The state of digital assets regulation in China
Digital assets regulations are not the same all around the world. In China, digital assets are not legal tender. The exchanging of digital assets is illegal.
In 2013, the People’s Bank of China (PBOC) banned financial institutions from handling Bitcoin transactions. In 2017, they further banned initial coin offerings (ICO) and domestic digital asset exchanges. In an attempt to crack down on ICOs, the PBOC ordered exchange platforms that traded digital assets (or provided facilitation services) to shut down.
The reasoning behind these actions is that the PBOC described ICOs financing as public financing without approval, which is illegal in Chinese law.
More about the ICOs ban
In September 2017, government agencies came together and issued the notice regarding the prevention of risks of token offerings and financing. This notice banned all ICOs in China and ordered any organisations and individuals who had previously completed an ICO to make arrangements such as returning token assets to investors to protect investor’s rights.
In an attempt to avoid the ban many exchanges chose to relocate to jurisdictions that are more favourable to digital assets. For example, in places like Japan, Hong Kong and Korea, governments aren’t so strict about digital assets. However, if exchangers are Chinese citizens or Chinese investors they’re not free from the jurisdiction of the Chinese criminal laws.
PBOC’s reasoning for the ban
We need to take a closer look at the bigger picture of China’s economy and financial market to understand their strict digital assets regulations. Over the past 20 years or so, China has endured high-speed economic development. It could be said that this came at the cost of high leverage in the financial system and the accumulation of financial risks.
Hence why in recent years, the PBOC has been focusing and prioritising the control of financial risk and stabilisation of the financial system.
Before focusing on ICOs, PBOC targeted internet platforms that provided peer-to-peer loans and micro-lending. They’re still in the process of cleansing and rectifying these platforms. ICOs numbers increased and funds were growing, this caught the attention of the PBOC thus the beginning of the ban with the notice.
The notice described ICOs as a process of fundraisers distributing digital tokens to investors in return for financial contributions (in the form of digital assets such as Bitcoin and Ethereum). Therefore, it was also pointed out that: “By nature, it is an unauthorised 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.”
The notice also targeted digital asset exchanges, now they have set rules which fundraising and trading platforms must adhere to.
They must not:
- Offer exchange services between virtual currencies, tokens and fiat currency.
- Provide or promote information intermediary services for digital assets.
- Buy or sell digital assets, this includes central counterparties (CCP)
Overseas ICOs
The ICO ban in China means that these businesses have to adjust their business models to avoid confrontation with China. Some stopped providing exchange services between fiat currency and digital assets. Others came up with a new token — such as USDT, QC — which has equal value to the fiat currency, investors could use fiat currency to purchase these new tokens to then use the token to buy digital assets.
ICOs outside of China are not 100% safe if they attract Chinese investors. According to Article 6 of the PRC Criminal Law; if any criminal activities or the result of such activities occurred in China the crime is deemed to have occurred in the territory of China. This means the organiser or anyone involved in the ICO may be subject to Chinese criminal liabilities.
Initial Miner Offerings (IMO)
After the banning of ICOs in 2017, up came the new kid on the block: Initial Miner Offerings (IMOs). This is the process of organisers selling mining equipment to investors, who were then rewarded with points and tokens for using the mining equipment.
In January 2018, the National Internet Finance Association of China (NIFA) got involved with the situation, calling it out as involving fundraising activities and is a disguised form of ICOs. A notice was given “Risk Alert concerning Prevention of Disguised ICOs Activities”. Needless to say, the IMO market also went down in China.
What is the current state of digital asset regulations in China?
The government state-approved digital assets had the status of property for determining inheritance under the 2020 amendment to China’s civil code. Despite the blanket ban of domestic digital assets exchanges, there are other ways around the ban, it is possible through the use of foreign platforms that aren’t regulated by China.
In 2019, a ban on digital asset mining had been considered by the government and reconfirmed it would remain legal but would be increasingly subject to global geopolitical sanctions and export control implications.
It is not illegal to hold Bitcoin and other digital currencies and you can buy and sell them in China. In fact, the Chinese government encourages the application and development of blockchain technology. They’ve made it very clear that blockchain technology must serve the real economy.
What can we expect?
A recent development suggests the Chinese government intends to position the country as a leader in the digital asset space. Although, there is no indication that China will loosen or lift its current ban on digital assets. The developments include statements by the Chinese government officials endorsing:
- Continued status of digital asset mining
- Blockchain technology
- A joint venture with SWIFT (the international payment and cross-border payment gateway.)
- Extensive trialling and testing of the central bank’s digital currency (the digital yuan)
There has been no mention of a timeline. However, China’s central bank has been working on introducing an official digital currency since 2012.
The Chinese government has expressed support for the implementation of a global regulatory framework for digital assets.
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