Getting to the bottom of things Part 3: Legal analysis of holding and trading “virtual currency” in China

Source: People's Daily Online - Blockchain Channel

Author: Shan Zhiguang He Yifan

"Cryptocurrency" is positioned as "currency" or "financial investment product" in many publicity, but no matter how everyone perceives it, it is certain that in the financial field, "virtual currency" is not "currency". Although there is no legislation specifically targeting "virtual currency" in China, according to the "Announcement on Preventing Risks of Token Issuance and Financing" (hereinafter referred to as the "94 Announcement") issued by the People's Bank of China and seven other ministries on September 4, 2017, the so-called "'virtual currency' is not issued by the monetary authorities, does not have monetary attributes such as legal compensation and compulsion, does not have the same legal status as currency, and cannot be circulated and used as currency in the market.

In addition, according to the provisions of the Notice on Preventing Bitcoin Risks (Yinfa [2013] No. 289) (hereinafter referred to as "Document No. 289"), 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. Therefore, according to China's current financial regulatory policies such as Announcement 94 and Document No. 289, "virtual currency" belongs to things with financial and investment attributes that have not been legally registered. "Virtual currency" is prohibited from being exchanged with legal currency, bought and sold, or bought and sold as a central counterparty, or issued and financed in the financial field.

However, due to the decentralized and offline tradable characteristics of "virtual currency", it is difficult to completely eliminate it in China from a technical and regulatory perspective. Therefore, in recent years, there are still a large number of people holding and trading "virtual currency" in China. Although this is still a niche market, with the rapid development of the digital economy, more and more people are participating in "virtual currency", which may have an impact on China's financial supervision and social order.

The purpose of this article is to analyze the holding and trading of "virtual currency" by Chinese citizens in China based on Announcement 94 and Document No. 289. Due to the particularity of the form of existence and the technology used in "virtual currency", this article will conduct as comprehensive an analysis and discussion as possible from multiple scenarios.

The "virtual currency" referred to in this article does not include legal digital currencies that have been or will be issued by various countries. At the same time, this article does not involve situations where entities within China use "virtual currency" as a means of payment or collection for purchasing, investing or operating traditional businesses.

1. Acquisition of “Virtual Currency”

1. The party concerned is a natural person who, within the territory of China, obtains "virtual currency" through mining, airdrops or gifts without paying any consideration. Announcement 94 and Document No. 289 do not explicitly prohibit this, but the financial regulatory level does not support the above activities;

2. If the party concerned is a natural person, and obtains "virtual currency" from an organization or individual in China by paying legal tender, Announcement 94 and Document No. 289 do not explicitly prohibit it, but the organization or individual selling virtual currency may be suspected of violating the law by selling or providing exchange between legal tender and "virtual currency";

3. The party concerned is a Chinese citizen who purchases "virtual currency" from any other party outside China with legally outbound funds, which is not explicitly prohibited by Announcement 94 and Document No. 289;

4. If a party holds a certain kind of "virtual currency" that has been legally obtained and obtains another kind of "virtual currency" through currency-to-currency transactions, and does not involve money laundering, Announcement 94 and Document No. 289 do not explicitly prohibit this.

2. Selling and Withdrawing Virtual Currency

1. The holder gives away the "virtual currency" he holds to others for free. Announcement 94 and Document No. 289 do not explicitly prohibit this. In addition, Document No. 289 defines Bitcoin as a virtual commodity. From a legal perspective, the act of giving away virtual commodities should fall within the scope of autonomy. However, the recipient must declare individual income tax to the Chinese tax authorities for the assets obtained for free. If the tax declaration is not made, it is suspected of tax evasion;

2. The holder purchases "virtual currency" in China by paying RMB, and then sells it for cash in foreign currency in any form; or the holder purchases "virtual currency" abroad by paying foreign currency, and then sells it for cash in RMB in any form. In the above cases, no matter how many currency-to-currency transactions are converted between the purchase and sale, it essentially violates China's foreign exchange control regulations and is suspected of money laundering;

3. If the holder is a Chinese citizen and sells the "virtual currency" he holds for cash, regardless of the region and currency, as long as there is a profit, he must declare personal income tax to the Chinese tax authorities. If he fails to declare tax, he is suspected of tax evasion;

4. The holder transfers the legally acquired "virtual currency" to other persons through individual-to-individual transactions without involving money laundering and tax evasion. This is not explicitly prohibited by Announcement 94 and Document No. 289, but is not encouraged by the policy.

5. If the holder is a Chinese citizen and knowingly sells the "virtual currency" he holds to others, thereby assisting others in illegally entering and leaving the country, he is also suspected of money laundering. If the funds of others are illegally obtained, more crimes may be involved.

3. “Virtual Currency” Trading Services

1. Any organization or individual that provides information on "virtual currency" in China, including matching information on transactions between individuals, and provides pricing, information intermediary and other services for tokens or "virtual currency" as stipulated in the 94 Announcement, shall be prohibited;

2. Any organization or individual that provides "virtual currency" trading services in or outside China, establishes RMB channels and capital pools in China, and charges transaction fees is prohibited by law;

3. Any organization or individual that issues "virtual currency" and raises funds in RMB within the territory of China is prohibited by law and is suspected of illegally absorbing public deposits or fundraising fraud;

4. Any organization or individual that issues "virtual currency" or provides corresponding transaction services in China, forms an organizational system, and conducts business through transactions between individuals is prohibited by law and is suspected of illegal business operations, illegal absorption of public deposits, or fund-raising fraud. If there are different levels and commission mechanisms within the organizational system, it may also be suspected of pyramid schemes;

5. Any organization or individual that takes advantage of the transaction characteristics of "virtual currency" to subjectively provide services for the entry and exit of funds to circumvent China's foreign exchange controls is tantamount to providing services of underground banks and is suspected of money laundering.

Generally speaking, if an individual wishes to purchase and hold "virtual currency" in China, there are relatively legal ways to do so, but when selling, the possibility of violating the law is very high. Any "virtual currency" issuance and trading service organized in China and involving a capital pool is basically in violation of China's current laws and regulations.

In the judgments of many local courts, "virtual currency" is recognized as an asset and is protected. Mining to obtain "virtual currency" does not violate the prohibitions of Announcement 94 and Document No. 289, but there must be a channel for cashing out. Purchasing "virtual currency" from mining companies as an individual does not violate the prohibitions of the above-mentioned Announcement 94 and Document No. 289, but after the purchase, re-selling may trigger financial supervision against money laundering and illegal fundraising, resulting in legal liabilities such as account closure.

After more than ten years of development, "virtual currency" has a very positive significance in the popularization of blockchain technology. The development of "virtual currency" has also accelerated the active research and promotion of legal digital currency by monetary management departments of various countries. The widespread use of legal digital currency will greatly promote the efficiency of capital circulation and will have a huge positive impact on the business world. All this is also due to the innovation and attempts of the "virtual currency" industry. The difference between legal digital currency and "virtual currency" mainly lies in whether it is legally associated with offline assets. At present, "virtual currency" still exists in the form of financial games or simulation disks, and has no connection with labor and production in the real world. To break through this limitation, countries need to make detailed legislation on digital assets and link offline assets to Tokens through laws, similar to the current stock exchange information system. A string of codes represents the legal holding of equity.

No matter how much positive impact "virtual currency" has on the popularization of blockchain technology, in actual operation, holding and trading "virtual currency" must strictly comply with the laws and regulations of the country where it is located. The public should have a certain understanding of China's relevant laws and regulations on "virtual currency" so that they can strictly abide by the law and regulations when they come into contact with "virtual currency". The audience of "virtual currency" is very small and it is also very professional. It is recommended that the general public should not easily get involved without relevant knowledge to avoid breaking the law unconsciously.

(Note: This article only represents the author's views)