Chinese court sees first-ever lawsuit over a liquidity rug pull, university student sentenced to 4 years and 6 months for issuing tokens

The first criminal case in China related to the issuance of virtual currency has attracted widespread attention. University student Yang Qichao was charged with fraud for withdrawing liquidity and was sentenced to 4 years and 6 months in the first instance.

Yang Qichao Issuing Virtual Currency Leads to Criminal Case

According to The Paper, "post-00s" college student Yang Qichao issued a virtual currency called BFF on the Binance Smart Chain (BSC), which led to a legal dispute due to the withdrawal of liquidity.

The prosecution accused Yang Qichao of issuing fake virtual currency and swiftly withdrawing liquidity after others invested 50,000 USDT, resulting in losses to the investors, constituting fraud. On February 20, 2024, the Henan People's Court sentenced Yang Qichao to 4 years and 6 months in prison and imposed a fine of 30,000 RMB in the first instance.

Defense Continues in Second Instance: No Existence of Fake Currency

On May 20, 2024, the second instance of the case was heard. Yang Qichao's defense lawyer insisted on pleading not guilty, stating that the virtual currency issued by Yang Qichao had a unique and immutable contract address, thus no "fake currency" existed. It was also pointed out that the victim Luo, as an experienced player in virtual currencies, should have been aware of the risks involved in trading.

Key Legal Disputes

Does Withdrawing Liquidity Constitute Fraud?

Yang Qichao's withdrawal of liquidity led to a sharp devaluation of the BFF coin, where Luo exchanged 81,043 BFF coins for only 21.6 BSC-USD. The defense lawyer argued that such liquidity withdrawal is common in virtual currency trading and does not violate platform rules, with investors expected to bear the risks themselves. However, the prosecution believed that Yang Qichao's actions constituted fraud by taking advantage of the complexity and lack of regulation in virtual currency issuance.

Legal Status of Virtual Currency in China

Reports indicate that the legal status of virtual currency in China is still unclear. Both public security agencies and courts have stated that due to national legal prohibitions, the value of virtual currencies involved cannot be determined domestically. However, in the first instance, the Nanyang People's Court believed that although virtual currency lacks monetary attributes, its property nature cannot be denied.

Did the Victims Actually Suffer Losses?

The defense lawyer argued that Luo, after the incident, saw an increase in liquidity, causing the value of the held BFF coins to rise, resulting in no actual losses. Trading records showed that Luo, through automated scripts, purchased BFF coins and "bottomed" Yang Qichao's issued BFF coins three times within 7 minutes, then claimed to have been defrauded.

Criteria for Determining Fraud

Reports state that fraud refers to acts of deceiving and obtaining significant public or private assets for illegal possession. The prosecution accused Yang Qichao of inducing Luo to invest by creating fake BFF coins and swiftly withdrawing funds. The defense argued that the speculative nature of the virtual currency market determines investment risks, and as an experienced player, Luo should have been aware of these risks.

Should Virtual Currency Be Protected by Criminal Law?

The defense lawyer believes that virtual currency investments are not legally protected activities, and both parties engage in illegal financial activities, so investors should not receive legal protection even if they incur losses. The first-instance court's ruling contradicts national legal provisions, indirectly supporting transactions between virtual currency and legal tender.

Ye Zhusheng, associate professor at the School of Law of South China University of Technology, believes that designating virtual currency as property under criminal law violates the principle of legal order unity, protecting virtual currency transactions' security under criminal law indirectly promotes virtual currency trading activities, contradicting civil law and financial policy goals.

Legal Understanding of Risks in Virtual Currency Trading

The defense lawyer emphasized that virtual currency trading is a high-risk investment activity, where gains or losses depend on the timing of buying and selling. Throughout the entire investment process, Luo did not suffer losses but rather profited, thus should not be considered a victim of fraud.

Speculation in Coins Requires Willingness to Accept Risks

The cryptocurrency trading market is filled with unfair and illegal activities not currently governed by the law. While the cryptocurrency community advocates for friendly regulation, it must also understand that less oversight means more risks to be borne. Once regulation expands to include protective jurisdiction, the cryptocurrency market will not enjoy the same leniency as it does now.