Virtual currency judicial disposal has become a "hard necessity," with three main challenges

Author: Liu Honglin

In recent years, we've clearly observed a shift: law enforcement agencies are handling an increasing number of criminal cases involving cryptocurrency. Whether it's telecom fraud, money laundering channels, organized pyramid schemes, or even local Ponzi projects, more and more illicit cash flows ultimately settle on-chain or in exchange accounts. Cryptocurrency’s role in these cases has evolved from being a peripheral asset to becoming a central investigative target. In other words, despite mainland China's continued marginalization of cryptocurrency under regulatory policy, it has already entered the mainstream battlefield of Chinese criminal enforcement.

As such, the judicial disposal of cryptocurrency is no longer a question of "whether to act," but rather one of "how to act" and "who should take responsibility." This is a bottleneck issue—if unresolved, authorities cannot move forward. When investigations go deep and large amounts of cryptocurrency are seized, the next steps—liquidation, restitution, and monetization—all stall at the word "disposal."

Today, however, this issue is finally being formally addressed—be it internal research by the Supreme People's Court, exploratory case-handling mechanisms led by the Ministry of Public Security (MPS), or academic and industry-led research initiatives—all aiming to establish an executable, replicable judicial disposal framework for such cases.

As legal practitioners, the ManQin Law team—including Attorney Liu Honglin—has participated in several cross-border exchanges and judicial support projects. Here, we’d like to share some observations and insights.

New Bottlenecks in Crypto-Related Case Progression

Consider this real-world detail: over the past two years, many client cases I’ve encountered have stalled precisely at the stage of judicial disposal. Some were hindered by limited on-chain tracking capabilities—the tokens were identified, but their corresponding identities and private keys could not be located. Others involved successfully frozen accounts and seized assets, yet no one knew how to handle the pile of USDT they had recovered.

In traditional investigations, freezing bank cards is standard procedure. With a court order, banks readily cooperate with freezing, transferring, and returning funds—a smooth, well-established process. But when it comes to cryptocurrency, complications arise:

• First, these assets often lack a clear "issuer" or "issuing institution," and there is no single controlling account. Instead, they are scattered across various addresses, exchange accounts, and cold wallets, making ownership and management ambiguous;

• Second, even when exchange accounts are identified, many platforms operate overseas, leaving domestic authorities without direct operational access. Cooperation depends entirely on platform "willingness," which introduces challenges around coordination mechanisms, formal agreements, and trust;

• Third, even if assets are successfully recovered, there remains no established protocol for valuation, liquidation, conversion, or distribution.

Faced with this gap, many local police departments have resorted to makeshift solutions: using traceable on-chain transaction records, hiring local crypto-savvy third parties for valuation, or even allowing project teams to repurchase and return funds. These approaches may seem primitive, but in the absence of unified guidelines, such localized experimentation has helped advance certain cases.

Yet these ad hoc methods carry significant compliance and operational risks. For example, the same type of token might be disposed of at vastly different prices across cities, sometimes leading to controversies over undervaluation or opaque sales—even triggering new complaints outside the original case. This forces higher-level authorities to confront what has become a “new systemic bottleneck”: solving crypto-related crimes now requires resolving the judicial disposal challenge.

Judging from available information, specialized studies have already been conducted internally within institutions including the MPS, Supreme People's Procuratorate, and Supreme People's Court. Research groups have also formed at universities such as Southwest University of Political Science and Law and China University of Political Science and Law, aiming to build universally applicable operational models. Meanwhile, during communications between Hong Kong and multiple crypto asset trading platforms, we’ve found that leading exchanges are proactively reaching out to Chinese law enforcement, hoping to serve as "compliant bridges" in future disposal processes.

In short, this is not merely a grassroots enforcement need—it reflects a national-level effort underway to construct a compliant institutional framework.

Who Should Hold Disposal Authority? The Core Lies in Fiscal Incentive Design

If the first section highlights "difficulty in enforcement," the second reveals "lack of motivation."

We must face reality: local public security organs in China have long operated under a model of self-reliance. Investigations, cross-border asset recovery, and digital forensics are inherently expensive. If, after uncovering millions—or even hundreds of millions—of yuan worth of cryptocurrency, all proceeds must be fully remitted to the central government, frontline officers effectively end up doing all the work for no tangible benefit.

Hence, many local law enforcement agencies harbor internal conflict: while genuinely wanting more professional and compliant procedures, they also fear a one-size-fits-all disposal mechanism that results in “you solve the case, others reap the rewards.”

Under these circumstances, without clarifying who holds disposal authority or establishing a reasonable fiscal sharing mechanism, frontline investigative enthusiasm will inevitably wane. We’re already seeing tendencies in some regions to limit investigations strictly to “identifying the crime and locating the coins,” avoiding further responsibility for asset management.

So critical questions emerge:

• Should the designated authority for judicial disposal reside with municipal police, provincial economic investigation bureaus, or directly under the MPS?

• Should proceeds from asset disposal remain locally retained as supplementary funding, or be entirely remitted to the national treasury?

• Can investigation costs be reimbursed? Are there incentives for investigators? Could a “cost-reimbursement mechanism” for case handling be introduced in the future?

Unless these issues are resolved, any so-called "standardized disposal mechanism" will struggle to gain traction in practice. In my view, if the state aims to institutionalize this process, beyond technical and procedural norms, the key lies in designing a fair fiscal incentive structure. At its core, this represents a redesign of governance systems and law enforcement motivation mechanisms.

Domestic or Overseas? Shedding Light on the "Gray Zone" of Disposal Processes

Only after addressing the above two issues can we turn to the practical question: *How* should disposal actually be carried out? And here lies the most realistic and sensitive part of the current ecosystem.

The current trend shows that more and more judicial disposals are bypassing the domestic system altogether, opting instead to liquidate assets through exchanges in Hong Kong, Singapore, and similar jurisdictions. This shift is driven by practical necessity: on one hand, domestic banks and financial institutions generally refuse to engage with crypto-related operations; on the other, actual settlement capacity resides overseas. Hong Kong, in particular, offers relatively low compliance barriers and enables smoother operational closure.

But this raises new concerns: if we tacitly accept that judicial disposal must occur on offshore platforms, then:

• Which exchanges qualify? Is there an officially recognized whitelist?

• Are formal judicial cooperation agreements required? What obligations should platforms bear?

• Which domestic companies can serve as intermediaries in judicial disposal? How should their status, fees, and authority be defined?

Currently, some third-party institutions are attempting to enter this space, seeking commissions from police departments to act as valuation agents, custodians, or overseas transaction facilitators. However, due to the lack of transparent bidding systems and regulatory oversight, this area risks devolving into a relationship-driven gray market.

We’ve also observed that many exchanges are proactively engaging with public security agencies—but it’s often unclear whether such cooperation stems from legal compliance or business development motives.

In the long run, I believe the central government will eventually introduce a “Judicial Disposal Whitelist Mechanism” and “Disposal Process Guidelines,” including:

• Establishing an official list of cooperating exchanges and defining their legal obligations;

• Mandating full traceability and auditability throughout the disposal process;

• Creating dedicated cross-border judicial disposal accounts to monitor fund inflows and outflows;

• Encouraging qualified domestic law firms, auditors, and tech firms to participate in the closed-loop process, enhancing procedural standardization.

This would ensure lawful and compliant asset disposal while providing fundamental protection for users and case parties alike.

Recommendations from ManQin Law

The judicial disposal of cryptocurrency may appear, on the surface, to be a technical execution problem. But in substance, it reflects an ongoing upgrade in the judicial system’s capacity to govern novel digital assets. Whether it’s law enforcement’s ability to trace asset origins, control and monetize on-chain holdings, or build cross-border collaboration frameworks, structured exploration paths are gradually taking shape.

We see more and more local police forces no longer avoiding the topic, but actively seeking partnerships with platforms, law firms, and technology providers to develop practical, review-proof disposal workflows. We also observe growing academic, policy, and judicial research efforts aimed at building theoretical foundations and policy recommendations for scalable, standardized solutions.

For the industry, this signals the emergence of a more stable and predictable disposal environment—one that not only facilitates smoother case resolution but also provides foundational support for the healthy development of the broader digital asset ecosystem. More importantly, once mature, this mechanism could become China’s standard operating procedure for the digital asset era, laying a stronger foundation for future governance.

We believe that through collective effort, cryptocurrency judicial disposal will cease to be a "black box" in law enforcement and evolve into a transparent, compliant, and efficient process. Such progress will ultimately drive the entire industry toward greater clarity and order.