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Article China: Regulators Ban Companies from Raising Money Through Virtual Currencies

(Oct. 19, 2017) On September 4, 2017, seven government administrations in China – the People’s Bank of China, the Office of the Central Leading Group for Cyberspace Affairs, the Ministry of Industry and Information Technology, the State Administration for Industry and Commerce, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission – jointly issued the Announcement on Preventing Financial Risks from Initial Coin Offerings (the Announcement.) (Zhongguo Renmin Yinhang, Zhongyang Wangxinban, Gongye he Xinxihua Bu, Gongshang Zongju, Yinjian Hui, Zhengjian Hui, Baojian Hui Guanyu Fangfan Daibi Faxing Rongzi Fengxian de Gonggao (Sept. 4, 2017), People’s Bank of China website.)

The Announcement provides that initial coin offerings (ICOs) are an unauthorized illegal fundraising activity and will be banned by the authorities. (Id. Item I.)

Definition of ICO Financing Activities

According to the Announcement, “ICO financing” is defined as the financing subjects’ raising of Bitcoin, Ethereum, and other “virtual currencies” from investors through the illegal sale and circulation of tokens, activities that by their nature are  unauthorized public financing tools. ICO financing activities are suspected by the authorities of involving the illegal sale of tokens, illegal issuance of securities, illegal fundraising, financial fraud, pyramid sales, and other illegal and criminal activities. (Id.)

The Announcement points out that tokens and other virtual currencies involved in ICO financing are not issued by monetary authorities, are not legal tender, and are not mandatorily accepted. Therefore, they do not have equal legal status with fiat currencies, and should not be circulated or used in the market as currencies. (Id.)

Provisions on Organizations and Individuals

From the date of issuance of the Announcement, all kinds of ICO financing activities will immediately be halted. The organizations and individuals that have completed ICO financing will withdraw from ICO financing activities and make relevant arrangements to return funds, with the purpose of protecting the interests of investors and properly dealing with risks. ICO financing projects that fail to cease operation and illegal activities found to have occurred in connection with completed ICO financing projects will be subject to investigation and punishment.  (Id. Item II.)

Trading Platforms

The Announcement indicated that all ICO financing trading platforms are prohibited from engaging in the following businesses:

  • providing exchange services between fiat currencies and virtual currencies;
  • purchasing or selling tokens and virtual currencies themselves or as central counterparts; or
  • providing pricing, information intermediary, or other services for tokens and virtual currencies. (Id. Item III.)

For any ICO financing trading platform that has violated the abovementioned provision, the administrative department will close its website platform and mobile APP, remove its mobile APP from APP stores, and revoke its business license in accordance with the law. (Id.)

Financial Institutions and Non-Bank Payment Institutions

According to the Announcement, financial institutions and non-bank payment agencies are prohibited from carrying out the following related businesses:

  • directly or indirectly providing products or services involving tokens and virtual currencies, such as account opening, registration, trading, liquidation, and settlement; or
  • underwriting any insurance business relating to tokens and virtual currencies, or including tokens and virtual currencies in any insurance coverage. (Id. Item IV.)

Investor Awareness and Self-Discipline of Industry Organizations

The Announcement also emphasizes the importance of enhancing public awareness of the financial and legal risks involved in ICO financing activities and of maximizing the  role of industry organizations in disciplining themselves and educating the general public. It states that investors must assume investment risks by themselves and should be on high alert for all kinds of illegal financial activities involving tokens and other virtual currencies. (Id. Item V.) Financial industry associations, on the other hand, must effectively interpret policies, urge members to voluntarily resist illegal ICO financing activities, and strengthen investor education. (Id. Item VI.)

Prepared by Yichao Zhang, Law Library intern, under the supervision of Laney Zhang, Senior Foreign Law Specialist.

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