Lawyer’s interpretation: Is it illegal for individuals to invest in cryptocurrency after the notice from the central bank and ten other departments?

Wu Shuo Author | Guangdong Guangqiang Law Firm Lawyer Li Zemin Lawyer Han Wubin Lawyer

This article is exclusively authorized to be published and edited by Wu Shuo

The "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" (hereinafter referred to as the "Notice") issued by ten departments contains a major clause that clarifies that the essential nature of virtual currency-related business activities is illegal financial activities.

Due to the nature of its illegal financial activities, any legal person, non-legal person organization or natural person who engages in business activities related to virtual currency will be labeled as "illegal" and strictly prohibited. This is also the origin of what the industry calls the "ban" on virtual currency.

Under this general background, many people will have questions. Since business activities related to virtual currency will be banned, can virtual currency be used as a financial product for individuals to invest in? Is it illegal for individuals to invest in virtual currency? If an individual suffers a loss from investment, can he get it back?

At present, there are many articles interpreting the "Notice", but most of them emphasize the strong regulatory attributes of virtual currencies, emphasize the illegality of virtual currencies, and inform the public that virtual currency transactions are illegal or even criminal. But under the attitude of strong regulation, can individuals really not invest in virtual currencies? Is personal investment illegal?

1. Preventing speculation in virtual currency transactions and “prohibiting investment in virtual currency”

Whether an individual can invest in virtual currency depends on the purpose of the state's issuance of the "Notice". The title of the "Notice" indicates that the entire "Notice" is issued to prevent and deal with the risk of speculation in virtual currency transactions, and its focus is on "speculation risk".

The beginning of the Notice also further explains that "recently, speculation in virtual currency transactions has increased, disrupting the economic and financial order, breeding illegal and criminal activities such as gambling, illegal fundraising, fraud, pyramid schemes, and money laundering, and seriously endangering the property safety of the people."

After careful analysis, it can be seen that what virtual currency needs to guard against is trading speculation and preventing virtual currency from being used as a tool for illegal and criminal activities.

Therefore, all services related to the issuance, trading, exchange, and various auxiliary information intermediary and pricing services of virtual currencies, as well as marketing, payment settlement, technical support and other services provided to overseas virtual currency exchanges are included in the prohibited scope. The reason is that these services or business activities will inevitably become a "breeding ground" for illegal activities such as gambling, illegal fundraising, fraud, pyramid schemes, money laundering, etc., and thus disrupt the economic and financial order.

From this, we can see that the above-mentioned business activities related to virtual currency will inevitably give rise to the "speculation risk" of virtual currency.

Therefore, as long as it does not cause "speculation risk" and does not use virtual currency for gambling, illegal fundraising, fraud, pyramid schemes, money laundering and other illegal activities, it will not become the target of prevention in the "Notice".

2. Virtual currency-related business activities are illegal financial activities and "illegal personal investment"

Many people believe that since virtual currency-related business activities are all illegal financial activities, then personal investment, including personal participation in spot trading, leveraged trading, and contract trading, is also illegal financial activity. This is a misunderstanding.

As mentioned above, the Notice prohibits engaging in business activities related to virtual currencies in order to prevent and deal with the risks of virtual currency trading speculation and prevent virtual currencies from becoming a tool for illegal activities such as gambling, illegal fundraising, fraud, pyramid schemes, and money laundering. In layman's terms, it prohibits anyone from providing any services related to virtual currencies to the public.

The "Notice" actually clarifies that the existing entities that provide virtual currency-related services to the public are engaging in illegal financial activities and must stop all activities in a timely manner. At the same time, it also informs any entity that they may not provide any virtual currency-related services to the public.

As Zeng Jie, a lawyer at Guangdong Guangqiang Law Firm, said, "The subjects and behavior patterns targeted by Article 2 of the Notice are professional work or commercial behavior of individuals or institutions for profit, rather than occasional trading activities or amateur, unplanned, low-frequency individual investors."

In fact, Article 16 of the "Notice" also explains the illegality of virtual currency-related business activities, rather than the illegality of personal investment.

“Strengthen policy interpretation and publicity and education. All departments, regions and industry associations should make full use of various media and other communication channels to publicize the illegality, harmfulness and manifestations of virtual currency speculation and other related business activities to the public through legal policy interpretation, typical case analysis, investment risk education, etc., and enhance the public's awareness of risk prevention.”

3. There are legal risks in participating in virtual currency transactions and "prohibition of investment in virtual currency"

The fourth paragraph of the Notice stipulates that "there are legal risks in participating in virtual currency investment and trading activities. If any legal person, non-legal person organization or natural person invests in virtual currency and related derivatives and violates public order and good morals, the relevant civil legal acts will be invalid and the losses caused by them will be borne by themselves; if they are suspected of disrupting financial order and endangering financial security, they will be investigated and dealt with by relevant departments in accordance with the law."

Many people believe that personal investment in virtual currency will not be allowed. In fact, this is a misunderstanding of investment in virtual currency. This regulation is only to fulfill the obligation of notification and is intended to remind the public that disputes arising from participating in virtual currency transactions are not recognized by law.

For example, if an individual incurs losses in the virtual currency staking, mining machine leasing, or derivatives trading provided by certain entities, or if the other party engages in illegal activities, the civil legal relationship between the individual and the other party may violate public order and good morals, resulting in the investment and financial management behaviors between the two parties being unprotected by law. Ultimately, the individual will bear the losses suffered and will not be able to recover them through legal means.

In fact, the spirit of the fourth part of the Notice is still consistent with the spirit of the 94th Announcement, that is, individuals who participate in virtual currency transactions shall bear the risks caused by them. However, unlike the 94th Announcement, the types of virtual currency transactions that individuals participate in are not recognized by the law and have been expanded to derivative transactions. Therefore, when individuals invest in virtual currencies, they should strengthen their risk control obligations.

4 Others

At the same time, although the "Notice" stipulates that overseas virtual currency exchanges providing services to residents in my country through the Internet are also illegal financial activities, this regulation is aimed at entities that set up exchanges and provide virtual currency services, not at individual investments.

In fact, my country’s current attitude towards virtual currency is consistent with its attitude towards foreign exchange margin trading and offshore futures trading, that is, China does not allow relevant entities to organize foreign exchange margin trading and offshore futures trading activities, nor does it allow relevant domestic entities to provide corresponding services to overseas entities. However, individuals are not prohibited from participating in trading activities organized by overseas entities.

In summary, although the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" issued by ten departments is a heavy blow to the currency circle, it does not mean that individuals are prohibited from investing in virtual currency or participating in virtual currency transactions.

The purpose of the "Notice" is to prevent virtual currency speculation and prevent virtual currency from being used as a tool for illegal activities by clarifying that virtual currency-related mandatory activities are illegal financial activities and prohibiting relevant entities from engaging in virtual currency-related business activities.

According to the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" issued by the central bank and other departments, the content of this article is only for information sharing and does not promote or endorse any business or investment behavior. Readers are requested to strictly abide by the laws and regulations of their region and not participate in any illegal financial behavior. Wu said that the content is prohibited from being reproduced or copied without permission, and violators will be held accountable.

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Risk Warning

According to the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" issued by the central bank and other departments, the content of this article is only for information sharing and does not promote or endorse any business or investment behavior. Readers are requested to strictly abide by the laws and regulations of their region and not participate in any illegal financial behavior. Wu said that the content is prohibited from being reproduced or copied without permission, and violators will be held accountable.