1 Government attitude and definition Back to top

While China has officially endorsed the underlying “distributed ledger” technology of blockchain (in Chinese: 区块链 or “Qūkuài liàn”, which translates literally as “block chain”), authorities have adopted a sceptical and restrictive attitude toward Bitcoin (in Chinese: 比特币 or “Bǐ tè bì”, which translates roughly as “special currency”), and other cryptocurrencies (in Chinese: 加密货币 or “Jiāmì huòbì”, which translates as “cryptographic currency”. China’s 13th five-year plan, released in 2016, described blockchain as a critical “strategic frontier technology” and called for increased research and development in technology and practical applications. China President Xi Jinping has called for technical innovations in “A new generation of technology represented by artificial intelligence, quantum information, mobile communications, internet of things and blockchain”. The Ministry of Commerce has proposed blockchain solutions in areas ranging from credit reporting and supply chain management, to e-commerce and the financial industry. The tax bureau is exploring a pilot project which would place tax receipts on the blockchain to aid payment verification. In contrast, cryptocurrencies are met with scepticism and considered to carry potential to create financial and even social instability. China regulation of Bitcoin dates back to the 2013 “ Notice on Preventing Bitcoin Risk ” (the “Notice”), an official notice issued in coordination by several Chinese regulatory bodies (People’s Bank of China Ministry of Industry and Information Technology China Banking Regulatory Commission China Securities Regulatory Commission China Insurance Regulatory Commission). The Notice seeks to reduce financial sector risk, by confirming “Bitcoin” shall not be treated as “currency”, and reaffirming that there is only one official currency of the PRC, the renminbi (“RMB”). The Notice lists characteristics of Bitcoin identified as separating it from a true fiat currency: “Bitcoin is not issued by any monetary authority, it does not have the status of legal tender and the obliged payment status of currency, it is not currency in the true sense. It does not have equal legal status with currency, and it cannot and should not be circulated as currency on the market.” The Notice further states that Financial and Payment Institutions may not “use Bitcoin to set price for product or services, not buy or sell Bitcoins, not act as a market maker for Bitcoins, not underwrite insurance related to Bitcoin or cover Bitcoin in insurance, not directly or indirectly provide other Bitcoin related services, including registering, trading, clearing, settlement; not accept Bitcoin or use Bitcoin as payment tool; not start a Bitcoin and RMB or foreign currency exchange; not start a Bitcoin saving, trust or mortgage service; not issue Bitcoin related financial services; not use Bitcoin as investment in trusts or funds”. At the time of the Notice’s publication in 2013, Bitcoin was the only major cryptocurrency. Similar prohibitions were renewed and expanded in 2017 with the release of the Tips on Preventing the Risks of so-called “Virtual Currency” such as Bitcoin (the “Tips”), issued by the Internet Finance Association. The Tips identify clear “financial and social risks” in the growing use of cryptocurrencies (described in Chinese official documents as virtual currencies, “that cannot be ignored”). The Tips raise concerns about cryptocurrency being used for “money laundering, drug trafficking, smuggling, illegal fund-raising and other illegal and criminal activities” while at the same time recognising that some users of cryptocurrency may simply be speculators or investors, and many may be uneducated regarding risks of utilising cryptocurrencies as investments. The Tips closes by reminding financial industry participants to abide by relevant laws, which is best interpreted as referring back to the Notice. Neither the Notice nor the Tips bans Bitcoin or other cryptocurrency from China, nor restricts individuals from holding and transferring cryptocurrencies. However, cryptocurrencies are prohibited to be used as a currency, and financial institutions are prohibited from offering cryptocurrency-related services. This leaves cryptocurrency in China in a largely unregulated grey area. Per the Notice, Bitcoin itself is to be treated as a “Virtual Commodity”. Reasonable people may assume that this means Bitcoin would be treated by the law similarly to any other commodity; however, this is not clearly specified anywhere in the law. Importantly, this Virtual Commodity status is not explicitly extended to any other cryptocurrency as identified in any other law or regulation. Under the Chinese system of civil law, this calls into question whether other cryptocurrencies shall have the status of “Virtual Commodity”. In the first half of 2017, cryptocurrencies peaked in China with wild speculation as to Initial Coin Offerings (“ICOs”). There were over 65 ICOs in first part of 2017, with Chinese investors estimated to have deposited at least RMB 2.6 billion (almost USD 400 million) during the first half of that year. This created twin risks of uncontrolled capital flight from China, and potential economic destabilisation from inexperienced retail investors losing substantial sums of money in speculative ICOs, many of which were identified to be scams or not far from scams. In September 2017, Chinese authorities stepped in with the Announcement… on Preventing Initial Coin Offerings (ICO) Risks (the “Announcement”). The Announcement effectively banned all ICO activity within the PRC as “unauthorized and illegal public fundraising” and “unauthorized public sales of securities”. The Announcement also made illegal all cryptocurrency exchanges within the PRC: “any of so-called token financing and trading platforms may not engage in the exchange services between any legal tender and tokens or between ‘Virtual Currencies’, or engage in the sale of tokens or Virtual Currencies for itself or as a central counterparty, or provide services such as pricing and information intermediary for tokens or Virtual Currencies.” China’s Block/Chain In contrast to cryptocurrency, the Chinese government has been much more favourable to blockchain technology itself; however, it has nevertheless identified a need to closely regulate blockchain services. In February 2019, the Cybersecurity Administration of China implemented the Blockchain Information Service Management Regulations (“BISMR”) which established the legal framework for the operation of a blockchain-based business within the PRC. While typical cryptocurrency blockchain technology emphasises anonymity for transactions, privacy, and avoidance of institutions, the BISMR emphasises China’s conception of “Cyber Sovereignty” and the importance of the distributed ledger for preserving information. Under the BISMR, enterprises providing blockchain-based services must register as such with regulators, and must collect real name and identity of users of the blockchain service. Blockchain service providers have an obligation to monitor use of the blockchain for illegal purposes, stop illegal use, remove illegal content, report illegal activities to authorities, and provide records to authorities on demand. The BISMR regulations may be best understood, as a legal means to ensure that illegal content is “Blocked” from publication by usage restrictions and by obligations for the service provider to remove prohibited content from the blockchain. At the same time, real name registration requirements and requirements for blockchain service providers to maintain records of use work to “Chain” users of the blockchain network to their activities and content posted to the network. Thus, China may be said to adopt a “Block/Chain” approach to blockchain regulation. This may cause special regulatory hurdles to Western companies providing blockchain-based services, where Western-based users may have certain expectations as to privacy, which may be put at risk as the company attempts to expand services into China’s 1.3 billion-person market. This may lead to unique solutions where one might find an internal China law-compliant blockchain network within China, which functions separately and does not interact with an external, globally accessible blockchain network. Cryptocurrency backed by the People’s Bank There has been speculation of an official, central bank-backed cryptocurrency in China since early 2017. A July 2017 article in MIT Technology Review cites People’s Bank of China (“PBoC”) internal documents which reveal the PBoC had been engaged in prototyping of such national cryptocurrency as much as two years ago and has been testing the prototype since then. As recently as July 2019, in the wake of the announcement of the Facebook-backed cryptocurrency Libra, the Director of the People’s Bank of China Research Bureau confirmed that the Chinese government is launching a research initiative for a new cryptocurrency platform. There have been no other official announcements about an official PRC cryptocurrency to date; however, on August 1, 2019, the PBoC announced it had secured six blockchain-related patents, including patents touching on cryptocurrency wallets, systems for cryptocurrency exchange, and synchronisation systems, among others.

Cryptocurrencies themselves are not directly regulated in the PRC; however, each of the primary ways users would typically interact with cryptocurrencies are highly regulated, if not outright prohibited. As mentioned above, the Notice prohibits financial institutions and payment institutions from providing Bitcoin-related services. Bitcoin and other cryptocurrency may not be used as money. ICOs and cryptocurrency exchanges are prohibited per the Announcement. However, as stated above, there is no outright ban on users owning cryptocurrency or making transfers of cryptocurrency, whether sending or receiving. Bitcoin is named a “Virtual Commodity” as per the Notice and should theoretically be treated as any other commodity able to be exchanged between individuals for an agreed value of other currency or other commodity. PRC law or regulation has not thus far gone into deeper explanation as to what “Virtual Commodity” is under law or how it may be same or different from a standard commodity. Importantly, a recent China court decision appears to clarify the legal status of Bitcoin in China by finding a legally recognised property right in Bitcoin. The ruling comes from Hangzhou Internet Court, a specialised court established in August 2017, which handles matters related to internet commerce. In one case, the plaintiff claimed that he had purchased 2.675 bitcoins via the online marketplace operated by Alibaba’s Taobao e-commerce platform. The purchased bitcoins were stored in a “virtual wallet” online. Later, when the plaintiff sought to sell the bitcoins and withdraw the money, it was discovered that the shop which had sold the bitcoins (and offered the online storage) had closed, leaving the individual unable to access the bitcoins or the purchase funds. The plaintiff filed the lawsuit against the operator of the online shop and against the Taobao online platform which hosted the shop, claiming RMB 76,300 in compensation and damages. What’s interesting is that although the plaintiff was not victorious in the case due to lack of supporting evidence, the court went out of its way to discuss the legal aspects of Bitcoin in the context of PRC property law. The court indicated in its July 2019 decision that Bitcoin met the legal requirements to be considered virtual property because it is “valuable, scarce, and disposable”. When discussing such a judgment, it is important to keep in mind that Chinese court decisions are each an independent interpretation of the law and judgments do not establish legal precedent for future cases to follow. However, it is a good guess that on an issue as sensitive as Bitcoin, the judge in this case would have some idea of high-level unofficial expectations for legal treatment of Bitcoin, which likely informed the conclusions offered in the decision. If ownership of Bitcoin were actually deemed illegal in China, it is likely the court case would have been thrown out at an early stage for not having an actionable claim.

In general, transfer of Bitcoin, cryptocurrencies or tokens between two individual private citizens is not illegal, and is not specifically regulated. For example, an individual owner of Bitcoin (“BTC”) may agree with an individual owner of Ripple (“XRP”) to transfer a certain amount of BTC to the owner of Ripple in exchange for either an agreed value of RMB, or an agreed value of XRP. Nothing in current PRC law or regulation makes either of these potential transactions illegal. If the owner of BTC receives RMB in exchange for the BTC transfer, the law would treat it as exchanging valid PRC fiat currency (“RMB”) for a commodity at an agreed price. The BTC owner would be obligated to send the agreed amount of BTC to the target wallet just as a shop owner hands over a bottle of water after receiving the purchase price in RMB. Likewise, if the two exchanged BTC for XRP, this is not prohibited by PRC law because it is the direct action of two private individuals rather than an online transaction facilitated by a publicly facing online cryptocurrency exchange. However, all of the above must be understood with the caveat that cryptocurrency is not to be used as or replace fiat currency. For example, it would be illegal within PRC for a purchaser to pay for an apple by sending Bitcoin to the seller, as RMB is the only officially recognised currency. In contrast, conducting an ICO whereby an individual or small start-up entity accepts money from investors which goes toward establishing a cryptocurrency, with promises of future returns or granting of coins to the donator, is patently illegal under the Announcement. In this case, it does not matter whether the ICO activity is conducted online and offered to the entire population or conducted in a closed face-to-face environment. The important difference in these scenarios is that the ICO format directly resembles sales of securities. While ICOs are not regulated by PRC Securities Law per se, they are illegal because they are deemed a form of unlicensed offering of securities. The Announcement identifies ICOs as a “scheme” to “issue and sell tokens to investors in exchange for the so-called Virtual Currencies such as Bitcoins and Ethercoins, which in essence is an unauthorized and illegal public fundraising… illegal issue of securities, illegal fundraising, financial fraud… and other illegal criminal activities”.

Currently, there are no specific tax laws or regulations which refer to cryptocurrencies, which creates a grey area. Normally a tax bureau would not hesitate to impose taxes on any kind of income. However, cryptocurrencies are in a unique situation as banks and financial institutions are prohibited from offering cryptocurrency-related services, and exchanges of cryptocurrencies are also prohibited. The PRC Taxation Bureau has no capability or infrastructure to monitor revenues from cryptocurrency trading. We are not aware of any example where tax authorities in the PRC collected tax against revenue generated via cryptocurrencies. While it is impossible to offer a definite statement of official tax treatment of cryptocurrencies, we believe that because of restrictions on cryptocurrency-related services, and cryptocurrency exchanges in general, as well as limitations to institutional capacity, the Tax Bureau would not be inclined to officially tax revenues from cryptocurrencies. However, in the event tax authorities become aware of a large amount of money in a bank account which is not attributable to normal business activities or employment, and the tax authorities have no record of such money being taxed, we would expect tax authorities to deem those funds as taxable income and levy a tax in accordance with law, regardless of the nature of the origin of the funds.

5 Money transmission laws and anti-money laundering requirements Back to top

China implements strict capital controls designed to limit the amount of capital outflow from China to other countries via foreign exchange. Individuals are limited to transporting or sending up to USD 50,000 outside of PRC annually, and corporate remittances abroad are closely scrutinised and must meet the approval of China’s State Administration of Foreign Exchange (“SAFE”). Cryptocurrencies risk destabilising this system of capital controls by allowing individuals to transfer money abroad without relying on Chinese banks and going through the SAFE process. As discussed above, the PRC implements a very strict currency control regime which places severe restrictions on convertibility of currency and ease of transfers abroad. These rules apply universally. Any use of cryptocurrency to transfer over USD 50,000 per individual out of the territory of the PRC annually will likely be deemed a violation of individual limitations of foreign exchange transfers. Note there is no such restriction on receiving over USD 50,000 or more of cryptocurrency within the territory of China via a transfer coming from outside the territory of China. Companies seeking to remit funds abroad for business purposes are also required to report to SAFE, and go through a formal application and approval process for the foreign remittance. Any corporate entity utilising cryptocurrency to transfer significant sums of money abroad would also likely be deemed in violation of currency exchange and foreign remittance regulations set by SAFE. According to the Notice, banks “should closely monitor the trends and activities Bitcoin and other similar virtual commodities with the characteristics of anonymity and easy cross-border access, seriously consider its money laundering risk, research and implement targeted preventative measures. The branches should include lawfully established organizations that provide Bitcoin registration or exchange services in its area into its anti-money laundering monitoring, and supervise them to strengthen their anti-money laundering monitoring”. The notice goes on for a second paragraph regarding obligations of “Bitcoin” websites to undertake anti-money laundering issues; however, this is less relevant now as anything which may be considered a “Bitcoin website” in PRC has been taken offline. Though banks are tasked with monitoring cryptocurrency-related activities for money laundering issues, the same banks have been prohibited from doing cryptocurrency-related business and all Chinese-located exchanges that the PRC banks would be in a position to coordinate with in anti-money laundering issues have been shut down.

6 Promotion and testing Back to top

As mentioned above, the PBoC is currently engaged in research and development of a new Central Bank Digital Currency (“CBDC”), which is coordinated by a new Digital Money Laboratory. The goal of the PBoC’s CBDC will be to maintain state control over “monetary sovereignty” and the idea that a virtual currency must be issued by the state central bank in order to be valid as currency. Since 2018, the PBoC has been recruiting blockchain technology and legal experts to further develop the technical and legal aspects of implementation of such CBDC. The PBoC is also studying the legal and economic impact of a planned CBDC implementation. The Digital Money Laboratory has submitted more than 40 patent applications for blockchain and cryptocurrency-related technologies. In a recent interview, Zhou Xiaochuan, President of the People’s Bank of China, responded to the news that the People’s Bank of China recognised that replacement of paper money by new technologies is “inevitable”. Mr. Zhou’s comments suggested the PBoC was seeking to balance desire for anonymity in cryptocurrencies against interests of maintaining social security, financial stability and social order, and the ability to combat criminal activities. Mr. Zhou cited energy consumption and storage restraints as key technical barriers to effective implementation of the CBDC for the next several years. Other than the above-mentioned PBoC research and development programme for a national cryptocurrency, it is unlikely that any special cryptocurrency research and development programmes have been established. However, the State Counsel has named blockchain in official documents as a key technology of the future requiring additional research and indigenous innovation. National level endorsement The PRC government is far more interested in promoting research and development in new applications for blockchain and distributed ledger technology, rather than cryptocurrency. At the national policy level, a reference to “blockchain” first appeared in the “13th Five-Year Plan for National Informatization” issued by the State Council in December 2016. According to the plan, China should strengthen the advanced layout of strategic frontier technology, and “strengthen the basic research and development and frontier layout of new technologies” such as blockchain, and several other futuristic technologies. In August 2017, the State Council issued an official Guiding Opinion which encouraged the “Development of personalized software by using open source code and the pilot application of new technologies such as blockchain and artificial intelligence” in support of cloud computing and big data applications. Two months later, in October 2017, the General Office of the State Council issued the “Guiding Opinions on Actively Promoting Supply Chain Innovation and Application”, proposing that China should strengthen the construction of supply chain credit and supervision service system via study of “new technologies such as blockchain and artificial intelligence”. While there are no officially announced projects implementing blockchain research in these fields, we can say for sure that blockchain has caught attention at the highest levels of government as a powerful, innovative economic force. Local level implementation Domestic regions have launched diverse incentive policies for blockchain technology research, including: Beijing; Guizhou; Guangzhou; Fujian; Zhejiang; Hong Kong; and 18 other regions which have issued blockchain policies, such as financial support, office space and more. One big example of this is a new Free Trade Zone in Hainan. Following the FTZ model which China used successfully to attract foreign manufacturing to the country through special incentives, the Hainan FTZ aims to attract blockchain research. The FTZ, established in October 2018, will see the entire Island of Hainan designated a “Blockchain Test Zone”, with the local Hainan government investing in promising blockchain products and building a new blockchain test facility. The focus of the Hainan FTZ is blockchain research, centred on the “Oxford-Hainan Blockchain Research Institute” jointly built by the Hainan Eco-Software Park and Oxford University’s Blockchain Research Centre. The Hainan FTZ is expected to attract interest from leading blockchain research divisions from both the academic and corporate sectors.

7 Ownership and licensing requirements Back to top

Pursuant to the Notice and the Tips, financial institutions, including generally banks, insurance companies, securities companies and investment management companies, are not allowed to engage in a wide variety of Bitcoin- and cryptocurrency-related services; specifically, they are prohibited from: • setting a price on Bitcoin products and services; • trading Bitcoin or acting as a central counterparty; • providing insurance coverage on Bitcoin; and • providing business services directly/indirectly related to Bitcoin, including: register, trading, clearing, and settlement of Bitcoin; receiving or using Bitcoin as method of payment; exchanging Bitcoin for RMB or foreign currencies; participating in businesses related to storing, custody, and collateralising of Bitcoin; issuing financial products related to Bitcoin; and taking Bitcoin into asset pools of trusts and funds. A plain reading of the Notice would suggest that these restrictions would apply to investment advisors and fund managers as target financial institutions. Investment advisors and fund managers are therefore prohibited from “participating in businesses related to storing, custody, collateralizing of Bitcoin; issuing financial products related to Bitcoin; taking Bitcoin into asset pool of trusts and funds” among other key cryptocurrency-related businesses. While the notice only specifically names Bitcoin, the later Tips appears to have the effect of extending the same prohibitions to all cryptocurrencies. Because cryptocurrency-related services are prohibited by financial institutions and treated very seriously by the authorities, there are no licensing requirements which would permit such activities.

The National Development and Reform Commission (“NDRC”) has issued a new draft this year of the Catalogue of Guidance for Industrial Structure Adjustment (2019 edition, draft for comments) (the “Draft Guidance Catalogue”). The Catalogue of Guidance for Industrial Structure Adjustment is an industrial policy document issued by the NDRC, which lays out national priorities as to economic, industrial and technology priorities and goals. A draft catalogue is a non-final version released for public comment, but can provide valuable insight into actual thinking of policymakers, and often the final product will be very similar to the draft. In the 2019 Draft Guidance Catalogue, cryptocurrency mining activities are singled out as “obsolete” and even given the label of “backward production technology equipment”. This basically means that cryptocurrency mining activities are officially disfavoured as a form of business. We also note that no “phase out” period is given, which indicates that the disfavoured approach to cryptocurrency mining is to be implemented immediately. While implementation of this document with cryptocurrency restrictions in its current form will not make cryptocurrency mining “criminal”, the document will certainly be used to make operations more difficult for cryptocurrency miners. Any businesses which had formerly been approved for cryptocurrency mining operations will be subject to shutdown or forced to change business model, and new businesses attempting to start up cryptocurrency mining operations will not be allowed to proceed. Reports are becoming more frequent of local police raiding and shutting down cryptocurrency mining operations, which had been flagged due to abnormally high power consumption; we expect such trends to continue. Cryptocurrency mining operations are disfavoured by Chinese authorities both due to the burden on public electrical power infrastructure and the broader potential uses of cryptocurrency as an alternative to the RMB and as a means to bypass RMB currency controls on foreign exchange.

9 Border restrictions and declaration Back to top

There are currency reporting and cross-border transfer agreements as discussed above, which transfers of cryptocurrency across borders will likely be deemed in violation of. However, there are no specific regulations as to the transfer of cryptocurrency across borders, or declaration of cryptocurrency holdings at border crossings or at customs.

There are numerous other restrictions on cryptocurrency-related activities as described above; however, currently there are no formal requirements for the reporting of cryptocurrency transactions which exceed a certain minimum. There will be regular tax reporting requirements where a user receives income related to cryptocurrency transfers; however, this is not a requirement specific to cryptocurrency.

11 Estate planning and testamentary succession Back to top