On the surface, it appears to be a technical operational issue, but in essence, it is a continuous upgrading process of the judicial system's governance capabilities for new digital assets.

Author: Liu Honglin

In recent years, we have clearly felt a change: the number of criminal cases related to virtual currencies handled by public security agencies has been increasing. Telecom fraud, money laundering channels, organized pyramid schemes, and even local Ponzi projects have seen more and more funds ultimately settle on the blockchain or in exchange accounts, and the status of virtual currencies in these cases has shifted from being "peripheral assets" to "core objects." In other words, although mainland China still adopts a marginal regulatory attitude towards virtual currencies, they have undeniably entered the main battlefield of criminal law enforcement in China.

As a result, the issue of judicial disposal of virtual currencies is no longer a question of "whether to do it," but rather a practical question of "how to do it" and "who will do it." This is a problem that cannot be ignored; once a case is thoroughly investigated and a significant amount of currency is seized, the next steps of refunding, returning, and liquidating will all be stuck on the word "disposal."

Today, we finally see this issue being formally addressed—whether it is the internal research of the Supreme Court, the case-handling mechanism exploration led by the Ministry of Public Security, or the academic and industry research projects, all are attempting to provide a set of executable and replicable judicial disposal operational mechanisms for such cases.

As legal practitioners, the Mankun lawyer team, including Lawyer Honglin, has also participated in several cross-border exchanges and judicial assistance projects, and here are a few observations and thoughts to share.

New Bottlenecks in Cryptocurrency Cases

Let me start with a very practical detail: in the past two years, many client cases I have encountered have been stuck at the judicial disposal stage. Some are due to limited on-chain tracking technology, where the tokens identified in the case cannot be matched with corresponding identities and private keys; others have clearly seized accounts and intercepted assets, but no one knows how to dispose of this pile of USDT.

In traditional case-handling thinking, freezing a bank card is the most routine operation; as long as the court issues a ruling, the bank cooperates to freeze, allocate, and return, and the process is incredibly smooth. But when it comes to virtual currencies, problems arise:

• First, these assets often do not have a clear "issuer" or "issuing institution," nor do they have a "unique account," but are instead dispersed across various addresses, exchange accounts, and cold wallets, with unclear management entities;

• Second, even if there are exchange accounts, many platforms are overseas, and domestic law enforcement agencies do not have actual operational authority, relying on the platform's "cooperation," which raises a host of issues such as docking mechanisms, cooperation agreements, and trust costs;

• Third, even if assets are successfully retrieved, how to liquidate and return them, how to measure their discounted value, and how to distribute the property still lacks ready-made solutions.

As a result, many local public security agencies have begun to try "local methods": finding traceable transaction records on the blockchain, bringing in local third parties who understand cryptocurrencies for valuation, or even directly asking project parties to repurchase and return. It sounds a bit primitive, but in the absence of unified guidance, this "local autonomous exploration" has indeed pushed the progress of some cases to a certain extent.

However, this approach also brings significant compliance and operational risks. For example, the disposal prices of the same type of tokens can vary greatly in different cities, with some even leading to disputes over "undervaluation" or "under-the-table sales," and even triggering new reports outside the case. This forces higher-level law enforcement agencies to confront this "new bottleneck"—if they want to solve cases and enforce laws, they must address the judicial disposal issue of virtual currencies.

From the information we can see, including the Ministry of Public Security, the Supreme People's Procuratorate, and the Supreme People's Court, several rounds of special research have already been conducted internally. Universities such as Southwest University of Political Science and Law and China University of Political Science and Law have also formed research groups to attempt to build a universally applicable operational model. During communications with several cryptocurrency exchanges in Hong Kong, it was also found that some leading exchanges are actively connecting with Chinese law enforcement agencies, hoping to play the role of a "compliance bridge" in future disposal processes.

In other words, this is not only a grassroots law enforcement demand but also a compliance system construction that is brewing at the national level.

Who Should Hold Disposal Rights? Behind It Is the Discussion of "Fiscal Incentive Mechanisms"

If the first part is about "difficulty in handling cases," then the second part is about "weak motivation."

We must face a reality: the local public security system in China has long been in a state of "solving resources by itself." Investigative actions, cross-border asset recovery, and digital tracing are inherently costly. Once it is finally discovered that there are tens of millions or even hundreds of millions in virtual currencies, if this portion of property is ultimately "handed over to the central government," it is tantamount to "working for nothing" for frontline public security.

Therefore, many local public security agencies are actually conflicted internally: on one hand, they genuinely hope that case handling can be more professional and compliant; on the other hand, they fear that the disposal mechanism will be "one-size-fits-all," resulting in "you solve the case, others reap the benefits."

In this situation, if the "ownership of disposal rights" is not clarified and a reasonable fiscal sharing mechanism is not established, the enthusiasm of frontline investigators will be dampened. We have even seen some places developing a tendency of "stopping at the point of finding the currency," to avoid involving subsequent asset operation responsibilities.

So the questions arise:

• Is the unit responsible for the judicial disposal of virtual currencies the local public security? Provincial economic investigation? Or the Ministry of Public Security's directly subordinate agencies?

• Are the proceeds from asset disposal retained by the local area as fiscal supplements? Or are they all handed over to the national treasury?

• Can the costs of handling cases be covered? Are there incentives for case handlers? Will a "case handling cost subsidy mechanism" be introduced in the future?

If these questions are not resolved, the so-called "standardized disposal mechanism" will be difficult to truly implement at the frontline. Personally, I believe that if the state wishes to promote this matter towards institutionalization, beyond the technical and procedural norms, the more critical issue is how to reasonably distribute fiscal benefits. Behind this is actually a redesign of the governance system and law enforcement incentive mechanisms.

Domestic or Overseas? The "Gray Area" of Disposal Processes Needs to Be Illuminated

Once we clarify the first two issues, we can then address the question of "how to specifically dispose of" the assets. Hidden within this is currently the most realistic and sensitive aspect of the business ecosystem.

The trend we see now is that an increasing number of judicial disposals are attempting to bypass the domestic system and directly liquidate through exchanges in Hong Kong, Singapore, and other places. This is actually a result driven by practical needs: on one hand, domestic banks and financial institutions generally do not accept cryptocurrency-related businesses; on the other hand, the actual clearing capabilities of exchanges are overseas, and the compliance costs for business connections in Hong Kong are relatively low, making it easier to form a closed-loop process.

However, this also brings a new problem: if we assume that judicial disposal must be completed on overseas platforms, then:

• Which exchanges can be "qualified"? Is there an "officially recognized" whitelist?

• Is it necessary to sign a judicial cooperation agreement? How will the platform fulfill its obligations?

• Which domestic companies can become intermediaries for judicial disposal? How are their identities, fees, and authorities defined?

Currently, some third-party institutions are beginning to try to intervene in this market, hoping to undertake public security commissions as asset valuation parties, custodial executors, or overseas trading assistants. But the problem is that this field still lacks a public and transparent bidding system and regulatory framework, making it prone to becoming a "relationship-intensive" gray business.

We have also found that many exchanges are actively engaging with public security—yet whether the cooperation is "compliance cooperation" or "business expansion" is sometimes unclear.

In the long run, I believe that the national level will eventually introduce a "judicial disposal whitelist mechanism" and "disposal process guidelines," including:

• Clearly defining the list of exchanges that can cooperate with law enforcement and their cooperation obligations;

• Requiring all disposal processes to be traceable and auditable;

• Establishing special accounts for cross-border judicial disposal to supervise the paths of asset inflow and outflow;

• Encouraging domestic law firms, auditing, and technology institutions to participate in the entire closed loop to enhance process standardization.

This is not only the bottom line to ensure the legal and compliant disposal of assets but also a basic guarantee for users and parties involved in cases.

Mankun Lawyer's Recommendations

The judicial disposal of virtual currencies, on the surface, appears to be a technical operational issue, but in essence, it is a continuous upgrading process of the judicial system's governance capabilities for new digital assets. Whether it is the law enforcement agencies' ability to trace the sources of assets, their control and liquidation processes for on-chain assets, or the construction of cross-border cooperation mechanisms, a more orderly exploratory path is gradually taking shape.

We see that more and more local public security agencies are no longer avoiding this topic but are actively seeking cooperation with platforms, law firms, and technology institutions to explore a handling process that is both practical for case handling and can withstand scrutiny. We also see research forces from universities, policy institutions, and the judicial system providing theoretical support and policy references for the replicability and standardization of this path.

For the industry, this means that a more stable and predictable disposal environment is taking shape. This not only facilitates the smooth progress of cases but also provides foundational support for the healthy development of the entire digital asset ecosystem. More importantly, once this mechanism truly matures, it will become the "standard action" of the Chinese judicial system in facing the future digital asset era, laying a more solid foundation for the next stage of governance.

We believe that with the joint efforts of all parties, the judicial disposal of virtual currencies will no longer be a "black box" in case handling but will become a transparent, compliant, and efficient law enforcement link. Such efforts will ultimately promote the entire industry towards a clearer and more orderly direction.

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