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China Further Clamps Down on Virtual Currency Platforms

2019.11.27 XIE, Qing (Natasha)、Fang, Hao

On November 14, 2019 the People’s Bank of China Shanghai Head Office (PBOC Shanghai) and the Shanghai Joint Committee of Financial Stability (SJCFS) jointly issued the Circular on Investigating and Clamping Down on Trading Platforms for Virtual Currencies (“Circular”) to further tidy up virtual currency trading venues in Shanghai.

The Circular points out that recently there has been a resurgence of virtual currency speculation under the guise of block chain promotion. In this context, local authorities shall investigate three types of virtual currency related activities, namely, (i) organizing virtual currency trading activities within the territory of PRC; (ii) on the pretext of block chain applications, issuing digital currencies or virtual currencies such as Bitcoin or Ethereum to raise funds from investors; or (iii) facilitating the promotion, solicitation or brokerage for overseas-registered initial coin offering (ICO) projects or virtual currency trading platforms.

The Circular urged local authorities to complete the investigations before November 22, 2019. Upon discovering any enterprise engaging in the abovementioned virtual currency related activities, local authorities shall promptly report the activities to both the PBOC Shanghai and the SJCFS and shall alert the enterprise to cease its relevant activities, nipping virtual currency speculation in the bud.

Our Observations

Prior to the issuance of the Circular, in 2017, seven regulators including the PBOC jointly issued the Announcement on Preventing Risks of Fundraising through Coin Offerings (“Announcement”). Pursuant to the Announcement, raising virtual currencies from investors in the PRC through coin offerings (including ICO) is classified as an unauthorized and illegal public fundraising. Further, this fundraising is alleged to be an illegal financial activity and thus shall be curtailed. The Announcement also provides that no entity or individual shall engage in illegal fundraising through coin offerings. Moreover, financial institutions or non-bank payment agencies shall not conduct any business related to fundraising through coin offerings, such as opening accounts or providing services on registration and trading.

The Circular reiterates the regulatory determination to rein in virtual currency related activities. Further to the Announcement, the Circular addresses activities of promotion, solicitation or brokerage for overseas-registered initial coin offering (ICO) projects or virtual currency trading platforms into the scope of regulation. Accordingly, offering services relating to ICO projects or virtual currency trading platforms registered overseas is explicitly determined to be an illegal activity that shall be prohibited. In addition, the Circular specifies that issuance of virtual currencies or fundraising activities under the guise of block chain promotion are within the scope of the activities targeted for clamp-down, which embodies the regulatory principle of “substance over form”.

We will continue to monitor the situation and keep our clients apprised of any important developments.

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