China issues announcement to ban fundraising through token offerings

On 4 September 2017 seven Chinese government agencies¹ jointly issued an Announcement on Preventing Risks relating to Fundraising through Token Offerings (Announcement), which took effect immediately upon issuance.

The Announcement reflects the Chinese government’s intention to prohibit fundraising through offerings of tokens (such as initial coin offerings (ICOs)), driven by the need to maintain financial order and stability.

In this client update we highlight the key features of the Announcement and suggest what immediate actions arise out of it for affected businesses.

The Announcement defines “token offerings” as fundraisings in which virtual currencies (such as Bitcoin and Ether) are raised by way of the sale and circulation of digital tokens. The Announcement states that token offerings are a form of unapproved illegal fundraising activity which involves criminal activity, including illegal securities issuance, illegal fundraising, financial fraud and pyramid selling. Token offerings that raise funds in fiat currency are illegal under current Chinese regulations and therefore are not addressed in the Announcement.

The Announcement specifies that, because tokens and cryptocurrencies that are distributed in token offerings are not issued by the competent currency-issuing authority of China, they:

• do not have the same legal status as legal (so-called “fiat”) currency; and
• should not be permitted to circulate on the market as in the same manner as fiat currencies.

The Announcement expressly provides that, as of 4 September 2017, any form of fundraising activities through the offering of tokens should stop immediately. Anyone who has completed a token offering prior to that date must make arrangements (such as the refunding to investors of the proceeds of the token offering) to protect investors. The Announcement emphasises that the Chinese authorities will investigate and strictly punish both past and future violations of Chinese law and regulations. The Announcement is not intended to apply to ICOs which are conducted by issuers outside China, which are not targeted at the China market and Chinese investors.

As of 4 September 2017 token fundraising and exchange platforms must not:

• provide exchange services between tokens and fiat currency and between cyptocurrencies;
• buy or sell tokens for cryptocurrencies or act as central counterparties facilitating the trading of tokens for cryptocurrencies; or
• provide pricing or information intermediary services for the exchange of tokens for cryptocurrency.

Failure to comply with the Announcement and relevant Chinese laws and regulations (for example, the Commercial Banking Law, the Securities Law, the Cyber Security Law) may lead to the shutdown of websites and mobile apps, the removal of mobile apps from app stores and the revocation of business licenses held by token fundraising and exchange platforms.

Under the Announcement, financial institutions and non-bank payment institutions are prohibited from providing products or services for token fundraising activities, including account opening, registration, trading, clearing, settlement and other services.

The Announcement is by far the most stringent measure to regulate cryptocurrencies in China to date. Prior to the Announcement:

• cryptocurrencies (such as Bitcoin) were not regulated clearly in China - there were only a few policies which suggested that Bitcoin, although not a legal currency, was to be treated as a virtual product;² and
• there was no clear guidance as to how ICOs should be regulated. 

With the issuance of the Announcement, the Chinese authorities have clearly indicated their position that token offerings such as ICOs are classified as illegal fundraisings.

Clearly this will significantly impact China’s booming cryptocurrency market. Given that the Chinese authorities have indicated they can punish both past and future violations, businesses engaging in ICOs in China must take immediate action to:

• suspend any ongoing fundraising activities through the offering of tokens or virtual currencies; and
• conduct a comprehensive compliance review of any completed token offering projects (including ICOs) to mitigate both non-compliance risk and the risk of criminal liability. 

Given ICOs are subject to different regulatory regimes in different jurisdictions, it is important for any business that is contemplating conducting an ICO to:

• obtain multi-jurisdictional securities law advice and to consider whether any jurisdictions (or categories of persons) need to be excluded from the ICO; and
• carry out investor identification checks to facilitate and support any such exclusions.