What are the common crimes involved in the criminal punishment of NFT digital collection platforms?

Author: Liu Zhengyao (Senior Lawyer, Shanghai Mankun Law Firm)

NFT or digital collection industry has been involved in a large number of criminal cases in the past two years, among which fraud is the most common crime, and fraud is the easiest crime to be sentenced to a serious crime, because many platforms are very easy to exceed 500,000 yuan in the amount involved (some platforms’ investment is easily over one million or even tens of millions), once the fraud amount reaches 500,000, the future sentence is more than 10 years, which is a serious crime.

However, a recent judgment of the Minhang Court in Shanghai on the digital collection platform involved in the case, “A picture is worth thousands of yuan, be careful of the scam hidden behind the “digital collection”!”, the case was closed with the crime of fund-raising fraud, and the defendants Xiao Zhang and Xiao Liu were sentenced to probation.

Today, Liu Lu will talk about what crimes are most likely to be involved in the digital collection platform if it is suspected of a criminal offense, and what is the difference between these crimes?

01 Why is the digital collection platform involved in criminal punishment?

According to a number of similar cases represented by Mr. Liu, the platform where the accident occurred was mainly focused on the opening of the secondary market, and all or part of the following problems existed:

First, self-buying and self-selling, malicious speculation

Some platforms will “buy” or buy digital collections through employees, waiting for the opportunity to sell at a high level, this kind of rat warehouse style is essentially cutting the leeks of ordinary users, and in the criminal law evaluation, it belongs to the “purpose of illegal possession” of other people’s property, and may be suspected of fraud.

Second, additional issuance

The external publicity is a limited edition, and the actual platform issues some additional collections for self-retention, and sells them after the price soars, which is essentially the same as the previous situation, and may also be suspected of fraud.

3. Fake IP

Using fake IP propaganda as a gimmick to attract attention, claiming to be a well-known artist in a certain circle, but in fact an art technician who can get less than 100 yuan on a certain treasure; This can easily constitute intellectual property infringement or even a crime.

Fourth, false on-chain

The biggest difference between digital products or NFTs and traditional electronic pictures is that they are unique and have their own “place” on the blockchain, but in practice, we find that some platforms claim to issue NFTs, but they are not actually on the chain, or the blockchain addresses given are fake to deceive novice users, which also constitute fraud crimes.

Fifth, the qualifications are incomplete

We know that there are at least three qualifications for a digital collection platform, especially a platform that has opened the secondary market: ICP and EDI business licenses, text network documents, blockchain information service filings, and of course, it would be excellent if there were art business records, auction business licenses, etc. But the reality is often very skinny, and some platform operators have nothing but a “pure heart” that is fanatical about digital Tibet. While incomplete qualifications do not necessarily lead to police visits, when a criminal offence is involved, it is often too late to remedy it, and it is often difficult for lawyers to find a favourable argument.

02 What crimes will be involved in the collection of data?

At present, there are three main crimes related to the involvement of digital collection platforms in practice: fraud, fund-raising fraud, and illegally absorbing public deposits.

I. Fraud

The crime of fraud is the most common crime triggered by non-compliant digital collection platforms. What is the crime of fraud? The provisions of the Criminal Law do not directly stipulate that, according to the simple understanding of ordinary people, it means defrauding others of money, and legal workers may judge from whether the perpetrator has a pattern of conduct in which the perpetrator “fabricates facts and conceals the truth to cause the victim to fall into a misunderstanding, and the victim disposes of property based on the misunderstanding, and eventually the victim loses the property, and the perpetrator or a third party acquires the property.” The reason why there are more convictions for fraud is because many ways to play the digital collection often make the judicial authorities think that the platform has the purpose of “defrauding other people’s property”, which translates to mean that the platform is cutting leeks, and the common situation is the above-mentioned rat warehouse, malicious speculation, a large number of additional issuances, and so on. According to the current regulations, once the amount involved is 3,000-10,000 yuan, it can be sentenced to up to 3 years in prison (the specific standards vary from province to province), and once the amount involved exceeds 500,000 yuan, it can be sentenced to more than 10 years in prison. We know that once the digital collection platform is involved, it is easy to reach an amount of more than 500,000 yuan.

2. The crime of illegally absorbing deposits from the public

Digital collection platforms sell collections ranging from thousands to tens of thousands, and some platforms explicitly advertise features such as high returns, which may trigger the crime of illegally absorbing deposits from the public. Four conditions are required for this crime to be constituted: illegality, publicity, inducement, and sociality. Illegality refers to the absorption of funds in violation of national financial supervision and regulations; openness is to publicize to the public through the media; inducement is the promise of the fund-raising platform to repay principal and interest or give returns; and sociality refers to the fact that the target of the absorbed funds is not a specific public (on the contrary, raising funds among relatives and friends does not constitute this crime). The digital collection platform does not have a financial license, and the publicity is carried out through the open network, and the target of fundraising is not a specific public, and the platform that has an accident often has a high yield and high return inducement publicity. When these four characteristics are met, it is likely to constitute this crime once it is determined by the judicial authorities to have disrupted the country’s financial order. According to the regulations, as long as one of the conditions is satisfied, such as the amount illegally absorbed exceeds 1 million, or the amount of deposits illegally absorbed exceeds 150, or the direct loss caused by non-absorption to depositors exceeds 500,000, they may be sentenced to up to 3 years in prison.

3. Fundraising fraud

This crime is the verdict of the Minhang Court, and the actor’s red-line behaviors mainly include fictitious IP parties, disclosure of high returns to unspecified objects through the network, self-buying and self-selling, and inflated transactions, etc., and the key is that the platform directly stops renewing the server in the later stage, and runs away after closing the platform. This is also the main difference between the crime of illegally absorbing public deposits and the crime of fund-raising fraud: whether there is an illegal possession of the fund-raising funds. The crime of fund-raising fraud is committed with the intention that the perpetrator does not intend to repay the loan at the time of illegal fund-raising, while the perpetrator of the crime of illegally absorbing deposits from the public has no intention to do so. If the perpetrator closes the platform, runs away and loses contact, and refuses to refund the money, it is very likely that the judicial authorities will find it a crime of fundraising fraud. The threshold for this crime is that as long as the amount of funds raised exceeds 100,000 yuan, it can be sentenced to imprisonment of not less than 3 years but not more than 7 years.

03 Epilogue

The digital collection market has been on a downward trend in the past two years, but the more the market is sluggish, the more we must adhere to the bottom line of compliance management, otherwise it will only lead to bad money driving out good money, so that the digital collection industry will be completely cool. As a criminal lawyer, Liu Lu advises all digital collection platforms to pay attention to avoid the red-line behaviors mentioned above. Even if you have to withdraw due to poor management, you must formulate a reasonable removal plan to avoid mass rights protection incidents that may lead to criminal punishment on the platform.

Extended reading:

Previously, Mankiw’s lawyer has undertaken a number of well-known domestic NFT digital collection criminal cases, interested friends can stamp: “Mankiw’s Case| An NFT digital collection platform was arrested on suspicion of fraud and finally closed the case without charge!”

Special Statement:

This article is the original article of Shanghai Mankun Law Firm, and only represents the personal views of the author of this article, and does not constitute legal advice and legal advice on specific matters. If you need to reprint this article, please contact Mankun Lawyer’s staff: MankunLawFirm