Imagine a college student creating his own virtual currency and then landing in jail for it. This is the story of Yang Qichao, a young man who issued a digital coin called BFF and ended up causing a big stir in the cryptocurrency world. When Yang withdrew the liquidity soon after issuing the coin, investors lost a lot of money, leading to accusations of fraud.
Yang Qichao Legal Obligations
Yang Qichao was born in China in 2000. He is a college student from a Chinese Province called Zhejiang Province. He was one of the senior students at a university in Zhejiang during his graduation. During his college days, Yang built a strong interest in virtual currencies. And he got involved in cryptocurrency trading out of passion and curiosity.
On his way to pursue his passion, Yang Qichao accidentally issued fraudulent virtual currency BFF and was imprisoned for taking funds. He faced allegations and was arrested for causing investors to lose $50,000 USDT coins. The People’s Court in Nanyang High-tech Industrial Development Zone found him guilty of scam and convicted him of four years and six months in jail and a fine of 30,000 yuan.
On May 20, 2024, the case came for hearing for the second trial at the Nanyang Intermediate People’s Court. Yang’s defense counsel continued to assert his innocence during the second trial according to the paper report.
Arguments from Yang’s Defence Counsel
The defense counsel argued that the virtual currency issued by Yang Qichao, in this case, has a unique and immutable contract address. So, there is no possibility to call it fake currency. The defendant and reporter have been skilled currency players for such long days. They also have vast expertise in virtual currency trading and understand the hazards of speculation.
The BFF platform allows for liquidity addition and withdrawal do not contravene the regulations. The victim’s BFF coins are greatly appreciated for its enhanced liquidity. Also, the transaction can be swapped for additional USDT coins without losing money.
Some lawyers knowledgeable about cryptocurrency said that the country’s laws still need to recognize virtual currency as legal. This is the first time the Chinese courtroom witnessed a liquidity withdrawal issue related to a virtual currency.
How DAO and BFF Coin Turned Yang’s Life
What is DAO and How It Works?
Decentralized Autonomous Organization or DAO is a new organizational structure working based on Blockchain technology. It is also referred to as a “crypto-cooperative” or “ financial flashmob.” ConsenSys defines a DAO as a community driven entity with no central authority.
DAOs use smart contracts to make decisions based on blockchain activity. These types of logically coded agreements specify actions such as raising circulating supply. And burning reserve tokens or distributing incentives to current token holders based on the outcome of a decision.
BFF, a Digital Virtual Currency
In early May 2022, Yang came across a DAO community organization called Blockchain Future Force (BFF), which was promoting the issuance of decentralized virtual tokens. He added 300,000 BSC-USD and 630,000 BFF liquidity to the virtual currency he issued.
Chinese Student Sentenced to 4.5 Years Prison for Cryptocurrency FraudUnderstanding Liquidity Pools and Virtual Currency Transactions
In decentralized virtual currency transactions, liquidity pools are crucial. Liquidity providers deposit token pairs into smart contracts to create a pool, allowing automated market makers to set token pair ratios for exchange.
After that, when Yang added liquidity to the wallet, Luo spent 50,000 BSC-USD to exchange 85,316.72 coins. Just 24 seconds later, Yang withdrew the liquidity in the BFF coins. And he received 353,488.115 BSC-USD 508,069.878 BFF coins. The process of withdrawing liquidity caused the BFF coins in the liquidity pool to decline seriously. Luo used 81,043 BFF coins to exchange for only 21.6 BSC-USD.
Withdrawal Liquidity
This action of withdrawing liquidity is called “withdrawal of capital” in the charge. Several cryptocurrency players say withdrawing liquidity is a common arbitrage method in virtual currency transactions. In the absence of sufficient liquidity, it can lead to large fluctuations in the exchange price of virtual currencies, earning ten or a hundred times the profit. Correspondingly, the virtual currencies held by the losers may depreciate significantly.
Therefore, if the issuer withdraws the funds quickly after adding liquidity, it will be regarded as unkind. During the arguments Yang Qichao gave an answer to defend himself from the withdrawal of liquidity,
I just took back the points that the big brother cut from me. I have been cut a lot.
Luo’s Experience and Allegations
Luo, who had lost his investment, requested repayment from Yang. After being rejected, he reported the incident to the authorities, which resulted in Yang’s arrest for illegal indictment of fraud. The prosecution asserted Yang’s dishonesty and fraudulence, while the defense argued that Luo, an experienced Bitcoin trader, was aware of the transaction risks.
The Legal Dilemma
A major contention in the trial was whether virtual currencies are protected by criminal law. Chinese laws and policies currently do not recognize the legality of virtual currency investments, and losses from such investments are typically borne by the investors. However, the first-instance court acknowledged the economic benefits of virtual currencies and treated Luo’s loss as a factor in sentencing.
Failure To Protect Virtual Currency in China
During the trial, another controversy focused on whether the lost virtual currency was property that should be protected by criminal law.
As early as the case began, public security officials warned Luo that due to restrictive measures in national legislation, no institution in China could determine the worth of the USDT currency involved. The first instance court also remarked that it is now impossible to undertake price assessments on virtual currencies such as Tether in China. It is also said that it is difficult to determine the exact amount of this fraud offense.
Luo lost 50,000 USDT coins. The USDT coin, commonly known as Tether in Chinese, is a virtual currency pegged to the US dollar that can be exchanged at a 1:1 ratio. However, USDT cannot be used directly on the Binance chain; it can only be traded for BSC-USD coins, commonly used on the Binance chain, via the USDT cross-chain bridge. BSC-USD can then be exchanged for other virtual currencies on the chain. After numerous exchanges and conversions between BSC-USD and USDT, USDT and US dollars, and US dollars and RMB, prosecutors charged Yang Qichao with defrauding Luo of RMB 330,000.
Notice on Preventing Bitcoin Risks
From the beginning of December 3, 2013, the People’s Bank of China, the Ministry of Industry and Information Technology, and the three major regulatory commissions of China Banking, Securities, and Insurance issued a “Notice on Preventing Bitcoin Risks” that explicitly stated that “Bitcoin does not have the same legal status as currency, and cannot and should not be circulated and used as currency in the market.
On September 15, 2021, the People’s Bank of China, the Supreme People’s Court, the Supreme People’s Procuratorate, and other ministries released a “Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation.” The notice stated that investment in virtual currency and related derivatives undermines public order and morals, invalidates civil legal activities, and results in losses. If there is a suspicion of disrupting financial order or threatening security, relevant departments will investigate and take appropriate action.
Binance Defies China’s Crypto Ban: Trades $90B in China in a MonthThe Broader Implications for Crypto Regulations in China
Is it Illegal to Trade With Binance in China?
China’s Supreme People’s Procuracy (SPP) and the State Administration of Foreign Exchange (SAFE) issued a public warning, highlighting the inappropriate use of Tether (USDT) as an intermediary tool in transactions between Renminbi and other foreign currencies.
The notification stated that employing USDT in exchanges breached the law. At the same time, China’s two top regulatory bodies have announced that all cryptocurrency trading using the Yuan is unlawful. This includes indirect participation, such as technical assistance or exchange services. China has issued a total ban on all cryptocurrency-related activity and a prohibition on international cryptocurrency exchanges serving Chinese users.
Binance, a blockchain-based data circulation platform, utilized core technologies like smart contracts, cryptographic algorithms, and consensus mechanisms to ensure data circulation regularity, security, and efficiency. It provides a clear and fair rule framework for data circulation through the automatic execution and transparency of smart contracts. The integration of blockchain and privacy computing technologies promotes standardization, security, and efficiency, supporting society’s digital transformation.
Conclusion
However, Yang’s actions were eventually found to be a major fraud, and a Chinese court sentenced him to six years and four months in prison. This is believed to be the first reported case of virtual currency fraud in China. The court held that Luo suffered a loss as a result of Yang’s actions.
The People’s Court Daily published a theoretical article on the “Criminal Law Property Theory” of virtual currency, arguing that recognizing it as criminal property violates the principle of unity of legal order. Ye Zhusheng, an associate professor at the South China University of Technology, believes that civil laws and financial policies do not protect virtual currency-related activities and vice versa. If the law protects virtual currency as property, it may guarantee the security of transactions and protect civil law.
