On 15 September 2021, the People’s Bank of China (PBOC), together with nine other government departments, jointly issued the Notice on Further Preventing and Handling the Risk of Speculation in Virtual Currency Transactions.
In recent years, increasing speculation surrounding the trade of cryptocurrencies such as bitcoin has disrupted the economic and financial order, and bred illegal activities such as money laundering, illegal fundraising, fraud, and pyramid sales, which all seriously endanger people’s property safety.
According to the decisions and arrangements of the CPC Central Committee and the State Council, the PBOC, together with relevant departments, issued a series of policies and measures to deny the status of cryptocurrencies as a legal currency, prohibit financial institutions from carrying out and participating in cryptocurrency-related businesses, and clean up and ban domestic cryptocurrency transactions and token issuance financing platforms.
In order to establish a normalised working mechanism and maintain the high-pressure crackdown on the trade of cryptocurrencies, the PBOC and nine other government departments jointly issued the notice by summarising past regulatory experience and analysing emerging risks.
Clarifying the nature of cryptocurrencies and related businesses. The notice emphasises that:
- Cryptocurrencies do not have the same legal status as legal currencies. The main characteristics of cryptocurrencies such as bitcoin, ETH and USDT include: (1) not being issued by monetary authorities; (2) using encryption technology, distributed accounts or similar technologies; and (3) existing in digital form.Cryptocurrencies have no legitimate compensation nature and cannot be circulated in the market as currencies.
- All cryptocurrency-related businesses are illegal financing activities. Any entity involved in cryptocurrency-related businesses – such as those conducting exchanges between legal currencies and cryptocurrencies, exchanges among different cryptocurrencies, buying and selling cryptocurrencies as a central counterparty, matching and pricing services for cryptocurrency transactions, token issuance and financing, and cryptocurrencies derivatives transactions – shall be suspected of conducting illegal financial activities such as the illegal sale of token notes, unauthorised public issuance of securities, illegal operation of futures business and illegal fundraising. All the above-mentioned businesses shall be strictly prohibited and resolutely banned according to law. In case any illegal financial activities constitute a crime, criminal responsibility shall also be imposed.
For the first time, the notice clearly points out that it is also illegal for overseas cryptocurrency exchanges to provide services to Chinese domestic residents through the internet. Relevant responsibilities will be imposed, according to law, on the domestic staff of the relevant overseas cryptocurrency exchanges, as well as the legal entity, unincorporated organisation, and individual person, who know or should know that they are engaged in a cryptocurrency-related business, but still provide marketing publicity, payment and settlement, technical support and other services for such exchanges.
The notice also points out the legal risks associated with the investment trading of cryptocurrencies. For the first time, the notice stipulates that for any legal person, unincorporated organisation and individual person to invest in cryptocurrencies and related derivatives, if such investment violates public order and good customs, the relevant civil legal acts shall be invalid and losses incurred shall be borne by themselves. In case the investments are suspected of undermining financial order and endangering financial security, the relevant department shall investigate and take action according to law.
Clarifying the restrictions on cryptocurrency-related business activities. Following the rules and regulations promulgated in the past few years, the notice also stipulates the prohibition on financial institutions and non-bank payment institutions providing services for cryptocurrency-related business activities.
Financial institutions and non-bank payment institutions: (1) shall not provide services such as account opening, fund transfer, clearing and settlement for business activities related to cryptocurrencies; (2) shall not include cryptocurrencies in the scope of mortgages and pledges; (3) shall not carry out insurance business related to cryptocurrencies or include cryptocurrencies in the scope of insurance liability; and (4) shall report to relevant departments in a timely manner if they find clues of violations of laws and regulations.
As cryptocurrency-related business is conducted mainly online, the notice strengthens the management of internet information content and access related to cryptocurrencies. Internet enterprises shall not provide services such as online business premises, business display, marketing publicity and paid diversion for business activities related to cryptocurrencies.
If they detect any violations of laws and regulations, they shall report to relevant departments in a timely manner, and provide technical support and assistance for the relevant investigation. According to the clues transferred by the financial management department, the competent department of network information and telecommunications shall promptly shut down internet applications, websites, mobile applications and applets that carry out cryptocurrency-related business activities.
The notice also sticks to the principle of cracking down on illegal financial activities related to cryptocurrencies and cracking down on criminal activities related to cryptocurrencies, and also emphasises the requirement to strengthen industrial self-discipline.
Building up a working mechanism to handle the risks associated with speculative trading of cryptocurrencies. The notice stipulates joint operations between different departments as well as the localisation of risk control work.
Strengthening risk monitors and alerts regarding speculative trading of cryptocurrencies. The notice strengthens the overall risk monitoring and risk alert requirements for speculative trading of cryptocurrencies and stipulates the build-up of the mechanism of information sharing and rapid reactions.
The notice not only provides clarity regarding the manner in which cryptocurrency trading within or from China will be addressed moving forward, but also impacts offshore providers of services to China-based customers. Offshore exchanges or companies with trading team members based in China who engage in offshore trading of cryptocurrencies should consider the following steps:
- Ensure that they understand the terms of the notice and its potential implications;
- Consider whether and how existing activities may need to be restructured, including facilitating the off-boarding of any mainland clients, or shifting trading activities to alternative jurisdictions;
- Determine whether existing systems can identify customers using a VPN to mask their actual location and, if not, what adjustments may need to be implemented; and
- Update internal policies and procedures to ensure compliance with the terms of the notice.
Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Howard Wu (Shanghai) at firstname.lastname@example.org