfer it to them for investment. Xiao Yu downloaded a certain exchange app herself and contacted Mr. Wang. Initially, Xiao Yu sent a small amount of USDT to the person, and there were indeed good profits. So Xiao Yu increased her investment. However, three months later, the person blocked Xiao Yu.

The police told Mr. Wang that Xiao Yu claimed that he and the person who deceived her online were colluding to cheat her out of 600,000 RMB. Is this true?

Mr. Wang submitted all his chat records with Xiao Yu to the police via his phone. The investigating officers took their duties seriously, reviewing all communication records between both parties and conducting multiple rounds of questioning with Xiao Yu. Xiao Yu admitted that the person who deceived her online told her to find a USDT seller herself, so she contacted Mr. Wang.

Therefore, the investigating officers confirmed that Mr. Wang was innocent. Moreover, the relevant chat records showed that Mr. Wang had repeatedly advised Xiao Yu to buy less and beware of being deceived.

Mr. Wang thought that since he was innocent, there shouldn’t be any problem with unfreezing his card, right? However, to his surprise, not only did the investigators not unfreeze his card, but they also froze all the bank cards under his name!? Now, not only his basic daily life but also his fur business was greatly affected. The payments from customers into Mr. Wang’s company account were also implicated because of the transactions made with this card.

Subsequently, the case fell into a stalemate—Mr. Wang was only willing to compensate the victim Xiao Yu a maximum of 20,000 RMB, while Xiao Yu demanded full compensation of 600,000 RMB from Mr. Wang. The police neither unfroze Mr. Wang’s cards nor deducted the funds in the cards for the victim. Currently, all bank cards under Mr. Wang’s name have been frozen for almost a year.

02. Everyone Has Their Own Perspective

This frustrating deadlock arises because each person has their own perspective:

1. Victim’s Perspective:
   The victim has been deceived, and due to a lack of relevant evidence and clues, in some places, even filing a case to seek justice is extremely difficult. After finally managing to file a case, due to many practical reasons, the police indeed cannot apprehend the real “bad guys,” and even if they do catch them, it’s challenging to recover the victim’s funds. The reasons behind this can be understood after watching these two videos.

2. Seller’s Perspective:
   It’s not illegal for individuals to buy and sell virtual currencies among themselves, and my USDT comes from legitimate sources, not stolen or obtained through fraud. The RMB I receive is also at the normal market price of USDT. So why is my card frozen and why am I being asked to compensate the victim for their entire loss just because they suddenly claim to have been defrauded? What does their being defrauded have to do with me? Why aren’t the police going after the real fraudsters?

3. Police Perspective:
   By tracing the financial transaction chain, we can rule out any suspicions against Zhang San. But since we can’t catch the upstream fraudsters, and the victim keeps demanding that the police arrest someone and compensate their losses, even resorting to constant complaints and petitions, accusing us of inaction. We’ve tried mediating between the parties, explaining to the victim that Zhang San isn’t the one who defrauded them and that they’re willing to compensate, so the victim shouldn’t demand such a high amount. However, the victim actually claimed that we and Zhang San are in cahoots! The victim’s emotions are currently quite intense, and both sides can’t agree on a compensation amount. If we unfreeze Zhang San’s card now, won’t the victim cause even more trouble? Our work involves handling cases, and we’re under scrutiny… But Zhang San indeed has no suspicion of committing a crime, and we don’t have the authority to directly deduct money from Zhang San’s account. So let’s just freeze all the accounts; maybe this way, Zhang San will voluntarily settle with the victim.

03. Reflection on Resolving the Deadlock

Lawyer Shao has encountered many cases where bank accounts are frozen due to buying and selling virtual currencies. However, is this situation reasonable just because it exists? Certainly not.

1.Regarding “Buying and Selling Virtual Currencies Not Protected by Law”:

When many cardholders communicate with the handling officers that their buying and selling of USDT is not illegal, many police officers respond: Yes, we also know that buying and selling virtual currencies is not illegal, but it is also not protected by law.

However, Lawyer Shao believes that the above view misunderstands the notion that “buying and selling virtual currencies are not protected by law.” The meaning of “not protected by law” should be, for example, if you entrust someone to invest your virtual currency and incur losses, or if you lend virtual currency to someone who refuses to return it, then you should bear the risk. There are indeed relevant court judgments confirming this, which can be referred to in my previous article “Court’s View: Transferring Virtual Currency to the Other Party Constitutes Illegal Debt! If You Lend It, Don’t Expect It Back! - Lawyer’s Advice: How to Get the Money Back?“

However, those whose cards are frozen or even receive criminal charges because of buying and selling virtual currencies, not only lose the virtual currency but also have to reimburse the so-called victim’s losses. Their loss exceeds the category of “bearing the risk” and is clearly unfair. The victim is a victim, and the seller is also a victim.

2.Regarding Freezing All Bank Cards Under One’s Name:

As mentioned in the real case mentioned earlier, even though existing evidence has ruled out any suspicion against Zhang San, in response to pressure from the victim, the investigating officers froze all of Zhang San’s bank cards, hoping to force Zhang San to settle with the victim. This is clearly unreasonable.

Some investigating units, although they state that they will not unfreeze the cards if the victim’s losses are not compensated, are willing to issue explanations for the cardholder, ruling out the cardholder’s involvement in the case, so that the cardholder can apply to the bank for unfreezing. Although this does provide some convenience for the parties involved, allowing their other bank cards to be used normally, the core demand for the cardholder is inevitably still the non-repayment of the money. Of course, in many cases we handle, the police eventually unfreeze the cards for which the cardholder is not responsible, but this is relatively rare.

According to legal provisions, in cases of telecommunications fraud, the public security organs indeed have the right to deduct funds and return them to the victims, but there is a prerequisite—the receiving account must be controlled by criminals. Obviously, normal sellers of USDT do not conspire with criminals, and their receiving accounts are not controlled by criminal accounts. Therefore, the public security organs have no right to deduct funds from the receiving accounts of such transactions—this is also the reason why many cardholders whose cards are frozen have communicated with the public security organs for many years without their account balances being deducted.

“Regulations on Freezing and Returning Funds in New Types of Illegal Criminal Cases in Telecommunications Networks” Article 2: This regulation defines new types of illegal criminal cases in telecommunications networks as cases where criminals utilize telecommunications, the internet, and other technologies to deceive (steal) victims into remitting (depositing) funds into bank accounts under their control through methods such as sending text messages, making phone calls, implanting Trojans, etc., and then commit illegal crimes.

Article 4: Public security organs are responsible for clarifying the flow of funds to the victims, promptly notifying the victims, making decisions on fund returns, and implementing them.

Regarding the determination of the innocent receipt by the recipient, Lawyer Shao believes that for the recipient (i.e., the USDT seller), the recipient cannot control whether the payment is made by the buyer themselves, nor can they predict whether funds instructed by the buyer for a third-party payment are illegal. Since virtual currency has been recognized as a virtual commodity and transactions between individuals are not prohibited, as long as the USDT seller can provide evidence proving that both parties engaged in normal buying and selling of USDT (such as communication screenshots from exchanges like Binance or Huobi, communication records between both parties, and legitimate sources of the USDT held), then according to legal provisions, the seller’s sale of virtual currency constitutes innocent acquisition, and should not be recovered or returned to the relevant victims.

According to the “Regulations on Freezing and Returning Funds in New Types of Illegal Criminal Cases in Telecommunications Networks” Article 2, this regulation defines new types of illegal criminal cases in telecommunications networks as cases where criminals utilize telecommunications, the internet, and other technologies to deceive (steal) victims into remitting (depositing) funds into bank accounts under their control through methods such as sending text messages, making phone calls, implanting Trojans, etc., and then commit illegal crimes.

Article 4: Public security organs are responsible for clarifying the flow of funds to the victims, promptly notifying the victims, making decisions on fund returns, and implementing them.

According to the “Interpretation of Several Issues Concerning the Specific Application of Laws in Handling Criminal Cases of Fraud” Article 10 issued by the Supreme People’s Court and the Supreme People’s Procuratorate, if the perpetrator has used fraudulently obtained property to repay debts or transfer it to others, and one of the following circumstances exists, it shall be recovered in accordance with the law:

(1) The other party knowingly received the fraudulently obtained property;

(2) The other party acquired the fraudulently obtained property gratuitously;

(3) The other party acquired the fraudulently obtained property at a price significantly lower than the market price;

(4) The other party obtained the fraudulently obtained property from illegal debts or illegal activities.

If someone innocently acquires fraudulently obtained property, it shall not be recovered.

In a recent case of freezing bank cards due to a virtual currency transaction handled by Lawyer Shao, when communicating with the handling personnel, their understanding of “the buying and selling of virtual currencies among individuals in China is not illegal” is: individual buying and selling refers to transactions only through wallets. If it is through an exchange, then it is not peer-to-peer, so buying and selling virtual currencies on exchanges is illegal. If you receive funds related to fraud, you must refund the full amount to the victim. ——Such views also directly illustrate why the unfreezing of virtual currency cards is often obstructed. The differences in understanding of virtual currency transactions by handling authorities in various places are too great.

04. Writing at the End

Due to varying degrees of understanding of virtual currencies and related transactions among handling units in different regions, not only is it challenging to achieve “same handling for the same case” in the unfreezing of bank cards, but in some cases, Lawyer Shao has encountered situations where individuals are charged with offenses such as concealing and aiding in the commission of crimes, despite the similarity of the cases to those where transactions led to frozen cards being as high as 95%. As a criminal lawyer with years of practice, I occasionally find such cases perplexing.

So, returning to the initial question of this article: When receiving proceeds from selling virtual currencies, who should bear the responsibility? Share your opinion in the comments below.

Statement:

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