introduction:
Based on the cases handled by Lawyer Shao in recent years and the large number of inquiries he has received in his daily work, it is found that it is not uncommon for domestic police (especially in Hunan Province) to take criminal coercive measures against relevant personnel in the perpetual contract business involving virtual currency trading platforms on suspicion of opening a casino.
These relevant personnel include: shareholders of the virtual currency trading platform, actual controllers, senior executives, business managers of the contract module, technical personnel, operations personnel, KOLs, and platform agents (who receive commissions for bringing orders to the exchange) .
According to the actual case handling, the judicial authorities seem to believe that as long as the virtual currency trading platform operates the "perpetual contract" business, the platform's behavior should be considered as the crime of opening a casino . On April 9, 2024, a user also posted a message on the social platform, saying that the high leverage of perpetual contracts is currently defined as online gambling, and the commission rebate agent, including personal development of downlines, may be suspected of being an accomplice of the casino.
A casino case that I recently handled was also caused by a virtual currency exchange conducting perpetual contract business, which led to the platform's related staff being arrested across provinces by public security organs.
So, does the perpetual contract business conducted by virtual currency trading platforms constitute the crime of opening a casino?
Author: Lawyer Shao Shiwei
0 1. What is a “perpetual contract”?
Perpetual Futures, the full name of which is "Perpetual Futures Contract", evolved from futures contracts. It is a unique and common investment tool in the cryptocurrency circle, which allows investors to conduct leveraged transactions in the cryptocurrency market. BitMEX, a cryptocurrency derivatives trading platform, mentioned on its official website that perpetual contracts were first created by the platform.
The difference between perpetual contracts and futures contracts is that futures contracts have a settlement date (delivery date), while perpetual contracts have no expiration date. This means that as long as the user's funds (margin) are sufficient, the contract can be held permanently and the user can freely choose when to settle.
Perpetual contracts have the following characteristics:
High leverage. Most exchanges’ perpetual contracts support 100x or even 200x leverage;
No physical assets are required for trading. The user's trading target is based on the index of spot prices, so users do not need to actually own the spot to conduct two-way transactions;
There is no expiration date and no need for delivery. As long as the position is not liquidated, users can hold it forever, avoiding the trouble of frequent delivery and position adjustment;
No interest. You only need to pay a lower handling fee and potential funding rate (but the funding rate is two-way, it can be an expense or income)
If the user determines that a certain currency will rise or fall in the future, he can use the perpetual contract to go long (bullish) or short (bearish) on the currency. By amplifying the leverage ratio, users can obtain higher potential profits while the risk will also increase exponentially. Therefore, the perpetual contract is a high-risk investment strategy.
0 2. Is a perpetual contract equivalent to gambling?
The case-handling unit believes that the logic of perpetual contracts is gambling is that one of the characteristics of gambling is to win big with a small investment, and perpetual contracts are about guessing the rise and fall of the price. On the surface, perpetual contracts seem to be a way for users to get higher returns by guessing the rise and fall of the coin price, but is this actually the case? Let's analyze it.
What is gambling? There is no clear definition of this in Chinese law, but through the following Supreme Court guiding cases, we can summarize the characteristic circumstances that will be identified as gambling.
The Supreme People’s Court’s “Notice on the Release of the 26th Batch of Guiding Cases” (Guiding Case No. 146. The case of Chen Qinghao, Chen Shujuan, and Zhao Yanhai opening a casino) issued on December 31, 2020 used the Internet to solicit “investors” outside of legal futures trading venues in the name of “binary options” transactions.
In this case, the court held that "members select foreign exchange products and time periods, click the "buy up" or "buy down" button to complete the transaction, and if they buy the right direction of increase or decrease, they can make a profit of 76%-78% of the transaction amount. If they buy the wrong direction of increase or decrease, the principal will belong to the website (dealer). The profit and loss results have nothing to do with the increase or decrease of foreign exchange trading products. The transaction price and profit and loss range are determined in advance , and the profit and loss results are not linked to the actual increase or decrease of prices . Traders do not have the right to exercise and transfer links , and the transaction results are accidental, speculative and speculative. Therefore, Longhui's "binary options" are essentially the same as the gambling behavior of "betting on size and winning or losing". It is actually a bet between the online platform and investors , and it is a gambling behavior disguised as options."
By analyzing the court's opinions in the case and comparing them with the trading model of perpetual contracts, we can see that perpetual contracts are not gambling . The main reasons are as follows:
1. In the above case, the user chooses "buy high" or "buy low" . If the direction is wrong, the user will lose money. This is the concept of "buy and leave" in gambling. Once the choice is made, it cannot be changed. However, in the perpetual contract model, after buying, the user can choose to close the position and sell at any time according to the rise and fall of the market.
2. In the above cases, the transaction price and profit and loss margin are determined in advance . In perpetual contract business, the transaction price refers to the closing price or the price of selling the contract, which is determined by the user or the market price. The closing price, opening price, selected trading time, etc. may affect the user's profit or loss.
3. In the above cases, the user's profit and loss results are not linked to the actual price fluctuations , that is, in the gambling model, the gambler's profit and loss amount can be estimated by probability. Lawyer Shao once mentioned a case in the article " The cryptocurrency contract allows you to fly, is it an angel or a devil? ". As a global agent of Star Coin, Xi guided customers to buy virtual currency to gamble by buying and selling, and then earned handling fees and profit and loss amounts from the gamblers. The reason why the platform's model was identified by the court as opening a casino is that users buy and sell virtual currency by betting USDT, making money if they buy the right one, and losing money if they buy the wrong one. This model is consistent with the model in the above case in this article.
In the perpetual contract business, whether the user makes a profit or loss is related to the rise or fall of the virtual currency. The amount of the user's profit or loss depends on the difference between the buying and selling prices, and the specific amount of profit or loss is uncertain.
4. In the above case, the trader has no right to exercise or transfer rights . In the perpetual contract business, users can decide whether to terminate or add transactions at a certain time point based on their own judgment of the market situation, and can withdraw and cancel transactions at any time. In addition, users can use the "reverse transaction" function to switch between short orders and long orders with one click.
5. In the above case, the online platform and investors are betting against each other . In the perpetual contract business, the exchange earns commission income, not "water" from the user's win or loss.
6. In the above case, the platform model is identified as " betting on size and winning or losing ", but perpetual contracts, as a financial derivative unique to the cryptocurrency circle, require investors to consider a variety of factors, conduct professional analysis and research on the trend and rise and fall of cryptocurrency prices, and then formulate investment strategies and allocate funds reasonably. The rise and fall of cryptocurrency prices is caused by the combined effect of many factors, such as: macroeconomic trends, monetary policy, market supply and demand, participation of institutional investors, market sentiment and event impact, etc.
In summary, lawyer Shao Shiwei believes that the gambling in the crime of opening a casino is purely a gamble on probability, and whether the gambler wins or loses is a random factor.
In the perpetual contract business, users need to independently choose their operating strategies through professional technical analysis and market analysis, and can determine whether to close, reduce or increase positions based on the changes in market trends during the transaction. Therefore, the operation of perpetual contract business by virtual currency trading platforms does not constitute the crime of opening a casino.
0 3. Lawyer’s Tips
As a kind of financial derivative, the perpetual contract of the virtual currency trading platform is currently classified as the crime of opening a casino by some law enforcement agencies based on its model and legal analysis. This lawyer believes that there is great controversy.
Although there are no direct policies and regulations that classify virtual currency derivatives trading models as criminal offenses, the Notice on Preventing the Risks of Token Issuance and Financing issued in 2017 clearly pointed out that businesses involving virtual currencies are illegal business activities. Therefore, for entrepreneurs and practitioners involved in the cryptocurrency industry, from the perspective of avoiding criminal risks, staying away from perpetual contract business can at least reduce potential legal risks to a certain extent.
