Lawyer: Seven solutions to the regulation of virtual currency assets in my country

This article sorts out the existing laws, regulations, policies and other provisions in our country, and attempts to clarify the legal nature of virtual currency in our country and under what circumstances citizens will not violate laws and regulations.

Text | Zhao Zhidong

As the virtual currency with the largest market value, such as Bitcoin, has been cut off from the transaction fund payment chain by banks in China, virtual currency exchanges have been shut down after September 24, 2021, and domestic users' accounts have been cancelled before December 31, 2021, many people believe that as long as there is virtual currency, it is illegal in my country and is not protected by law.

In fact, the above view is biased. For this reason, this article sorts out the existing laws, regulations and policies in my country, trying to clarify the legal nature of virtual currency in my country and under what circumstances citizens will not violate laws and regulations.

1. Is virtual currency valuable?

Monetary policy is one of the main economic policies of almost all countries in the world. The most basic condition for the application of monetary policy is that the central bank monopolizes the right to issue currency and regulates interest rates, exchange rates, prices, employment and economic growth, etc. Even with the advancement of technology, a single paper currency has developed into multiple forms such as electronic currency, but behind it is still the national credit endorsement, which is the most fundamental basis.

In the foreseeable future, sovereign states will not give up monetary policy. Therefore, private creation and issuance of virtual currency is not a real currency, does not have national credit support, and will have a serious negative impact on current monetary sovereignty, financial stability, monetary policy, and financial supervision.

This is the current situation with virtual currencies such as Bitcoin and Ethereum. Over the past 10 years, many sovereign countries have announced that they do not recognize them and have even introduced strict policy restrictions. They are mostly hyped up among the people and their prices are constantly pushed up.

2. Legal attributes of virtual currency in my country

According to Article 127 of the Civil Code of the People's Republic of my country, if the law has provisions on the protection of data and network virtual property, such provisions shall be followed. At the same time, according to Article 58 of the Notice of the Supreme People's Court on Issuing the Decision on Amending the Provisions on Causes of Civil Cases (Fa [2020] No. 346), under the third-level cause of action "346. Disputes over network infringement liability": "(1) Disputes over network infringement of virtual property" shall be added.

In December 2013, the central bank and five other ministries issued the "Notice on Preventing Bitcoin Risks". In the definition of Bitcoin's attributes, it is mentioned that "in terms of nature, Bitcoin should be a specific virtual commodity that does not have the same legal status as currency and cannot and should not be circulated and used as currency in the market."

We can see that Bitcoin and other assets can be regarded as virtual property in our country. Unless there are special regulations that explicitly state otherwise, they are protected by law.

3. Liquidity of Virtual Currency

At present, there are no laws and administrative regulations in my country that stipulate that virtual currencies, including Bitcoin, are prohibited from circulation and cannot be traded. Article 153 of the Civil Code stipulates that civil acts that violate the mandatory provisions of laws and administrative regulations are invalid. However, this does not apply if the mandatory provisions do not result in the invalidity of the civil act. Civil acts that violate public order and good morals are invalid.

At present, there are no laws or administrative regulations in my country that prohibit Bitcoin trading activities.

The "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Transaction Speculation" (Yinfa [2021] No. 237) issued by the People's Bank of China and ten other departments on September 15, 2021 does not prohibit all trading activities involving virtual currency, but prohibits virtual currency-related business activities that are illegal financial activities.

The second paragraph of Article 1 of the Notice clearly stipulates: "Virtual currency-related business activities such as the exchange of legal currency and virtual currency, the exchange of virtual currencies, the purchase and sale of virtual currency as a central counterparty, the provision of information intermediary and pricing services for virtual currency transactions, token issuance financing, and virtual currency derivatives transactions are suspected of illegal issuance of token tickets, unauthorized public issuance of securities, illegal operation of futures business, illegal fundraising and other illegal financial activities, which are strictly prohibited and resolutely banned in accordance with the law. Those who engage in related illegal financial activities that constitute a crime shall be held criminally liable in accordance with the law."

On September 4, 2017, the "Notice of the People's Bank of China, the Central Cyberspace Affairs Commission, 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 on Preventing Risks in Token Issuance and Financing" also prohibits illegal token issuance and financing activities. According to the definition in Article 1 of the Notice, token issuance and financing refers to the financing subject raising so-called "virtual currencies" such as Bitcoin and Ethereum from investors through the illegal sale and circulation of tokens. It is essentially an act of illegal public financing without approval, and is suspected of illegal sale of token tickets, illegal issuance of securities, illegal fundraising, financial fraud, pyramid schemes and other illegal and criminal activities. "

4. Prohibition of speculation in virtual currencies

What we should note is that the circulation and speculation of virtual currency has always been prohibited in our country.

On June 21, 2021, in order to combat speculation in virtual currency transactions such as Bitcoin and protect the property safety of the people, the People's Bank of China interviewed some banks and payment institutions such as Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank, Postal Savings Bank of China, Industrial Bank and Alipay (China) Network Technology Co., Ltd. regarding the issue of banks and payment institutions providing services for virtual currency trading speculation. All banks and payment institutions are required to strictly implement the "Notice on Preventing Bitcoin Risks" and "Announcement on Preventing Token Issuance and Financing Risks" and other regulatory provisions, earnestly fulfill their customer identity identification obligations, and shall not provide account opening, registration, trading, clearing, settlement and other products or services for related activities.

All institutions should comprehensively investigate and identify the financial accounts of virtual currency exchanges and over-the-counter dealers, and promptly cut off the payment links of transaction funds; they should analyze the financial transaction characteristics of virtual currency trading speculation activities, increase technological investment, improve abnormal transaction monitoring models, and effectively improve monitoring and identification capabilities; they should improve internal working mechanisms, clarify division of labor, strengthen responsibilities, and ensure that relevant monitoring and disposal measures are implemented in place.

At present, after implementation, banks and financial institutions have actually cut off the funding payment link for virtual currency trading speculation activities.

5. Property Rights Attributes of Virtual Currency

According to the "Notice on Preventing Bitcoin Risks" and the "Announcement on Preventing Token Issuance and Financing Risks", these are work requirements for financial institutions, but they are not prohibitive regulations on the property rights attributes of virtual currencies.

Therefore, it cannot be said that the prohibition of virtual currency speculation does not mean that holding virtual currency and trading virtual currency in my country is illegal. For example, Bitcoin, as a property right attribute, can be freely transferred and exchanged for equivalent value as a value attribute. The infringement of virtual currency as a property right attribute and the violation of contractual agreements, which cause legal disputes, are protected by law.

VI. Illegality of Virtual Currency

According to the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" issued by ten departments, the following behaviors involving virtual currencies are illegal or behaviors subject to management by the management department:

1. It is clarified that overseas virtual currency exchanges providing services to residents in my country through the Internet are illegal financial activities, and financial institutions and non-bank payment institutions are not allowed to provide services for virtual currency-related business activities.

2. It is also clear that virtual currency does not have the same legal status as legal currency, and virtual currency-related business activities are illegal financial activities. Here we note that the specific behavior of "related business activities" should refer to activities with the same legal status as "legal currency", such as purchasing products and other financial activities are illegal activities. However, the author believes that the owner of virtual currency, as a subject of property rights, has all the attributes of property rights, and if infringed by other parties, it should be protected by law.

3. Domestic staff of relevant overseas virtual currency exchanges, as well as legal persons, non-legal organizations and natural persons who knowingly or should have known that they were engaged in virtual currency-related businesses and still provided them with marketing, payment settlement, technical support and other services, shall be held accountable in accordance with the law. Since many virtual currency exchanges are set up overseas, but provide services to domestic virtual currency traders to enable normal trading of virtual currencies, any act of providing auxiliary services to virtual currency exchanges is illegal.

4. Internet companies are not allowed to provide online business premises, commercial displays, marketing promotions, paid traffic diversion and other services for virtual currency-related business activities.

5. Market regulatory authorities should also strengthen the registration and advertising management of market entities related to virtual currency. The registered names and business scopes of enterprises and individual industrial and commercial households shall not contain words or content such as "virtual currency", "virtual assets", "cryptocurrency", and "encrypted assets".

6. State organs shall focus on cracking down on illegal operations, financial fraud and other criminal activities in virtual currency-related business activities, money laundering, gambling and other criminal activities carried out using virtual currency, and illegal fundraising, pyramid schemes and other criminal activities using virtual currency as a gimmick.

VII. Regulation of virtual currencies in Hong Kong

On November 6, 2019, the Hong Kong Securities and Futures Commission announced a new framework for virtual currency asset trading, including "Warning on Virtual Asset Futures Contracts" and "Position Paper: Regulating Virtual Asset Trading Platforms", warning investors of the risks of purchasing virtual asset (such as Bitcoin) futures contracts in Hong Kong.

The Hong Kong Securities and Futures Commission has warned that although virtual asset futures contracts have different terms and characteristics, most of these futures contracts are unregulated and highly leveraged, so they are considered to be extremely risky. Operating a virtual asset trading platform may be illegal.

In the "Position Paper: Regulating Virtual Asset Trading Platforms", the Hong Kong Securities and Futures Commission stated that the SFC has no right to issue licenses or enforce regulation on platforms that trade non-securities virtual assets. Under the existing regulatory framework, only platforms that provide securities-type virtual assets or token trading services to customers fall within the scope of regulation of the SFC. Currently, there are dozens of virtual asset trading platforms in Hong Kong, none of which are regulated by the Hong Kong Securities and Futures Commission. Therefore, investors are reminded to pay attention to investment risks.

(The author is Zhao Zhidong, a partner lawyer at DeHeng Law Firm in Shanghai)