Lawyer's Insights | With the mining industry collectively liquidated and regulatory regulations frequently issued, will crypto asset trading be banned?

"Darkest hour" is a true portrayal of the current crypto mining industry. Starting from Inner Mongolia, the policies have been implemented one by one. Finally, a notice on cleaning up and shutting down virtual currency "mining" projects in Sichuan became a life or death sentence for many miners.

Since the beginning of this year, a number of policies have been introduced to regulate crypto assets.

On May 18, the China Internet Finance Association, the China Banking Association, and the China Payment and Clearing Association jointly issued the "Notice on Preventing the Risk of Virtual Currency Trading Speculation". Previously, similar risk warning notices have been issued several times. On May 21, the 51st meeting of the State Council Financial Stability and Development Committee clearly stated: "Strengthen the supervision of platform companies' financial activities, crack down on Bitcoin mining and trading, and resolutely prevent individual risks from spreading to the social field."

On June 21, the People's Bank of China summoned some banks and payment institutions to discuss the issue of virtual currency trading speculation, "making it clear that all institutions must comprehensively investigate and identify the capital accounts of virtual currency exchanges and over-the-counter dealers, and analyze the capital transaction characteristics of virtual currency trading speculation activities."

On July 6, the Business Management Department of the People's Bank of China and the Beijing Local Financial Supervision and Administration Bureau jointly issued a document stating that "relevant institutions under their jurisdiction shall not provide business premises, commercial displays, marketing and promotion, paid diversion and other services for virtual currency-related business activities."

With the ever-tightening regulations and policy storms, more and more ordinary users are beginning to worry whether trading crypto assets in the future will be non-compliant or even illegal?

1. Lack of legal definition: Bitcoin is a virtual commodity

Regarding the announcement issued by the three associations on May 18, Chen Haodong, executive director of Guangdong Puwei Law Firm, believes that "the three associations' announcements are self-regulatory rules for the industry and are not within the legal effect hierarchy", which means that the announcements are more of a risk warning. (Note: The legal effect hierarchy is from high to low: Constitution - Basic Laws - Laws - Administrative Regulations - Local Regulations - Administrative Rules)

Regarding the content of the 51st meeting of the Financial Stability and Development Committee, lawyer Chen Haodong said, "The spirit of the meeting is not legally binding and is not in the legal hierarchy, but it plays a very important guiding role within the government's administrative system."

"At present, the overall regulatory trend for trading behavior is to prohibit speculation and discourage ordinary users from participating. Its essence is to prevent and control financial risks. There are great differences between trading behavior and mining behavior in terms of time and space. It is unlikely that trading behavior will be cut off in a one-size-fits-all manner at the actual level." Guo Yatao, the head of the Chain Law Team, believes that whether crypto asset trading will face a similar regulatory situation as mining. As early as December 5, 2013, five central ministries and commissions jointly issued the "Notice on Preventing Bitcoin Risks" (hereinafter referred to as the "Notice"), which is China's first regulatory document specifically regulating the risk of money laundering in encrypted digital currencies. It mentions that Bitcoin is a specific virtual commodity that does not have monetary attributes such as legal compensation and compulsion. It is not a real currency and does not have the same legal status as currency. It cannot and should not be circulated and used as currency in the market. However, as a commodity trading behavior on the Internet, ordinary people have the freedom to participate under the premise of assuming their own risks.

For a long time, the country has a relatively unified understanding of Bitcoin, that is, "Bitcoin is a specific virtual commodity." Although the supervision has been tightened, the subject definition has not changed. Since it is a commodity, it has the attribute of being tradable, that is, commodities can be exchanged with each other. Lawyer Chen said, "Bitcoin is a commodity, so it is of course legal to buy virtual commodities through professional acceptors. As for whether professional acceptors are legal, there is a lot of controversy, because whether professional acceptors meet the policy of "virtual currency" exchange business is still vague." Regarding the supervision of institutional and individual transactions, Lianfa Lawyer Guo Yatao believes that "so far, in terms of policies and specific implementation measures, most of the prohibitive measures are taken against institutions (service providers), while the attitude towards individual entities is not encouraged and risks are borne by themselves. The trend of cracking down on trading behaviors will cause various departments to strengthen the supervision of trading behaviors, but for ordinary users, there will be no legal risks. What individual users need to be vigilant about is to stay away from illegal fundraising activities and high-risk products."

In addition, the "Notice" document does not legally define "encrypted digital currency" (still hasn't done so far). It only regulates "Bitcoin" but not other encrypted digital currencies. This has also led to the current huge differences in attitudes towards encrypted assets in various places.

Lawyer Chen believes that "from a legal perspective, transactions between fiat currency and digital currency are not compliant, while currency-to-currency transactions are in a vacuum."

2. Regulatory attitudes of various countries towards crypto assets

At present, crypto assets are still an emerging field, and there is a certain lag in supervision. The attitudes and policies of different countries towards crypto assets themselves are also different. Different government departments in the United States have very different attitudes towards Bitcoin. The Treasury Department's Financial Crimes Enforcement System FinCEN regards Bitcoin as a "currency", the US Federal Internal Revenue Service believes that Bitcoin is not a currency but a property, and the US Commodity Futures Trading Commission also regards Bitcoin as a "commodity", which is neither property nor currency. The European Central Bank believes that cryptocurrencies such as Bitcoin do not meet the definition of "currency" in the economy or law. It does not meet the three conditions of currency as a medium of exchange, value storage, and accounting unit at the same time. However, cryptocurrencies may have an impact on the performance of the functions of central banks. Therefore, the European Central Bank believes that institutions should be established to regulate cryptocurrencies, assess risks, and prudently regulate to maintain the integrity of the financial system.

In the early days, Russia had a total ban on Bitcoin, but in 2016, the Russian Federal Tax Service announced that Bitcoin was "not illegal", but there are still strict regulations on transactions. If both parties use encrypted digital currencies instead of rupees to trade in a specific transaction, it is illegal whether it is regarded as a foreign currency or an external guarantee. The German Federal Financial Supervisory Authority and the German Federal Ministry of Finance both believe that encrypted digital currencies such as Bitcoin are accounting units and can be classified as financial instruments in the German Banking Act. Since encrypted digital currencies can be used as a means of multi-party settlement based on a contract between two parties, they may replace legal tender and are also the first country in the world to recognize the legality of Bitcoin. According to Yonhap News Agency, the Financial Services Commission of South Korea is currently discussing the formulation of security token standards subject to the Capital Markets Act. If it is a security defined in the Capital Markets Act, even if the issuance form is a digital token, it must comply with the provisions of the Capital Markets Act.

The Japanese Financial Services Agency defines Bitcoin as an "asset" or "property," which is consistent with the classification of the U.S. Internal Revenue Service. In the UK, virtual asset service providers must register their crypto assets with the UK Financial Conduct Authority, otherwise they will be operating illegally.

In 2014, the Central Bank of Singapore stated that "Bitcoin is a commercial consideration and will not interfere with the transaction and use of Bitcoin." Even DBS Singapore Development Bank, one of its three major banks, launched a digital trading platform Digital Exchange at the end of 2020, providing exchanges between four legal currencies and four major cryptocurrencies. The Danish Financial Supervisory Authority and the Central Bank of France stated that Bitcoin is not legal tender, and Bitcoin-related transactions are not strictly financial activities. The Danish Financial Supervisory Authority also believes that the Bitcoin system can be regarded as a taxable electronic service, and Bitcoin is not protected by domestic legal mechanisms such as deposit insurance. In general, the international regulatory attitude towards crypto assets represented by Bitcoin varies. Some are identified as securities or financial instruments, but more are identified as an asset or commodity.

3. Where will future regulation go?

In terms of local execution, attitudes towards cryptocurrencies such as Bitcoin vary greatly. Some local courts believe that digital assets can be regarded as valuable "property" or "virtual goods". For example, in a criminal ruling made by the Taizhou Intermediate People's Court of Zhejiang Province, the court held that "the Bitcoin obtained by the victim after paying the price is not only a specific virtual commodity, but also represents the property actually enjoyed by the victim in real life, and should be protected by the criminal law." However, there are also some places that have not yet accepted that digital currency is "property". For example, the Xi'an Intermediate People's Court believes that digital currency "should be a specific virtual commodity, does not have the same legal status as currency, cannot and should not be circulated and used as currency in the market", and "cannot be protected by law". There are also places that believe that "virtual currency is obviously different from tangible property such as money and property in the sense of criminal law, and intangible property such as electricity and gas, and it is difficult to constitute property in criminal law."

The reason for such a big difference is the lack of entry thresholds determined by laws and regulations and clear judicial interpretations. At present, the legal definition of digital currency is still in the exploratory stage. Before the corresponding judicial interpretation is issued, it is naturally difficult for various courts to form a unified judgment standard. In the supervision of encrypted assets in China, the regulatory authorities are more likely to regulate the issuance or trading behaviors related to encrypted assets through flexible methods such as interviews, risk warnings and announcements. This is also the reason. If supervision is further strengthened in the future, clarifying judicial interpretations may be the first step in future supervision.

Regarding the future regulatory focus of crypto assets, attorney Guo Yatao believes that "in the future, the depth and breadth of law enforcement against criminal activities using crypto assets will exceed the past, and high-intensity supervision of the industry will become the norm," especially for some high-risk products (contracts, leverage) and behaviors that endanger financial security will be the main focus of supervision.

In short, the supervision of crypto assets is being clarified step by step, and as individuals, we must abide by relevant laws and regulations, improve our risk prevention awareness, stay away from all kinds of illegal and criminal activities that use blockchain gimmicks, and be responsible for the safety of our own wallets. *Note: The above content is for reference only. If there are any errors, please correct them.

According to the "Risk Warning on Preventing Illegal Fund Raising in the Name of "Virtual Currency" and "Blockchain"" issued by the China Banking and Insurance Regulatory Commission and other five departments, readers are requested to abide by the laws and regulations in their regions and investors are requested to raise their awareness of risk prevention.