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China’s Further Clampdown on Virtual Currency Business Activities​

2021.10.09 XIE, Qing (Natasha)、LUO, Danchen

On September 24, 2021, the People’s Bank of China (PBOC), jointly with the Supreme People’s Court, the Supreme People’s Procuratorate and other seven regulatory departments, officially released the Circular on Further Preventing and Handling the Risks Concerning Speculation in Virtual Currency Trading (Yin Fa [2021] No. 237) (the “Circular”), which immediately garnered the attention of the market. The attention focused mainly on China’s regulatory trends and law enforcement of virtual currency business activities, as well as the extraterritorial applicability of relevant PRC laws in the context of major cryptocurrencies exchanges operating outside China but still targeting Chinese domestic residents. In this briefing, we offer market participants a closer look at some of the key points of the Circular and their implications.


1. Cryptocurrency-Related Businesses Constitute Illegal Financial Activities


The most noteworthy point is that the Circular deems cryptocurrency-related businesses to be “illegal financial activities” under the Regulation on the Prevention and Handling of Illegal Fund-Raising Activities (the “Regulation”), which was issued by the State Council and effective on May 1, 2021. Pursuant to the Regulation, apart from the “illegal financial activities” explicitly defined in the Regulation, other illegal financial activities shall be determined by the financial regulatory department of the State Council, and if there are no explicit laws and regulations governing the prevention and handling of such “other illegal financial activities”, relevant provisions of the Regulation shall apply thereto. This is the first time that a certain “other illegal financial activity” is determined by the PBOC and other financial regulatory authorities in such a normative document since the implementation of the Regulation.


The Circular is silent on the definition and scope of “cryptocurrency-related businesses”, but explicitly sets out five types of cryptocurrency-related activity, namely, conducting exchanges between legal currencies and virtual currencies, or among different virtual currencies; buying and selling virtual currencies as a central counterparty; providing intermediary services or pricing services for virtual currency trading; token issuance for financing; and virtual currency derivatives trading, all of which shall be strictly banned and clamped down for being suspected of constituting a typical illegal financial activity, such as illegal sale of tokens, unauthorized public offering of securities, illegal futures business operations, or illegal fund-raising activities.


We understand that the “cryptocurrency-related businesses” listed in the Circular is not exhaustive. Certain cryptocurrency-related business activity cannot be determined to be a typical illegal financial activity explicitly defined under the relevant laws and regulations. The financial regulatory authorities still have the discretion to determine the scope of “cryptocurrency-related businesses”, thereby deeming it illegal. In this regard, for example, the Chinese financial regulatory authorities may deem providing IT support for trading cryptocurrencies within China a “cryptocurrency-related business” pursuant to this provision.


Furthermore, we tend to believe that in the presentation of “cryptocurrency-related businesses”, the Circular actually targets activities taking place within the territory of China, as well as overseas activities that have nexuses in China (excluding Hong Kong, Macau, and Taiwan in the context of jurisdiction), instead of those activities completely taking place outside China and have no nexuses in China.


2. Overseas Cryptocurrencies Exchanges Offering Services to Chinese Domestic Residents via the Internet Constitutes Illegal Financial Activities


Crucially, the Circular provides that overseas cryptocurrencies exchanges using the internet to offer services to Chinese domestic residents shall be considered illegal financial activity too. Superficially, this provision grants certain extraterritorial applicability, but delving a little deeper, we can see this provision mainly targets (1) domestic staff at relevant overseas cryptocurrencies exchanges and (2) any legal person, unincorporated organization and natural person who provides services such as marketing and promotion, payment and clearing, IT support to overseas cryptocurrencies exchanges even if they know or should have known that the overseas exchanges engage in cryptocurrency-related business. Taken literally, in exercise of extraterritorial jurisdiction and law enforcement, the Chinese regulatory authorities mainly aim at banning overseas cryptocurrencies exchanges to solicit, promote or provide services to Chinese domestic residents.


3. Investing in Cryptocurrencies and Their Derivatives in Violation of Public Order and Good Customs Shall Render Relevant Civil Legal Acts Invalid


It is worth noting that the Circular does not prohibit domestic legal persons, unincorporated organizations, and natural persons from investing in a cryptocurrency and its derivatives. However, if such investments violate public order and good customs, the relevant civil legal acts shall be rendered invalid. Furthermore, in the event that such investments are suspected of disturbing the financial order or endangering the financial security, these domestic legal persons, unincorporated organizations, and natural persons may still be subject to liabilities.


4. Financial Institutions Are Obligated to Report Clues of Suspected Violations to the Relevant Regulatory Authorities


Pursuant to the Circular, financial institutions and non-bank payment institutions shall not provide services for cryptocurrency-related businesses, nor accept cryptocurrencies as pledges or mortgages, conduct insurance business related to cryptocurrencies or offer insurance liabilities coverage for cryptocurrency-related matters, and shall report to the relevant regulatory authorities in a timely manner if they find clues of any violation of laws and regulations.


Our Observations


Early in 2017, Chinese regulator began to take action to ban the issuance of cryptocurrencies for financing. Based on this past experience and the considerations of financial risks currently facing China, “cryptocurrency-related businesses” are for the first time defined as illegal financial activities by the Circular, vowing unprecedentedly harsh crackdown on practitioners’ domestic cryptocurrency-related activities, imposing all-around restraints on cross-border solicitation and marketing activities by overseas cryptocurrencies exchanges, and rooting out domestic entities or persons’ providing ancillary services for cryptocurrency trading.


From a legal perspective, the Circular has provided the legal basis for the law enforcement of clamping down on cryptocurrency-related businesses by determining cryptocurrency-related businesses as prohibited “other illegal financial activities”, the declaration that Chinese financial regulatory authorities have the discretion to determine certain types of “other illegal financial activities” by issuing normative documents from time to time. 


The Circular embodies China’s priorities in financial regulatory and law enforcement practices by citing the purposes of maintaining the stability of financial order, curbing over-speculation, and safeguard ordinary investors’ interests, while also highlighting the differences between China and other markets in terms of the prevention and handling of financial risks. The Chinese financial regulatory authorities hope to retain a significant degree of discretion to determine “other illegal financial activities” to better respond to a rapidly changing financial world.


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

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