Regulation Of Cryptocurrency In China – Technology

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Cryptocurrency-related activities have received little tolerance
from the Chinese government. Initial coin offerings (ICO) were
banned in China in September 2017. Exchange platforms that traded
cryptocurrencies or provided facilitation services were also
ordered to be closed following the crackdown on ICO. Many exchanges
chose to relocate to jurisdictions that are more favorable to
cryptocurrencies than China. However, due to the long-arm
jurisdiction of the Chinese criminal laws, organizers and promoters
of overseas ICO and exchanges may not be free from the jurisdiction
of Chinese criminal laws, if those persons are Chinese citizens or
if Chinese investors invested in overseas ICO or traded
cryptocurrencies on overseas exchanges.

Interestingly, it is not illegal to hold Bitcoins and other
cryptocurrencies or even to buy or sell them in China. The Chinese
government also encourages the development and application of
blockchain technology, but made it clear that blockchain technology
must service the real economy.

1. ICO

China’s Policy:

On September 4, 2017, seven government agencies of China, i.e.
the People’s Bank of China (“PBOC”), the Central
Cybersecurity and Information Technology Lead Group of Communist
Party of China, the Ministry of Industry and Information
Technology, the State Administration for Industry and Commerce,
China Banking Regulatory Commission, China Security Regulatory
Commission and China Insurance Regulatory Commission, jointly
issued the “Notice regarding Prevention of Risks of Token
Offering and Financing” (the “Notice”). The Notice
banned all ICO in China and ordered that any organizations or
individuals who had previously completed ICO to make arrangements
such as return of token assets to investors to protect investor


To understand the harsh attitude of the Chinese government
towards ICO, we have to look at the big picture of China’s
economy and financial market. In the past 20 plus years, China has
enjoyed high speed economic development, which, many believe, came
at the cost of high leverage in the financial system and
accumulation of financial risks. In the past two years, control of
financial risks and stabilization of the financial system has
become the top priority of PBOC. Before ICO, internet platforms
providing P2P loans and micro lending had been targeted by PBOC and
other financial regulators and are still in the process of
cleansing and rectification. It is no surprise that ICO, due to the
sheer increase both in numbers and in the amount of funds raised,
as well as some socially chaotic events caused by ICO, received the
death sentence from PBOC.

Nature of ICO in the Eyes of PBOC:

In the Notice, ICO was described as a process by which
fundraisers distribute digital tokens to investors who make
financial contributions in the form of cryptocurrencies such as
Bitcoin and Eethereum. The Notice further pointed out: “By
nature, it is an unauthorized and illegal public financing
activity, which involves financial crimes such as illegal
distribution of financial tokens, illegal issuance of securities
and illegal fundraising, financial fraud and pyramid

Among the crimes mentioned in the Notice, “illegal
fundraising”, which generally means raising funds without
government approval, is a crime that has been widely used in
cracking down on undesirable financial activities as the scope of
the crime can be interpreted very broadly.

Overseas ICO:

It should be noted that even ICO outside of China are not
completely safe if they attracted Chinese investors. According to
Article 6 of the PRC Criminal Law, if any of the criminal
activities or results of such activities occurred in China, the
crime is deemed to have occurred in the territory of China. If the
ICO involved financial crimes based on Chinese criminal law
standards, the promotors or organizers of those ICO may potentially
be subject to Chinese criminal liabilities if they are Chinese
citizens. Even if they are not Chinese citizens, if overseas ICO
attracted Chinese investors, they may still potentially be subject
to Chinese criminal liabilities.

Initial Miner Offerings (IMO):

After ICO was banned by the Chinese government in September
2017, a new business model quickly became popular, which was called
“Initial Miner Offerings” (IMOs). In contrast to ICO, the
organizers sell mining equipment to investors initially, and the
investors are awarded with tokens or points for their mining
activities using the equipment. On January 12, 2018, the National
Internet Finance Association of China (“NIFA”)[1] issued
the “Risk Alert concerning Prevention of Disguised ICO
Activities”, in which NIFA pointed out that an IMO involves
fundraising activities and is a disguised form of ICO. Following
the NIFA alert, the IMO market in China also went down.


China’s Policy:

The Notice also targeted cryptocurrency exchanges and ordered
that any so-called “fundraising and trading platforms”
shall not:

– Offer exchange services between fiat currency, tokens and
“virtual currencies”;

– Buy or sell tokens or “virtual currencies”, or buy
or sell “virtual currencies” as a central counterparties
(CCP); or

– Provide price determination or information intermediary
services for tokens or “virtual currencies”.

Adjustments of Market Players:

In the several months after the Notice, most of the
cryptocurrency exchanges closed down their platforms in China but
continued exchange business through platforms registered in foreign
jurisdictions such as Japan, Hong Kong, Korea or other
jurisdictions which seemed to be more favorable to the exchange
business than China.

They also made adjustments to their business models. To avoid
direct confrontation with Chinese monetary authorities, some
exchanges no longer provided exchange services between fiat
currency and cryptocurrencies. Some chose to introduce a new token
(such as USDT, QC, etc.) to their platforms which has value
equivalent to the value of fiat currency, as an intermediary
between fiat currency and cryptocurrency. Investors may use fiat
currency to buy this new token and then use this new token to buy

Further, many exchanges launched peer-to-peer trading platforms
that support direct transactions between investors without the
exchange acting as a CCP. On those platforms, one investor can buy
cryptocurrencies from another investor and pay the seller via bank
transfers, Alipay or Wechat pay[1].

Legality of Adjusted Business

Those modified business models are not entirely safe from the
Chinese criminal law perspective. Although major exchanges have
been relocated overseas, they may still be subject to Chinese
criminal liabilities due to the long-arm jurisdiction of the
Chinese criminal laws. If the founders or managers of an exchange
are Chinese nationals, or they make decisions in China to operate
the overseas exchange, or the investors are in China, if the
exchange performs prohibited functions, Chinese justice authorities
would still have jurisdiction over those persons.

Access to Overseas Exchanges:

To further prevent Chinese investors from purchasing and trading
cryptocurrencies on overseas exchanges, China has blocked internet
access to the websites of some overseas exchanges from China.
According to Chinese laws, no person should use the internet to
view information that violates Chinese laws and regulations. Those
who access overseas exchanges via virtual private networks
(VPN’s) may potentially face risks if the exchanges contain
prohibited information. In January 2017, the Ministry of Industry
and Information Technology ruled that only authorized VPN’s
could be used in China. The sale or provision of VPN services by
companies or individuals without telecom licenses issued by Chinese
telecom authorities became illegal.

3. Mining Activities

It was reported that on January 2, 2018, the Working Team
Leading Risk Control and Rectification concerning Internet Finance,
a special task force established under the State Council, issued
notices to local governments requesting them to take measures to
“guide” Bitcoin mining operators to exit from their
respective regions. Since then, major miners reportedly decreased
or ceased their operations in China, once the largest mining base
in the world, and moved to more favorable countries, similar to the
move of the cryptocurrency exchanges.

4. Legality of Holding and Trading

In view of China’s harsh attitude towards ICO,
cryptocurrency exchanges and mining activities, some may assume
that it would be illegal for Chinese to hold or trade Bitcoins or
other cryptocurrencies. This is not correct. No PRC law or
regulation prohibits Chinese investors from holding
cryptocurrencies or trading cryptocurrencies . This seems to be
consistent with an early notice jointly issued by five Chinese
government agencies led by PBOC back in 2013, which defined Bitcoin
as a special virtual commodity, but not a currency. That notice
also explicitly provides that Bitcoin does not have legal status as
a currency and should not be circulated and used in the market as a
currency. This should still be the position taken by PBOC as of

Article 127 of the General Rules of the Civil Law of China,
which took effect on October 1, 2017, provides that: “In case
laws have provisions on the protection of data and internet virtual
properties, such laws should be complied with.” Some Experts
believe that this means that one of the basic laws in China
recognizes the legal status of cryptocurrencies as virtual

5. Transfer of Payments Using Blockchain

Senior officials of PBOC have publicly encouraged the use of
blockchain technology to improve the convenience, promptness and
low cost of retail payments. In fact, PBOC established its own
Digital Currency Research Institute for the goal of issuing digital
money. It should be noted, however, that China’s digital money
would still be fully controlled by the central government, in
contrast to the nongovernmental nature of Bitcoin.

According to news reports, in December 2017, China Merchants
Bank, Wing Lung Bank of Hong Kong and Wing Lung Bank, Shenzhen
Branch have successfully completed cross-border transfers of
Renminbi[4] payments using blockchain technology. Many other banks
have reportedly made experiments and even progress on the use of
blockchain technology to improve their transaction systems.

6. The Future of Blockchain in China

Despite the ban on ICO and cryptocurrency exchanges, PBOC and
other government agencies have consistently showed great enthusiasm
towards the application of blockchain technology for the goal of
modernizing China’s financial systems and becoming a world
leader in this new innovative technology. In recent years, various
guidelines and papers issued by the government have endorsed
blockchain technology and even placed blockchain technology in the
same category of big data and artificial intelligence (AI). In the
past twelve months, many local governments sponsored the formation
of sizable investment funds to make investment in startups of
blockchain technology and applications.

However, the endorsement of blockchain technology is not without
reservation. In the view of PBOC, blockchain technology and digital
currency should be researched for the goal of better service to the
real economy. PBOC believes that blockchain technology can be
developed without the use of tokens, which are believed to have
been the roots of various social problems such as illegal
fundraising and fraud.


1. The current leaders of NIFA are former senior
officials of PBOC, and alerts issued by NIFA often predict the next
moves of PBOC.

2. Both of which are popular third party payment APPs in

3. Given that cryptocurrency exchanges were banned in
China, cryptocurrencies may only be traded in a peer-to-peer

4. Official currency of China.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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