Sep 25, 2017
On September 4, the People’s Bank of China (“PBoC”), along with six other Chinese government administrations, including the Securities Regulatory Commission and the Banking Regulatory Commission issued a notice (the “Notice”)1, in which a token offering (also known as an initial coin offering, or “ICO”) is identified as an “illegal public fundraising activity.” The Notice continued to state that token offerings “raise suspicions of illegal selling of coin notes, illegal securities issuance and fundraising, financial fraud, illegal direct marketing and related criminal activity.”2 The Notice includes the following key statements:
To most who had been monitoring the development of China’s regulation on token offerings and the cryptocurrency industry in general, this did not come as a surprise. In mid-August, it was reported that certain Chinese administrations were discussing and investigating token offering activities in China, and the legal basis for the government to regulate token offerings is the Measures for Banning Illegal Financial Institutions and Illegal Financial Activities adopted in the year of 1998 (the “Measures”). The Measures were intended to regulate illegal financial institutions “formed without the approval of the PBoC, engaging or mainly engaging in financial activities such as taking deposits, granting loans, settling funds, discounting bills, lending funds, making trust investment, engaging in financial leases, providing financing guarantees, or trading on foreign exchanges.”3
Despite the halt of token offerings, according to an interview by Sina Technology conducted with Dr. Sheng Songcheng, Counselor to the PBoC and Executive Deputy Director of the China Europe International Business School Lujiazui Institution of International Finance (CLIIF) on September 5, 2017, China should encourage the blockchain technology. Dr. Sheng said, “bitcoin is the first and most famous application of the blockchain technology, and this technology has been widely recognized as a very important innovative technology by institutions, governments, enterprises, experts and professionals around the world.”4 Similarly, when interviewed by CCTV-135 on September 6, 20176, Mr. Hu Bin of the Chinese Academy of Social Sciences (CASS)7 stated that a “stop” of (illegal) token offerings is not a “prohibition” of token offerings, and that innovation and risk control shall be balanced by introducing the Sandbox Plan, previously spearheaded by Guiyang City, Guizhou Province, which encourages “regtech,” i.e. technology under the supervision and regulation of the government8. This may become the basis for token offerings’ future in China.
Almost concurrently, South Korea regulators were reportedly strengthening the regulation of digital currency and looking to punish token offerings that raise funds in the form of stock issuance using digital currencies permitted in other countries for violating Korea’s capital markets act.9 On September 14, 2017, Thailand’s Securities and Exchange Commission stated in a guidance that some digital tokens may be subject to the country’s securities laws, but cautiously “under[stood] the unique environment in which tech startups operate and realize[d] that ICO may not yet fit neatly with SEC Thailand’s current regulatory framework.”10 Japan, as the country that reportedly benefited from China’s halt on token offering, was to introduce oversight on virtual currency exchanges in October11, following the country’s recognition of virtual currency as a legal form of payment in April 201712. Singapore, a popular choice of location in Asia for token offerings, released a report last month stating that the issue or offer of coins/tokens in Singapore may be subject to regulation if they meet the criteria set by the Securities and Futures Act of Singapore.13
CKR Law believes that China’s recent halt of token offerings is the government’s warning to those who have or plan to conduct token offerings as a fraud without a legitimate underlying business. Instead of interpreting it as a step back, we see this action as the government’s determination to guide and supervise the development of digital currency, and in a broader sense, the blockchain technology industry in China. It should be noted that cryptocurrency is essentially a decentralized and borderless token, and that a crackdown on token offerings by one government cannot completely stop token offering activities. U.S. clients who have plans to conduct token offerings or activities in the field of cryptocurrency should take measures to prohibit the participation of Chinese buyers of their tokens, and Chinese companies should refrain from conducting any token offerings at all, pending the government’s review of the industry. Nevertheless, we encourage these clients to seek professional advice from qualified attorneys in order to comply with the laws and regulations of the relevant jurisdictions, which are expected to continue to evolve in China and elsewhere. Meanwhile, those who wish to invest in token offering projects should be cautious and use stricter scrutiny in identifying investment targets.
CKR Law will continue to monitor developments surrounding the blockchain technology industry. CKR Law’s Blockchain Technology Task Force provides a global and full-service solution to help investors and companies in the industry mitigate the risk of, as well as navigate the defense of, litigation and regulatory actions facing them or those with whom they may be affiliated. Members of this Task Force include our global experts in securities and corporate governance, as well as our litigators. Our global team is experienced in advising and defending our clients in all types of legal matters, proceedings, arbitrations and government actions in the U.S. and other foreign countries. Our Blockchain Task Force members can advise clients as to regulatory compliance, mitigate the risk of litigation, allegations, and investigations, and defend clients if such matters arise.
Clients active in or intending to engage in activities in the blockchain technology industry or with concerns about investments in blockchain technology companies or holdings of digital currency in China or elsewhere are strongly encouraged to contact CKR Law at:
DISCLAIMER: This article is not intended to provide legal or tax advice, and no legal, tax, or business decision should be made based on its contents.
1For the Notice in Chinese, visit http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/3374222/index.html.
3For an unofficial translation of the Measures, visit http://www.lawinfochina.com/display.aspx?id=20739&lib=law.
4Zhou, Ailin, “PBoC’s Sheng Songcheng: ICO Ban is Advisable, but Blockchain Technology Shall Be Encouraged,” Sina Technology, September 5, 2017, http://tech.sina.com.cn/i/2017-09-05/doc-ifykqmrw0485299.shtml (last visited September 20, 2017).
5China Central Television, China’s official state television broadcaster.
6For the video and the literal record of this interview, visit http://finance.ifeng.com/a/20170907/15659316_0.shtml.
7CASS, an affiliate of the State Council of China, is the most comprehensive academic research organization in China for study in the fields of philosophy and social sciences.
8Qingdao City, Shandong Province also commenced a similar plan on August 31, 2017; see “Qingdao Commences China Blockchain Sandbox Plan,” Sina News, http://news.sina.com.cn/o/2017-09-05/doc-ifykpzey4370560.shtml (last visited September 20, 2017).
9Yoon, Yung Sil, “Financial Authorities to Strengthen Regulations on Digital Currency Trading,” Business Korea, September 4, 2017, http://www.businesskorea.co.kr/english/news/money/19180-regulating-bitcoin-trading-financial-authorities-strengthen-regulations-digital (last visited September 20, 2017).
10“SEC Thailand’s Viewpoint on ICO,” The Securities and Exchange Commission, Thailand, September 14, 2017, http://www.sec.or.th/EN/Pages/FinTech/ICO.aspx (last visited September 20, 2017).
11“Japan to Begin Supervision of Cryptocurrency Exchanges,” Nikkei Asian Review, September 13, 2017, https://asia.nikkei.com/Politics-Economy/Policy-Politics/Japan-to-begin-supervision-of-cryptocurrency-exchanges (last visited September 20, 2017).
12“The Virtual Currency Act Explained,” bitFlyer, https://bitflyer.jp/en/virtual-currency-act (last visited September 20, 2017).
13“MAS Clarifies Regulatory Position on the Offer of Digital Tokens in Singapore.” Monetary Authority of Singapore August 1, 2017, http://www.mas.gov.sg/News-and-Publications/Media-Releases/2017/MAS-clarifies-regulatory-position-on-the-offer-of-digital-tokens-in-Singapore.aspx. Also see CKR’s previous client alert “SEC Investigates The DAO on Its Initial Coin Offering on Blockchain”.