Virtual asset-related crimes are occurring with increasing frequency, and judicial determinations are exhibiting a trend toward “de-virtualization.” This article deconstructs the “de-virtualization” analytical pathway, identifies practical challenges, proposes actionable solutions, clarifies compliance boundaries, and provides reference guidance for relevant parties to mitigate criminal risks.

I. Introduction

In the digital information era, blockchain technology and virtual currencies—valued for their decentralization, anonymity, and seamless cross-border transfer capabilities—have earned accolades such as “digital gold.” However, crimes involving virtual currency—including fraud, money laundering, and illegal fundraising—are becoming increasingly diversified, frequent, and technologically sophisticated. According to the Supreme People’s Procuratorate’s 2025 Work Report, procuratorial organs nationwide have prosecuted 3,032 individuals for money laundering crimes involving the use of virtual currencies to transfer illicit proceeds. Such cases consistently display three salient features: (1) technical obfuscation of illicit activity, (2) normalization of cross-border transmission, and (3) complexity in legal characterization of conduct.

In judicial practice, defendants commonly raise defenses citing “neutrality of blockchain technology” or “decentralization implies lack of regulatory oversight.” Compounding this, inconsistent early judicial standards for assessing asset attributes and substantive conduct have led to divergent rulings—even among factually similar cases—regarding whether conduct constitutes a crime at all, or whether it qualifies as one offense versus another. These inconsistencies hinder both precise criminal enforcement and effective financial risk prevention. Faced with the high incidence of such crimes and inconsistent judicial reasoning, resolving classification ambiguities and unifying adjudicative standards has become an urgent priority in current criminal justice practice.

II. Core Orientation: The Practical Essence and Regulatory–Judicial Foundations of “De-Virtualization”

We observe that recent judicial policy has exhibited a pronounced “de-virtualization” trend. This trend is not isolated but reflects a clear conceptual core and robust supporting foundations. At its essence, “de-virtualization” entails stripping away the technological veneer of virtual assets and evaluating them within traditional legal frameworks—guided by the principle of “functional regulation and substantive assessment,” while rejecting the defense logic that “technological uniqueness equates to legal exception.”

From the regulatory perspective, the Notice on Further Preventing and Addressing Risks Related to Virtual Currency Trading and Speculation (Yinfa [2026] No. 42), jointly issued in 2026 by the People’s Bank of China and seven other departments, tightens regulatory posture beyond the 2021 baseline: it reaffirms that virtual currencies lack legal tender status; declares related business activities illegal financial activities; highlights their cross-border risk transmission characteristics and anti-money laundering (AML) regulatory gaps; and explicitly states that civil acts violating public order and good customs—such as investing in virtual currencies—are void. This provides a normative foundation for the criminal justice system’s “de-virtualization” approach.

From the judicial perspective, the Supreme People’s Court and Supreme People’s Procuratorate’s Interpretation on Several Issues Concerning the Application of Law in Handling Money Laundering Criminal Cases (Fa Shi [2024] No. 10) formally incorporates “virtual asset trading and exchange” into the statutory behavioral patterns of money laundering offenses. This marks the highest judicial authorities’ official inclusion of virtual assets within the regulatory scope of traditional financial crimes—and establishes their functional equivalence to conventional funds and property in criminal evaluation. Importantly, regulatory “illegality” does not automatically equate to criminal “guilt.” When assessing defendants’ unlawful conduct, criminal doctrinal analysis must still accurately characterize virtual assets: although not legal tender, virtual assets possess the core proprietary attributes of “controllability, value, and transferability,” qualifying them as “property” under criminal law.

III. Practical Analytical Pathway: Three Core Dimensions to Penetrate the Technological Facade

(A) Asset Attribute Dimension: Prioritize Recognition of “Property Attributes” to Avoid Currency-Based Classification Disputes

In practice, defendants most frequently argue: “Virtual currencies are not legal tender and thus should not be treated as objects of property crimes.” In response, judicial practice adopts a “penetrative” approach—bypassing debates over monetary status and focusing instead on proprietary attributes—to progressively integrate virtual assets into existing criminal law frameworks. At a seminar on “Uniform Application of Law in Virtual Currency–Related Criminal Cases,” organized by the Shanghai No. 2 Intermediate People’s Court, participants noted that narrowly construing money laundering as limited to “laundering black money” or requiring involvement of formal financial institutions is misguided. Although virtual currencies lack legal tender status and legal tender obligations, their real-world exchange value, controllability, and prevailing usage practices confirm their proprietary nature.

(B) Substantive Conduct Dimension: Penetrate Technical Forms and Focus on Core Functional Purpose

At the conduct level, many virtual asset–related crimes are masked by technical jargon such as “decentralization,” “coin mixing services,” or “cross-chain transfers.” The “de-virtualized” criminal adjudication methodology deliberately avoids excessive preoccupation with technical minutiae, instead centering on the substantive functional purpose of the conduct—and assessing its functional equivalence to traditional criminal behavior. For example, if a technical facilitator participates in virtual currency–related crimes by designing transaction flows, refining transaction models, or sharing in illicit proceeds, such involvement may establish subjective knowledge (“mens rea”) of the underlying criminal activity. In such cases, the facilitator may simultaneously violate the crime of “assisting information network criminal activities” and constitute a co-perpetrator in the virtual currency–related offense—triggering application of the “more serious offense” principle for sentencing.

(C) Compliance Boundary Dimension: Grounded in Practical Needs, Clarify Operational Compliance Requirements

The “de-virtualization” trend affects not only judicial adjudication but also imposes explicit compliance requirements on individuals and entities engaged in virtual asset–related businesses—including domestic entities conducting tokenization activities abroad. Entities must abandon the “technological exception” mindset and cannot evade legal responsibility by invoking “decentralization”; they must reconstruct their business narratives using conventional legal terminology to clearly articulate business models; and they must implement AML internal control systems—particularly customer due diligence (KYC), transaction record retention, and reporting mechanisms for large-value transactions.

IV. Practical Challenges and Resolution Strategies

(A) Challenges in On-Chain Tracing and Electronic Evidence Preservation

In Web3 environments, features such as anonymous addresses, coin mixing services, and cross-chain bridge transfers fragment fund flows. Resolution strategies include: (1) prioritizing professional blockchain analytics tools for tracing; (2) achieving dual evidence preservation via notarization by notary agencies and time-stamped storage on blockchain-based evidence platforms; and (3) anchoring “on-chain address ↔ offline entity” identities through evidence such as private key possession records and OTC transaction logs.

(B) Challenges in Establishing Subjective Knowledge (“Mens Rea”)

Defendants often assert “technical service provision” as a defense. Resolution strategies include: (1) proactively preserving records of “compliance reviews” and “risk warning documentation”; (2) actively declining manifestly anomalous transactions—e.g., those lacking regulatory oversight or featuring prices significantly deviating from market levels; and (3) for defense counsel, emphasizing submission of project compliance audit reports and evidence demonstrating fulfillment of KYC/AML obligations.

V. Conclusion

The “de-virtualization” approach in virtual asset–related criminal cases centers on returning to the essence of law and focusing on the substantive nature of conduct. Looking ahead, sustainable development can only be achieved by steadfastly upholding compliance baselines, abandoning the “technological exception” mindset, and strictly observing red lines in virtual asset AML and cross-border regulatory regimes.

[Zhong Lun Law Firm Team]