What should we do if a blockchain project fails to repay investors after issuing coins?

Recently, a friend came to consult about a blockchain project he had participated in before. The project party issued tokens before September 4, 2017. At that time, he got a quota through a friend's introduction and invested about 300,000 US dollars (based on the price at the time). After 1994, the project party went overseas but did not liquidate the tokens. Now he comes to ask, can he get the investment money back?

Situations like this are quite common in the domestic cryptocurrency circle. After the September 4th announcement, the cryptocurrency issuance platforms either closed down or expanded overseas, and few of them continued to exist in the mainland. After consulting professionals, it was found that a batch of cryptocurrency issuance projects had indeed moved to unknown corners of the underground, and another part had not been cleared and ignored the various requests of users. Next, let's talk about the legal issues involved.

What is ICO?

ICO (Initial Coin Offering), or the first token issuance, originated from the concept of the initial public offering (IPO) in the stock market. Unlike IPO, ICO projects issue tokens instead of stocks, and are blockchain projects. To put it simply, the first issuance of tokens is like buying new stocks, using mainstream currencies (such as Bitcoin) to buy newly issued tokens, and then conduct investment transactions.

ICO has created many myths of getting rich quickly, so people in the currency circle are flocking to it. However, there are few high-quality projects after all, and it is very easy to provide convenience for various financial and cyber crimes. Therefore, in 2017, seven departments of the central bank jointly issued the "Announcement on Preventing the Risks of Token Issuance and Financing" (also known as the "September 4th Announcement"), which defined the nature of ICO, that is, an act of illegal public financing without approval, especially suspected of illegal sale of token tickets, illegal issuance of securities, illegal fundraising, financial fraud, pyramid schemes and other illegal and criminal activities. As a result, all parties related to domestic currency issuance have been affected, and none of them are spared.

What are the legal risks of unresolved projects?

The September 4th Announcement not only ordered all types of token issuance and financing activities to stop immediately, but also required organizations and individuals that had completed token issuance and financing to make arrangements for withdrawal. At one time, major project parties in Beijing, Shanghai and Shenzhen returned their tokens, and the completion rate quickly reached 90%. Those project parties that did not return their tokens would be subject to legal sanctions to varying degrees .

First, the 94th Announcement clearly stipulates that the relevant departments will seriously investigate and punish illegal and irregular acts in token issuance and financing activities that refuse to stop and completed token issuance and financing projects in accordance with the law. This makes all administrative supervision " legal ". The Shanghai Internet Financial Risk Special Rectification Leading Group Office has required relevant ICO issuance platforms to immediately stop related businesses and organize liquidation as soon as possible in accordance with the law and reasonably protect the rights and interests of users. It will focus on urging various trading platforms to ensure that investors can withdraw coins and cash smoothly. In principle, it requires relevant platform executives and other personnel to stay in Shanghai to assist in the liquidation work .

Secondly, according to existing laws, if the tokens are refused to be returned, it may be suspected of constituting a criminal offense . The project party that issued the token not only failed to clear and return the tokens in accordance with the regulations, but also engaged in various tricks, then it is very likely to be "in jail": the project party itself promised various income items to defraud users' investment, which may constitute the crime of illegally absorbing public deposits; the platform party ran away with the funds, misappropriated them privately, or took them for itself, which may constitute the crime of fundraising fraud or financial fraud; even if the trading platform (exchange) is transferred to the lower operation, quietly providing matchmaking transactions and on-site transactions for both parties, it may also constitute the crime of illegal business operations. Of course, the above is only a possibility, and the specific crime composition must be determined according to law, but if you are targeted, you have already lost, right?

What should users do if the project owner has not yet cleared the account?

The 94th announcement proposed project withdrawal. For those tokens with premium, investors obviously do not want to withdraw their coins, because if they withdraw at the issue price, the loss of taking over at a high price is unacceptable, and the loss will become a reality. Therefore, these investors insist on not withdrawing their coins and wait for an opportunity to switch to overseas trading platforms. Most investors often see a price drop after holding coins, and withdrawal becomes a good opportunity to get out of the predicament, but the project party is unwilling to withdraw.

For users, how can they recover their losses when facing a project party (company) with which they cannot communicate? According to the experience of attorney Mankiw and a large number of practical cases, there are two different paths for rights protection.

First, file a civil lawsuit in court . Investors (users) can file a civil lawsuit in court, often on the grounds of unjust enrichment and demanding a refund. However, according to the current judicial caliber, the court will generally determine that the contract is invalid and return the "property" involved in the case in accordance with the legal consequences of the invalidity of the contract. However, the court rarely orders a full refund , and all courts return a certain amount of virtual currency at their discretion based on the specific circumstances. However, some courts simply refuse to accept the case, which also adds a considerable obstacle to investors' rights protection.

Second, file a criminal complaint with the public security organ . This is also the method that attorney Mankiw recommends more. Investors can file a complaint with the public security organ on the charges mentioned above and provide relevant evidence to increase the success rate of the complaint. Generally, after the public security accepts the case, it will conduct a preliminary investigation. After contacting the project party, the project party may take the initiative to withdraw after feeling the pressure from the judicial organs; and if the conditions for filing a criminal case are met, the public security organ will file a case. At this time, the project party will be subject to a thorough investigation by the state power organ, and if necessary, the assets will be sold off to return to the investors at a discount, so that the investors can successfully recover their property. In short, criminal means are always the most direct and thorough way to protect rights.

Attorney Mankiw's Summary

Since the country has regulations, we should follow them. Project owners and exchanges should close their mainland China businesses. If they continue to operate, they can only go overseas. Failure to close or going underground is extremely criminal. Users should not invest in underground projects. If you encounter projects that have not been closed, you should take legal action to protect your rights. If you have any legal questions, please consult Attorney Mankiw.