Issue date:24 Jul 2018 Author:Shen Wenhao
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 rights.
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 scheme.”
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.      
2. Exchanges
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 cryptocurrency.
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 Models:
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 Cryptocurrencies
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 today.  
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 property. 
5. Transfer of Payments Using Blockchain Technology
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 China. 
[3] Given that cryptocurrency exchanges were banned in China, cryptocurrencies may only be traded in a peer-to-peer manner.
[4] Official currency of China.


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