The Chinese government could use the new regulations being developed against illegal financing to investigate initial coin offerings (ICO) in the digital currency market.

China’s State Council Legislative Affairs Office has published a draft of the proposed rules and will be asking for public comments on the proposal in September 2017 before officially starting the legislative process.

Public indignation

The proposed regulation was introduced amidst the public indignation against the proliferation of pyramid selling schemes across the country. Members of said schemes have reportedly imprisoned and killed several college graduates who fall prey to their scams.

The proposed rule is mainly focused on tackling various fundraising activities in the country. However, article 15 of the proposed ruleset indicates that virtual currency-based funding initiatives could be targeted for investigations.

Part of the draft regulation reads:

"If the department overseeing illegal fundraising activities found a fundraising without proper permission, or a fundraising that violates the relevant provisions of the State, and if one of the following circumstances is found, the department shall launch an administrative investigation. Other relevant departments shall cooperate with the investigation.

….

(2) to raise funds in the name of issuing or transferring equity, raising funds, selling insurance, or engaging in asset management activities, virtual currency, leasing, credit cooperation and mutual funds..."

Life imprisonment

The proposed law mandates that the government should create an interdepartmental committee to fight unlawful fundraising efforts. The draft rule also clarifies that the parties involved in illegal fundraising activities will be responsible for their own losses.

China currently uses two laws to deal with unlawful fundraising under its crime law system. The crime of illegally absorbing public deposits carries a maximum penalty of 10 years of imprisonment.

The crime of fund fraud, meanwhile, carries a maximum sentence of life imprisonment.