The government of the People’s Republic of China (PRC) sees great potential in the blockchain industry as critical next-generation information technology infrastructure with which it can build smart city connectivity linked to 5G network infrastructure. In April 2020 the PRC government launched its nationwide blockchain service network (BSN) that it has developed with UnionPay, China Mobile, and the State Information Centre (SIC).
The BSN is a public blockchain hosting platform that will allow blockchain builds to plug into the network as a low-cost alternative to private blockchain networks. The BSN currently has over 100 city nodes across the PRC and has all three of the PRC’s major telecoms participating. This is expected to double to over 200 city nodes by 2021, with the goal of 451 by 2022.
The PRC's spending on blockchain technology is expected to exceed USD2 billion by 2023 (up from USD470 million predicted by the end of 2020). The country's expenditure on blockchain technology will see a compound annual growth rate of 65.7% from 2018 to 2023.
PRC businesses’ use of blockchain include cryptocurrency/digital asset exchanges, cold/hot wallet providers, and crowdfunding and e-payment solutions.
Until recently, the PRC’s blockchain market had been dominated by private companies and startups operating a variety of public and private blockchain services. However, as outlined, the BSN was launched in April 2020.
PRC Government adopts a bipolar attitude towards blockchain technology and cryptocurrencies. On the one hand, the PRC Government has been promoting blockchain technologies through multiple policies and initiatives in a wide range of industry, including government affairs. On the other hand, cryptocurrencies are heavily scrutinised by the PRC regulatory authorities.
The Administrative Measures on Blockchain Information Service (“Blockchain Measures”), issued by Cyberspace Administration of China (CAC) on 10 January 2019 and effective on 15 February 2019, establish the regulatory framework of blockchain technology and cryptocurrencies in the PRC. However, the provisions of the Blockchain Measures do not go into great detail on the implementation of blockchain technology. Therefore, uncertainties still remain with respect to implementation.
Given the Government’s positive attitude and encouragement towards the development of blockchain, we may anticipate further clarifications and implementing measures to be issued in relation to blockchain technology and cryptocurrencies.
Scope of Regulation
The Blockchain Measures apply to organisations operating as a “blockchain information service provider” (“blockchain provider”) in the PRC. Blockchain providers are defined to include:
Blockchain Provider Obligations
A blockchain provider is subject to a series of obligations under the Blockchain Measures, notably including but not limited to:
The most important feature of the regulations is the requirement to maintain “real-name registration of blockchain information service users”. Users, therefore, cannot remain anonymous.
Violation of the Blockchain Measures could be subject to an order to rectify; warning; suspension of business; administrative fines; or even criminal liability if the offense is severe.
Notice No 289 in 2013 and Announcement No 94 in 2017
Under the Notice of the People's Bank of China, Ministry of Industry and Information Technology, China Banking Regulatory Commission, China Securities Regulatory Commission, and China Insurance Regulatory Commission on Preventing Bitcoin Risk, issued on 3 December 2013 (“Notice No 289”), and Announcement of the People's Bank of China, the Cyberspace Administration of China, the Ministry of Industry and Information Technology, the State Administration for Industry and Commerce, the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission on Preventing Initial Coin Offerings (ICO) Risks, issued on 4 September 2017 (“Announcement No 94”), any digital assets such as bitcoins or other cryptocurrencies are not issued by monetary authorities in the PRC. They do not have any monetary attributes such as legal compensation and compulsory nature, hence digital assets do not have the equal legal status with currencies, and are prohibited from circulation and usage in the market as currencies.
On this basis, any financial institutions and non-banking payment institutions in the PRC are also prohibited from carry out business services relating to digital assets. This includes, amongst the others, buying and/or selling digital assets, underwriting activities with digital assets, accepting digital assets as a payment and settlement tool; carrying out digital assets foreign currency exchange services; custody services of digital assets, issuance of digital assets-related financial products, and managing investment funds that invest in digital assets.
In addition, initial coin offerings (ICOs) are banned and cryptocurrency exchanges are subject to strict restrictions in China. Announcement No 94 stipulates the offering and exchange of cryptocurrencies are in nature illegal fundraising, and may subject to criminal offences. Therefore, any ICO activities should cease immediately.
Announcement No 94 also prohibit cryptocurrency trading platforms from converting legal tender into cryptocurrencies, or vice versa. The trading platform are also prohibited to purchase or sell cryptocurrencies, setting prices for cryptocurrencies, or providing other related intermediary services. Financial institutions and non-bank payment institutions are prohibited from directly or indirectly providing services for ICOs and cryptocurrencies, including opening bank accounts or providing registration, trading, clearing, or liquidation services. Providing insurance services relating to ICOs or cryptocurrencies is also prohibited.
So far, China has not purposefully implemented standards applicable to the blockchain sector proposed by international bodies such as FATF or BIS. The Ministry of Industry and Information (MIIT), has been working on drafting the industry standards for blockchain technology in order to align with international standards imposed by organisations such as International Organisation for Standardisation (ISO) or the International Telecommunication Union (ITU).
Regulatory bodies of blockchain and cryptocurrencies include the CAC, the PBOC, MIIT, Public Security Bureau (PSB), China Banking and Insurance Regulatory Commission (CBIRC), and China Securities Regulatory Commission (CSRC). As explained in 2.1 Regulatory Overview, the CAC regulates blockchain and the Internet in the PRC.
The PBOC, which is the PRC’s central bank, is the PRC regulator in charge of cryptocurrency and digital asset-related affairs. The PBOC considers virtual currencies to be illegal because they are not issued by any recognised monetary institution and do not hold any legal status that can make them equivalent to money. As of June 2019, the trading of all cryptocurrencies and digital assets was completely banned in the PRC. This includes initial coin offerings ICOs, which were first made illegal in 2017.
In addition, as of April 2020, the PBOC has started trials on its own digital currency in several PRC cities such as Shenzhen and Chengdu. This digital currency will be known as the “e-RMB” and will likely be used to settle payments on public transportation, food, and retail purchases. The PBOC will be the sole issuer of this digital currency.
The MIIT has been working on drafting the industry standards for blockchain technology, and align the PRC standards with the international standards. The bulk of the industry standards are still being drafted. In April 2020, the National Blockchain and Distributed Ledger Technology Standardisation Technology Commission was established under the MIIT to facilitate the publishing the PRC industry standards. The commissioners consist of university faculties and Internet giants.
The PSB is the regulator for the security assessment under the Blockchain Measures. The PSB also prosecutes criminal offenses in relation to the use of blockchain technology.
The CBIRC and CSRC regulates the ICO, AML, and other matters in relation to financial risk.
The PRC has a number of fintech and blockchain research institutions throughout the country, with most of them being research centres formed between large-scale PRC research universities, homegrown PRC technology giants, and local municipal governments. These institutions function purely as research organisations, with technology developed being used for test cases for future use for consumer applications. They have no say in any formal policy developments or any formal status as anything other than research institutes.
The PRC courts have recognised the nature of “virtual property” of cryptocurrency. A case decided by the Futian District People’s Court of Shenzhen in January 2020 stressed that although cryptocurrency (including Ethereum) is not fiat currency in China, Ethereum constitutes property under PRC criminal law, because Ethereum “has financial worth”, and Ethereum owner may manage, charge fees for, transfer, and publicly trade the Ethereum. This is aligned with the case decided by a court in Zhejiang in 2016 where the court considered Bitcoins to be virtual property.
That said, the courts have been holding splitting opinion on whether cryptocurrency-related rights should be protected.
Some court recognised the legality of a contract involving investing a mining machine. In a case decided by a court in Zhejiang in June 2019, an individual sought to invalidate a purchase agreement and request refund for bitcoin mining machines he ordered from the other party. He argued that the subject matter of the agreement violates applicable laws and regulations because it is forbidden to trade bitcoins, and therefore the agreement should be invalidated.
The court dismissed his claim and explained that, unlike the use of bitcoins for payments, it is allowed to trade bitcoins as commodities and bitcoin mining machines, therefore the sales agreement for the mining machines do not violate any laws and regulations and should be binding on both parties. Other courts adopt the opposite approach, ruling that debts arising out of purchase of cryptocurrencies or mining machines are illegal.
On 6 July 2018, the People’s Bank of China (PBOC) indicated that Chinese authorities had identified 88 cryptocurrency trading platforms and 85 ICO platforms, which have all safely withdrawn from the market.
From January 2019 to November 2019, Chinese regulators shut down six domestic cryptocurrency trading platforms, blocked Internet access to 203 offshore cryptocurrency trading platforms, closed thousands of relevant payment accounts, and took down almost 300 mini programs and public accounts on WeChat. In 2019, more than 100 people were prosecuted in Beijing and Hangzhou for running cryptocurrency exchanges. In November 2019, both the National Special Rectification Leading Group for Internet Financial Risks and local authorities in Beijing, Shanghai, Shenzhen, etc, declared to conduct full investigations into and rectifications of cryptocurrency trading platforms .
Moving forward, the enforcement will continue and become a routine practice.
Pursuant to the Fintech Development Plan (2019–2021) issued by the PBOC, a fintech regulatory sandbox was first launched in Beijing in December 2019 and then extended to Shanghai, Chongqing, Shenzhen, Hangzhou, etc. Licensed financial institutions and technology companies can apply for its financial services or finance-related technology products to get into the sandboxes. For the services and products in the sandboxes, PBOC and other relevant authorities will take a fault-tolerant regulating approach and use soft management measures such as information disclosure, project disclosure, and mutual supervision.
The tax regime in China has not been updated to consider the use of blockchain or cryptocurrencies. There are also no specific tax laws or regulations in China which refer to blockchain or cryptocurrencies.
The PRC government has recently formed its National Blockchain Standardization Committee. The committee will work on setting industrial standards for blockchain technology. This technology has been a key focus of the PRC government ever since President Xi Jinping advocated for the PRC to become a leader in the field in October 2019.
Questions of ownership and transfer of a digital asset will depend on whether the digital asset is deemed to be “property” under Chinese law. Under PRC law, private individual property rights are protected by law if they are acquired through legal means. PRC law defines “property” to include tangible or intangible property, including real estate, savings, daily commodities, individual income and other legally acquired property.
There are multiple judicial cases in China which clarify that virtual commodities, such as Bitcoins and Ethereum, are property under PRC law because they have economic value and are capable of bringing economic benefits to other individuals.
The Chinese Civil Code, which is recently passed by the National People’s Congress and will take effect on 1 January 2021, also clarified that virtual commodities can be inherited by subsequent assigns (eg, children and relatives) upon death of the holder of the virtual commodities. This further supports the proposition that digital assets can be “property”, the ownership of which is capable of being passed to other individuals under PRC law. Therefore, the ownership and transfer of a digital asset should be consistent with the ownership and transfer of other intangible property.
Virtual commodities, such as Bitcoin or Ethereum, are categorised as “property” under PRC law (see 3.1 Ownership). They are not legal tender and valid currencies. Only the DCEP (which stands for “Digital Currency Electronic Payment”), which is the national digital currency issued by the PBOC, is considered the only digital currency and legal tender in China.
PRC law does not distinguish different types of digital assets and categorise them accordingly (eg, “securities” for security tokens).
Currently, only the DCEP (or e-RMB), which is issued by the PBOC, is pegged to the Chinese Yuan (RMB), the national currency in China. The DCEP/e-RMB is the only digital currency and legal tender in China, and is intended to have the same legal effect as the RMB.
There are no laws or regulations specific to privately-issued stablecoins. However, news reports in China indicate that the PRC authorities are extremely resistant to the idea of the issuance and usage of privately-issued, RMB-pegged stablecoins, particularly after the roll-out of the state-issued DCEP.
There are no distinctions made between stablecoins backed by deposits of fiat currency and algorithmic stablecoins that use a formula to maintain their peg.
Yes, payments are allowed to be made in China using DCEP. Currently, DCEP is deployed in four cities in China for trial. The PBOC anticipates to issue DCEPs to banks nationwide, but there is no precise timeline on when this will be completed. For other cryptocurrencies/virtual assets (eg, bitcoin or Ethereum), there is no outright ban on individual users making transfers to another individual using bitcoin or Ethereum.
However, digital asset exchange platforms are prohibited from operating in China. Platforms may therefore not make any payment transactions with any individuals in China. Under the Announcement No 94, digital asset exchange platforms are banned from:
As yet, there is no knowledge of any laws or regulations specific to NFTs. See 3.3 Stablecoins.
The PRC’s regulatory authorities had imposed a ban on ICOs in September 2017. This includes a ban on trading on domestic cryptocurrency exchanges – essentially forming a blanket ban on digital asset exchanges in the PRC. However, some PRC cities have expressed interest in creating “blockchain digital asset exchanges”.
Furthermore, some of the PRC’s biggest technology companies have been issuing asset-backed securities that are tradeable via blockchain in conjunction with financial institutions.
The trading and exchange of cryptocurrencies in the PRC is banned, so there is no way to legally exchange between crypto and fiat currencies in that jurisdiction. The same applies for cryptocurrency-to-cryptocurrency exchanges.
The Blockchain Measures requires the Blockchain Provider to conduct real-identity verification by way of corporate registration number, individual ID number or PRC mobile number. Blockchain Providers shall not provide services to users who do not complete the real-identity verification.
In Notice No 289, the authorities warned banks and other financial institutions on the inherent risks in trading Bitcoin and other virtual commodities “with characteristics of anonymity and easy cross-border access”. In particular, Notice No 289 urged all branches of the People’s Bank of China (“PBOC Branches”) to “seriously consider the money laundering risks” in facilitating trade in these virtual assets.
Notice No 289 states that the PBOC Branches should conduct the following AML/KYC procedures:
Notice No 289 also stated the obligations that each Bitcoin Service Provider is required to undertake in respect of AML/KYC. This includes the obligation to make real-name registrations with the regulatory authorities. Suspicious transactions should also be reported to the China Anti-Money Laundering Monitoring and Analysis Center and the Public Security Bureau, and co-operate with the People’s Bank of China’s Money laundering investigation activities in this respect. However, this is less relevant now, as anything that may be considered as a “Bitcoin website” in the PRC has been shut down.
In addition, the Administrative Measure on Anti-money Laundering and Counter-terrorism Financing by Internet Finance Service Agencies (for Trial Implementation) jointly issued by the PBOC, CBIRC and CSRC provide the regulatory framework for licensed financial institution that provide Internet financial service in China. In particular, the financial institution shall register on the Internet AML and Counter-Terrorism Monitoring Platform operated by the PBOC, establish its own internal control mechanism, and report any suspicious transaction or transaction in large amount.
There is no available market in China on digital assets, given the Chinese authorities have outright prohibited all primary ways users would typically interact with digital assets.
Digital assets exchanges are prohibited from re-hypothecating digital assets to third parties under Chinese law.
Under Announcement No 94, digital asset exchange platforms are banned from providing any services, including acting as a central counterparty to the purchase and sale of any tokens or virtual currencies. This will cover trading any digital assets in their own books.
According to Notice No 289, any financial institutions and non-banking payment institutions in the PRC are prohibited from providing storage or custody services of digital assets.
Under Announcement No 94, ICO is prohibited in China, and fundraising through the creation and sale of tokens is not allowed.
PRC laws prohibit fundraising through the sale of tokens.
According to Notice No 289 and Announcement No 94, investment funds and collective investment schemes in the PRC are prohibited from investing in bitcoins and other cryptocurrencies. In practice, it is generally understood that investment in other digital assets are similarly prohibited in the PRC, even though such is not expressly addressed in Notice No 289 and Announcement No 94.
Under Announcement No 94, fund raising and trading platforms for cryptocurrencies (including, without limitation, any App or website for such purposes) in the PRC are prohibited from facilitating any trade between fiat currencies and cryptocurrencies or between two cryptocurrencies, or otherwise buying or selling any cryptocurrencies or acting as market maker in relation thereto, or providing pricing, information intermediary or other services in connection with any cryptocurrency. “Fund raising and trading platforms for cryptocurrencies” is not defined in Announcement No 94, but is interpreted broadly in practice.
We are not aware of any laws, regulations or binding judicial decisions addressing the legal enforceability of private contractual arrangements made in whole or in part utilising agreed-upon computer code that executes across multiple “nodes” on a blockchain-based network.
The Blockchain Whitepaper issued by China Academy for Information and Communication Technology (CAICT, an institution affiliated to the MIIT) adopts a relatively conservative attitude to ”smart contracts” and raise a number of concerns. First of all, there is not legal definition of smart contract and its validity remains unclear, although it is technically feasible to form smart contract. Secondly, confidentiality of the agreement might become a big concern as the smart contract will be accessible to all the nodes. Thirdly, there is no generally applicable plan to achieve the oracle mechanism to ensure the information embedded in the blockchain is true and accurate.
Finally, smart contracts may only work for predictable obligations, as opposed to open-sided provisions, or rights and obligations that are not clearly defined at the time of execution.
Under the Blockchain Measures, blockchain providers shall comply with applicable laws, regulations, and national standards in order to provide blockchain related services. “Fiduciary duty” is a common law concept and is not used in China, a civil law jurisdiction, to determine liability of developers.
DeFi platforms are not allowed to operate in China. Under Announcement No 94, digital asset exchange platforms are banned from providing any services, including providing pricing services or acting as an information intermediary for any tokens or virtual currencies.
Given the broad definition of “acting as an information intermediary”, borrower/lender matching over the digital platform will be caught under the ambit of Announcement No 94.
The position under Chinese law is unclear in this respect.
There are court cases in Chinese which clarify that Bitcoin is capable of being “property” (and, theoretically, is capable of being taken as security). However, these do not establish legal precedents for future cases to follow. There is no awareness of any laws, regulations or judicial interpretations in China which clearly state that digital assets are capable of being taken as security.
Although there is no outright ban on users owning digital assets in China, the primary ways users would typically interact with digital assets are outright prohibited. In addition, according to Notice No 289, any financial institutions and non-banking payment institutions in the PRC are prohibited from providing storage or custody services of digital assets.
The Cybsersecurity Law of the PRC effective on 1 June 2017 together with a series of guidelines including Personal Information Security Specification (collectively “Data Protection Laws”) regulate collection, use, share, transfer (including cross-border transfer), storage of personal information in the PRC. Examples of the key obligations under the Data Protection Laws include:
There is no data protection laws or regulations that specifically targeting blockchain-based products, and we are not aware of any data privacy enforcement against blockchain-based products or services.
See 8.1 Data Privacy.
Mining of cryptocurrencies is allowed. That said, China has been imposing strict restrictions on mining and mining activities in the past year. Notably, the National Development and Reform Commission once considered listing mining to be the industry to be eliminated in the draft Industrial Structure Adjustment Guidance Catalog issued in April 2019.
Although it turned out that mining was eventually removed from the finalised list, the possibility of changes in regulatory landscape cannot be fully ruled out.
There are no special PRC regulations that apply to the staking of crypto-assets.
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