Compliance is a topic that cannot be avoided in the development and growth of the cryptocurrency industry. In order to help market participants better understand the compliance trend of the cryptocurrency industry and integrate into the wave of digital finance development, Lianwen invited Wang Yijia, Chief Compliance Officer of ZING , a compliant financial solution platform, to write an article to interpret Sino-US cryptocurrencies from a professional perspective Current status of compliance.
The full text will be divided into two releases. This article is the first part, starting from OTC, exchanges and other cases, analyzing the legal status of China’s cryptocurrency industry.
Author: Wang Yijia, Chief Compliance Officer of ZING, Master of Laws from Northwestern University, Senior Legal Counsel in the Digital Currency Field
ZING is a digital asset compliance financial solution platform jointly created by the traditional financial services company Taichu Financial Holdings and the American digital financial service provider Legend Trading. It is committed to providing institutional customers with compliant investment channels in the field of encrypted digital currencies. ZING currently holds a financial service provider license (MSB, Money Service Business). In the future, under the compliance license, it will strengthen the construction of transaction infrastructure such as clearing and settlement and liquidity, open up traditional financial fields and blockchain fields, and provide overall financial services solution.
With the continuous development of information technology and extensive network dissemination, blockchain is no longer a strange vocabulary to most ordinary people. The encrypted digital currency represented by Bitcoin is the most extensive and representative application based on the decentralization of the blockchain. Encrypted digital currency naturally has some currency attributes due to its high circulation and exchangeable characteristics. In particular, stable currency has the attributes of general equivalent to legal currency in commercial applications. At the same time, encrypted digital currency also contains some new features that are different from traditional currencies, such as global circulation without geographical restrictions and no actual form. These features greatly speed up the exchange efficiency of encrypted digital currencies on a global scale, and have advantages that traditional currency settlements are difficult to match.
However, while blockchain leads technological innovation, it also brings challenges to regulation. Encrypted digital currency is based on its mathematical algorithm and naturally has the anonymity of “private key is owned”, making it difficult to track and supervise. At present, the mainstream encrypted digital currency is not issued by the central bank subject of any country or region. The unrestricted circulation brought about by its “decentralized” nature can easily be used by criminals to disrupt the stability of the financial order. It is precisely because of this that governments of various countries have maintained a high degree of attention to the exchange of legal currency and encrypted digital currency. In recent years, they have been trying to control it from multiple perspectives such as legislation, regulation, and supervision. At the same time, they are also constantly seeking technical solutions. It is regulated.
Legal status of China’s encrypted digital currency industry
From the perspective of jurisprudence, encrypted digital currency has both formal characteristics such as property rights and intellectual property rights. At present, the development of the field of encrypted digital currency has greatly exceeded the speed of legislation, and how to define it in law and how to supervise it has been generally controversial. However, China is a country in the continental law system, with statutory law as the main source of law, which means that all judgments in cases are mainly based on statutory laws. As far as the status quo is concerned, China’s legislative bodies are still exploring the field of encrypted digital currency, and they do not have complete legislative conditions, let alone formulate systematic laws and regulations.
China is still using regulatory documents to regulate the blockchain and encrypted digital currency businesses in principle: as we generally know, in 2013 it was managed by the People’s Bank of China, the Ministry of Industry and Information Technology, and the China Banking Regulatory Commission. The “Notice on Preventing Bitcoin Risks” (“Document 289”) jointly issued by the Committee, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission, and the subsequent 2017 by the People’s Bank of China, the Central Cyberspace Administration of China, Industry and Information Technology The “Announcement on Preventing Token Issuance Financing Risks” jointly issued by the Ministry of Industry and Commerce, the State Administration for Industry and Commerce, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission (the “Announcement 94”), etc., to a certain extent restrict or even prohibit some cryptocurrency related fields business. By combing through the various documents currently released by China in the field of encrypted digital currency, we can get a glimpse of the current attitude of the regulatory authorities towards encrypted digital currency and understand what is the red line of Chinese supervision.
Document No. 289, issued in 2013, is China’s first policy document specifically aimed at encrypted digital currencies. It pointed out that the attributes of Bitcoin should be correctly understood: “Although Bitcoin is called “currency”, It is not issued by the monetary authority, does not have monetary properties such as legal compensation and compulsion, and is not a real currency. In terms of nature, Bitcoin should be a specific virtual commodity”, “It does not have the equivalent of currency The legal status cannot and should not be used as currency in the market.”
It can be seen that China is currently adopting a very cautious attitude towards encrypted digital currencies represented by Bitcoin and has clearly denied its currency status. According to the many Bitcoin-related judicial cases that occurred after the publication of Document No. 289, it can be seen that courts at all levels also use this definition as the standard in judicial practice. It is important to point out that currently only Bitcoin has obtained the legal status of virtual goods in such policy documents, and Chinese courts will exercise certain discretion during the trial process and may include other encrypted digital currencies as virtual goods. In the category of goods.
Document 289 further mentions that “At this stage, financial institutions and payment institutions are not allowed to use Bitcoin as a price for products or services, cannot buy or sell Bitcoin as a central counterparty, and cannot underwrite insurance business related to Bitcoin or include Bitcoin in The insurance liability is not allowed to directly or indirectly provide customers with other services related to Bitcoin.” At the same time, it also mentioned that Internet sites that provide services such as Bitcoin registration and transactions should be filed with telecommunications regulatory agencies and perform anti-money laundering obligations (but due to 2017 The 94 Announcement promulgated in 1999 explicitly prohibits the business of encrypted digital currency exchanges, so this provision is no longer feasible in practice). It can be seen that traditional financial institutions including banks in China cannot be permitted by regulation. Way to enter the field of encrypted digital currency represented by Bitcoin, and then carry out any business related to encrypted digital currency.
Although the “current stage” mentioned in the document provides a theoretical possibility for future policy deregulation, we have not found any signs of deregulation of relevant policies in the 7 years since Document 289 was issued. For example, the 94 announcement further emphasized that “no organization or individual shall illegally engage in token issuance financing activities.” This sentence aims to explain that under the current legal framework of China, derivative financial activities based on encrypted digital currencies such as ICO and IEO are characterized as an unauthorized and illegal public financing activity, suspected of illegal sale of tokens, tickets, and illegal issuance Securities and illegal fundraising, financial fraud, pyramid schemes and other illegal and criminal activities.
At present, China’s regulatory authorities still adopt a conservative and cautious attitude towards encrypted digital currencies. However, from a practical perspective, the private sector still has strong demand for blockchain technology and encrypted digital currency transactions and derivative services represented by Bitcoin.
With the recent application testing of central bank digital currency led by the central bank and commercial banks, local governments at all levels and large commercial enterprises such as Ant Financial have implemented more and more applications, technology platforms and scenarios, and market confidence has been further strengthened. Chinese President Xi Jinping also expressed his affirmation of the blockchain industry, saying that “the integrated application of blockchain technology plays an important role in new technological innovation and industrial transformation.” With the vigorous development of the science and technology innovation board of the Chinese stock market and the implementation of the registration system, “de-monetization” blockchain technology companies that have blockchain technology application scenarios and commercial value under the framework of legal compliance have also gained The possibility of full acceptance by regulation and capital market.
For the industry, compliance is the most eagerly awaited problem in future development.
Look at the red line of supervision and compliance requirements from the perspective of cases
In the past few years, many criminal and civil cases involving encrypted digital currency have occurred in China. According to the author’s understanding, recently, the Chinese public security authorities have frozen a large number of bank cards suspected of fraud or money laundering in encrypted digital currency transactions, and conducted investigations into some companies and individuals, causing everyone in encrypted digital currency practitioners to be at risk. In the absence of clear legislation as a guideline and lack of professional personnel guidance, the parties are often not clear about the specific regulatory taboos they have violated. For a long time in the past, when communicating with practitioners such as exchanges and encrypted digital currency financial service institutions outside of China, the author found that these professional practitioners are also concerned about the laws involved in the expansion and landing of their business in China. The problem expressed concern.
Under China’s current statutory framework, although the development of blockchain, especially the encrypted digital currency industry, is still in an unreliable state, perhaps the cases that have occurred can provide us with some reference in terms of regulatory thinking.
China’s unique digital currency criminal case
Speaking of criminal cases involving encrypted digital currencies in China, one area has to be mentioned-Yancheng, China.
Recently, a piece of news from the Ministry of Public Security of the People’s Republic of China caused a shock in the field of encrypted digital currency in China. According to the news, “The Ministry of Public Security commanded and uncovered the first large-scale multinational network pyramid scheme using encrypted digital currency as a trading medium, completely destroying the Plus Token illegal trading platform, and the amount involved exceeded 40 billion yuan.” This big case was solved by the Yancheng police.
News display:
In May 2018, the criminal suspect Chen and others began to engage in Internet MLM crimes by setting up a “Plus Token platform” and developing related applications. The platform uses blockchain technology as a gimmick and uses encrypted digital currencies such as Bitcoin as the transaction medium. Under the guise of providing encrypted digital currency value-added services, it promises high rebates and attracts the participation of the general public. ……Participants can obtain membership by recommending online and paying encrypted digital currency worth more than US$500 as the “threshold fee”. Members will receive the platform-created “Plus” coin based on the value of the encrypted digital currency paid, and follow The sequence forms the upper and lower lines and the hierarchical relationship. According to the number of offline development and the amount of funds invested, the platform divides members into five levels: member, big family, big coffee, great god, and creation, and distributes the corresponding number of “Plus” coins as rewards and rebates according to the level.
In order to attract more people to participate, the criminal gang used the Internet to publicize platform access methods, operating models, bonus systems, profit prospects, etc., and hired foreign personnel to pretend to be the platform founders to package and fake its so-called “international platform” and “foreign projects” In the background, it organizes meetings, concerts, tourism and other offline activities from time to time to promote the platform, and even spends a lot of money to hold a thousand-person promotion conference overseas. According to statistics, during the period of the platform’s existence, the platform has developed a total of more than 2 million members, with more than 3,000 hierarchical relationships, and has collected millions of encrypted digital currencies such as Bitcoin and Ethereum. The amount involved has reached more than 40 billion yuan ( Market quotations calculated at the time of the case), most of the encrypted digital currency was used to issue member “pull head” rewards, and some were cashed out for daily expenses and personal squandering of Chen and others.
According to public information statistics, the total amount of criminal offences suspected of virtual currency crackdown by the Yancheng police has exceeded RMB 50 billion. Cases involving virtual currency pyramid schemes, such as the DGC coin, wotoken case, Yataifang, and Gigabit, are also tried in Yancheng. Among them, the “WoToken” platform involved more than 7 billion yuan of funds; the DGC currency involved more than 5 billion yuan; the amount involved in Yataifang reached 814 million yuan, the founder of Gigabit, and the actual control of the exchange CHANGE COIN (coin exchange) Ren Lei Taiguo was also suspected of being under residential surveillance by the Yancheng police in a MLM activity case.
The author visited Yancheng on the spot and communicated with the case handlers who participated in the investigation of the plus token in Yancheng. According to the communication with the Yancheng police, the Yancheng police gave their opinions and ideas on combating crime in this area. At present, the Yancheng police has set up a special economic crime crackdown team in the field of encrypted digital currency to conduct full research on China’s encrypted digital currency related regulatory policies, understand the business model related to encrypted digital currency, and deal with the disks packaged in the encrypted digital currency business. Key economic crimes such as crypto schemes.
“Circle circle” generally refers to “a type of model that maliciously defrauds money by creating a fund disk”. It should be emphasized that this model is not unique to the field of encrypted digital currency. It is also used in traditional telecommunication fraud, financial fraud, and pyramid schemes. Often involved, the fraudsters here just use “blockchain technology” or “encrypted digital currency” as bait and disguise.
In general, scammers issue some non-mainstream digital currency (generally called altcoin) on non-mainstream exchanges through ICOs and other forms. The operating mode of this type of digital currency scam is similar to the traditional MLM method, setting up some “membership mechanisms” or promising extremely high returns, the essence is actually a Ponzi scheme. Because digital currency itself has financial attributes and anonymity, it is easy to be used by criminals as a criminal tool. At the same time, since digital currency is not classified as “currency” under the Chinese legal framework, such crimes are in early supervision In the blind zone, the privacy is very strong. However, in recent years, with the increase in supervision and enforcement experience, the possibility of such “circling” escaping from legal sanctions has been greatly reduced.
The Yancheng police has conducted a lot of research on policies and technologies in the project of cracking down on the above-mentioned funds, and even connected some service providers on a large scale in the technology of tracking on the chain. In China’s political environment, the three major exchanges, Huobi, OKEX, and Binance, have also provided active cooperation for the police to detect cases within their obligations.
Can China do OTC?
When we talk about businesses related to encrypted digital currencies, one business that cannot be surpassed is OTC transactions. Because OTC is the most basic way to directly convert legal currency into encrypted digital currency, it is the underlying infrastructure of all encrypted digital currency-related businesses, and plays a crucial role as a bridge in all businesses.
As mentioned earlier, China has not enacted legislation on encrypted digital currency related businesses, and has adopted clear regulations to define whether a certain business is legal or illegal, and many of the policy documents mentioned in the previous article have not specifically directed OTC. So how to qualitative OTC transactions and whether OTC transactions can actually exist in China, we can also get references from the cases that occurred and the author’s communication with the public security law.
For the purpose of this article, OTC is divided into “single transaction between individuals” and “behavior of OTC information intermediary business”. The main difference is that if it is only a person to person transaction, that is, “a certain individual (or not the subject of such transactions as the subject of daily business) uses the legal currency from another individual (or not the subject of such transactions as the subject of daily business) Buy encrypted digital currency at any place.
The author counts the current cases related to the encrypted digital currency field in China. All cases related to the purchase of encrypted digital currency are civil disputes.
E.g:
(1) In September 2018, in the case of “Beijing Xinfubao Technology Co., Ltd. and Chen Dianfeng’s Unjust Enrichment Dispute”, the plaintiff filed a lawsuit with the Shanghai Hongkou District People’s Court: requesting the defendant to return the 20 ETH (Ethereum currency).
In its judgment, the court held that “the country currently does not recognize the currency properties of so-called “virtual currencies” such as Ether, and prohibits them from being used as currency for financial activities such as circulation, but it did not deny that Ether can be used as a property in the general legal sense to be subject to law. Equal protection. “And finally judged that the defendant returned the unjust enrichment of 20 ETH.
(2) In the October 2018 “Dispute over the equity transfer between a partnership enterprise and a natural person”, the Shenzhen Court of International Arbitration determined that:
First, the Bitcoin return contract between civil entities does not violate the mandatory provisions of laws and regulations and should not be deemed invalid. Chinese laws and regulations do not prohibit private possession and legal circulation of Bitcoin;
Second, although Bitcoin exists in the virtual space of the network, it has particularities in terms of possession and control and publicity of rights changes, but it does not prevent it from being the object of delivery;
Third, before the laws and regulations define Bitcoin, the arbitral tribunal cannot positively determine that it is a “virtual property” as stipulated in Article 127 of the General Principles of the Civil Law, but it can reversely determine that it is neither issued by the monetary authority Currency, which is not the electronicization of legal tender, does not generate interest;
Fourth, Bitcoin is not legal tender, which does not prevent it from being protected by law as property. Bitcoin has property attributes, can be dominated and controlled by humans, has economic value, and can bring economic benefits to the parties. This is the unanimous intention of the parties and does not violate the law. The arbitration tribunal recognizes this.
The arbitration tribunal finally supported the claimant’s arbitration request for the change of equity, payment of equity transfer payment and liquidated damages, but rejected the arbitration request for compensation for the loss of encrypted digital currency interest.
Based on the judgment ideas in the cases over the years, the author believes that cases involving person-to-person transactions, transfers, contracts, etc. related to encrypted digital currencies represented by Bitcoin are all civil cases and do not fall under the jurisdiction of criminal law. Within range. It can be seen from the civil judgments that have been produced so far that although China does not have relevant legislation to clarify the legal status of Bitcoin or other encrypted digital currencies, in judicial practice it has been regarded as property and given a certain degree of legal protection.
On July 22, 2020, the Supreme People’s Court issued the “Opinions of the Supreme People’s Court of the National Development and Reform Commission on Providing Judicial Services and Guarantees for Accelerating the Improvement of the Socialist Market Economic System in the New Era”, stating that it will “strengthen The protection of new rights and interests such as property and data will give full play to the value-leading role of judicial adjudication in the protection of property rights.”
This is the first time that the Supreme People’s Court has mentioned “digital currency” in an official document. The identification of digital currency, online virtual property, and the protection of such new rights and interests are all landmarks. Because only by clarifying the scope of rights and interests, more comprehensive legal protection can be carried out.
The above judicial practice and opinions show that the “asset” or “property” attributes of encrypted digital currencies in law are becoming stronger. As a result, the relevant legal protection of encrypted digital currencies will be increasingly strengthened.
However, if an institution develops OTC as a large-scale “business”, related OTC transactions need to be treated differently from the above-mentioned “person to person transactions. This distinction is similar to the views of Chinese regulators on lending behavior: If it is just borrowing money between individual citizens, it is a private lending behavior. If it specializes in “borrowing business” and earning interest margins in batches, it needs to be supervised by relevant departments and needs to obtain relevant financial business licenses in advance.
Since China currently does not have complete legislation and licensing for encrypted digital currency transactions, there are also certain disputes between legal practitioners and law enforcement agencies such as public security, procuratorate, and law enforcement as to whether OTC business is an “illegal operation”.
The author tends to believe that it is currently impossible to develop large-scale OTC business in China, because as early as the 94 announcement in 2017, any organization was required to “not provide pricing or information intermediary services for tokens or “virtual currencies.”
In addition, it must be mentioned that the Supreme People’s Court and the Supreme People’s Procuratorate jointly promulgated the “Interpretation on Several Issues Concerning the Application of Law in Criminal Cases of Illegal Fund Payment and Settlement Business and Illegal Foreign Exchange Trading” issued on January 31, 2019.
implied in the text:
Article 1 Violation of national regulations and one of the following circumstances shall fall under the “illegal engagement in fund payment and settlement business” as stipulated in Article 225, Paragraph 3 of the Criminal Law:
(1) Using methods such as accepting terminals or online payment interfaces to pay monetary funds to designated payers in illegal ways such as fictitious transactions, false prices, transaction refunds, etc.;
(2) Illegal providing services for others to cash out from corporate bank settlement accounts or transfer corporate bank settlement accounts to personal accounts;
(3) Providing cheque cashing services for others illegally;
(4) Other situations of illegally engaging in fund payment and settlement business.
Article 2 Whoever violates national regulations by committing illegal foreign exchange transactions such as buying and selling foreign exchange or buying and selling foreign exchange in a disguised form, disrupting the order of the financial market, and the circumstances are serious, shall be convicted and punished for illegal business operations in accordance with Article 225, Paragraph 4 of the Criminal Law .
According to the communication between the author and law enforcement agencies, the law enforcement agencies currently believe that the above clauses are the closest to the OTC industry and the most directly based judicial interpretations. From the above judicial interpretations, we can learn that if you illegally engage in fund payment and settlement or illegally buy and sell foreign exchange, it can be regarded as illegal business. However, because the illegally engaged in fund payment and settlement business in judicial practice mainly refers to situations such as false transactions, public transfers to private, cheque cashing, etc., it does not apply to the legal currency-encrypted digital currency exchange in the OTC transaction scenario. Therefore, the author believes that OTC service providers face more problems Suspected of the criminal risk of the crime of illegal trading of foreign exchange.
Judging from the existing cases in China, no public security organ or court is making a judgment that “OTC is an illegal operation.” Therefore, law enforcement, judicial departments, and OTC-related practitioners urgently need legislators to issue relevant regulations or provide further judicial interpretations to clarify how the OTC business should be characterized.
Can China open a digital currency exchange?
“Whether it is possible to legally open an exchange in China” seems to be a very contradictory question.
Speaking of this topic, we have to mention again the 94 announcement that has appeared many times in this article. In the history of China’s encrypted digital currency exchange business, the promulgation of the 94 announcement is also a watershed.
The “94 Announcement” clearly mentions:
As of the date of this announcement, any so-called token financing trading platform shall not engage in the exchange business between legal currency and tokens, “virtual currency”, or buy or sell tokens or “virtual currency” as a central counterparty. Do not provide pricing or information intermediary services for tokens or “virtual currencies”.
The issuance of this document directly cut off the business of “legally opening a fiat currency exchange in China” to a certain extent. Therefore, “no exchanges can be opened in China” seems to have become a consensus.
As far as we know, the actual business coverage of mainstream domestic exchanges with actual operating locations include China, and major, medium and small exchanges are still “existing” in China’s digital currency field.
The path currently adopted by China’s exchanges is mainly to set up entities overseas, which are controlled or opened by foreign entities. Exchange servers are set up overseas. In principle, they do not serve mainland Chinese customers and do not touch legal currencies. We can also see from the service agreements displayed by major exchanges that Huobi is a “Seychelles company” and OKEX is a “Maltese company”. There are numerous similar examples.
In addition, if you need to exchange between legal currency and encrypted digital currency at present, you can see a special page from the exchange, which lists some “merchants”, and individual teams or individuals of these merchants conduct OTC to realize legal currency and encryption. For the circulation of digital currencies, the exchange only provides a “platform where OTC service providers can be found” to realize the cutting of legal risks.
The above behavior has to be said to be a path for opening an exchange with Chinese characteristics. Before there is a clearer judicial interpretation, this approach seems to have become “the way to survive for the China Exchange.” In fact, China’s major exchanges have also cooperated a lot with regulatory authorities in the field of on-chain tracking and security, and provided assistance to law enforcement agencies in the investigation of related criminal cases within the scope of their obligations. Therefore, the introduction of relevant legislation to “make Chinese exchanges legal and compliant” is also expected by relevant business practitioners such as exchanges, wallets, and encrypted digital currency banks.
