CMS Expert Guide to Crypto Regulation in China

Cryptocurrency regulation in China has been relatively strict, with multiple crackdowns on various aspects of the industry.

In December 2013, the People’s Bank of China (PBOC) and four other authorities jointly released the Circular on the Prevention of Risks from Bitcoin (关于防范比特币风险的通知), which mandated that all financial institutions must refrain from conducting business related to Bitcoin.

In September 2017, the PBOC and other authorities issued the Announcement on Preventing Initial Coin Offering (ICO) Risks (关于防范代币发行融资风险的公告) (“ICO Ban”), highlighting that initial coins or virtual currencies do not possess legal status as official currencies and cannot circulate or be used as currency in the market. This Announcement also prohibits all forms of initial coin offering activities and exchange services for token financing and trading platforms.

In January 2018, the Payment and Settlement Division of the Business Administration Department of the PBOC issued the Notice on Self-Inspection and Rectification of Providing Payment Services for Illegal Virtual Currency Transactions(关于开展为非法虚拟货币交易提供支付服务自查整改工作的通知), which strictly prohibits all legal person payment institutions from  providing services for any virtual currency transactions and requires these institutions to take effective measures to prevent payment channels from being used for virtual currency transactions.

In September 2021, the PBOC and nine other central authorities released the Circular on Further Preventing and Resolving the Risks of Speculation in Virtual Currency Trading (“Circular 237”) (关于进一步防范和处置虚拟货币交易炒作风险的通知). Circular 237 is a significant regulatory document that aims to strengthen China’s approach to managing the risks associated with virtual currencies. Key provisions of Circular 237 include:

1. Emphasis of the illegality of virtual currency-related activities: The Circular emphasizes that virtual currencies do not possess legal status as official currencies in China, and declares that virtual currency related business activities are classified as illegal financial activities, including activities of exchanging legal currency with virtual currency, exchanging virtual currencies with each other, acting as a central counterparty for buying and selling virtual currencies, providing information intermediation and pricing services for virtual currency transactions, token issuance financing, and virtual currency derivative trading etc.
2. Crackdown on offshore exchanges: Circular 237 also targets offshore virtual currency exchanges that provide services to Chinese residents. The authorities will monitor and block access to these platforms, as well as scrutinize and punish individuals or entities involved in facilitating such services.
3. Prohibition of financial services for virtual currency transactions: The Circular explicitly prohibits financial institutions and payment service providers from offering any services related to virtual currency transactions. This includes services like account openings, registration, trading, clearing, and settlement, and financial institutions and payment service providers shall not include virtual currencies in the scope of collateral. 
4. Enhanced supervision and monitoring: The authorities will establish a coordination mechanism to strengthen supervision, monitoring, and early warning systems for risks associated with virtual currency trading and speculation. This is aimed at promptly identifying and mitigating potential risks.
5. Strict enforcement and punishment: Circular 237 calls for the strict enforcement of relevant laws and regulations, including the punishment of individuals or entities found to be engaging in illegal virtual currency activities. It also encourages the public to report any suspicious activities related to virtual currencies.

Also in September 2021, the National Development and Reform Commission issued the Circular on Regulating Virtual Currency “Mining” Activities (整治虚拟货币 “挖矿” 活动的通知). This circular prohibits new virtual currency “mining” projects and mandates the accelerated withdrawal of existing projects.

In addition, although China’s criminal law does not explicitly legislate against crypto , in June 2021 the Supreme People’s Court, the Supreme People’s Procuratorate, and the Ministry of Public Security jointly issued the Opinions on Several Issues Concerning the Application of Law to Handling Criminal Cases Involving Telecommunications Network Fraud and Other Criminal Cases (II) (关于办理电信网络诈骗等刑事案件适用法律若干问题的意见（二）), which makes it clear that in the process of investigating a case by the public security authorities, if a virtual currency dealer is explicitly told that the person with whom they are dealing is suspected of the offence of telecommunications network fraud offences, and still continues to deal with such person,  , the dealer shall be held criminally liable for the offence of assisting in information network criminal activities in accordance with the provisions of Article 287 paragraph 2 of the Criminal Law. If a dealer who knows that the proceeds of a telecommunications network fraud offence and the proceeds thereof have been converted into property or cashed out through virtual currencies, etc., at a price that is significantly different from the market price, in accordance with the provisions of Article 312, paragraph 1, of the Criminal Law, he or she shall be held criminally liable for the offence of disguising or concealing the proceeds of crime or the proceeds therefrom, unless there is evidence proving that the dealer was genuinely unaware of the offence.

According to the ICO Ban and the far-reaching Circular 237, all these activities in relation to fungible cryptoassets are banned as part of the broader prohibition on cryptocurrency-related financial activities.,  

NFTs are not explicitly banned in China. In April 2022, the China Internet Finance Association, China Banking Association, and China Securities Association jointly issued the Initiative to Address NFT-Related Financial Risks (“NFT Initiative”). The NFT Initiative recognizes NFTs as an application of blockchain technology with the potential to positively drive industrial digitization.

On the other hand, the initiative underscores the importance of adhering to certain norms to prevent financial risks associated with NFTs. This includes:

• Avoiding the inclusion of financial assets such as securities, insurance, credit, or precious metals in the underlying goods of NFTs to prevent the issuance of financial products through trading.
• Steering clear of practices that diminish the non-fungible characteristics of NFTs, such as splitting ownership or creating batches, to evade ICO restrictions.
• Refraining from offering services for NFT trading involving centralized exchanges, continuous listing trading, and standardized contract trading to avoid setting up an exchange.
• Not using virtual currencies like Bitcoin, Ethereum, or Tether as valuation and settlement tools for NFT transactions.
• Implementing real-name authentication for issuers, sellers, and buyers, maintaining customer identity information and transaction records, and actively participating in anti-money laundering efforts.
• Refrain from direct or indirect investment in NFTs and refraining from providing financial support for NFT investments.

In addition, China also promulgated the Regulations on the Administration of Blockchain Information Services (区块链信息服务管理规定)in 2019, which stipulate that blockchain information service providers should fill in information such as the service provider's name, service category, service form, application field, server address, and other information through the blockchain information service filing management system of the Cybersapce Administration of China to fulfil the filing procedures within ten working days from the date of service provision. Currently there are a number of companies have completed the filing to sell NFTs (in Chinese we also call it digital collection).

As NFTs are being treated differently from crypton assets as it is not subject to the broader ban in China. The activities listed are generally allowed so long as the any transaction involving NFTs uses legal currency for the settlement, and the trading website has completed the filing for providing blockchain information service.

According to Circular 237, offshore virtual currency exchanges are prohibited from providing crypto-currency exchange service via Internet to residents in the PRC, and domestic personnel of relevant offshore virtual currency exchanges, as well as entities or individuals who knowingly or should have known that they are providing marketing, payment settlement, technical support, etc. to these exchanges engaged in virtual currency-related businesses, shall be sought accountability in accordance with the law. By prohibiting the provision of any form of assistance, including marketing, payment settlement, and technical support to offshore virtual currency exchanges operating in China, the rules indirectly and strictly limit the ability of these exchanges to conduct business in China. Thus, offshore virtual currency exchanges are prohibited from actively marketing or soliciting services to Chinese residents.

However, the rules do not explicitly state that the “reverse solicitation” scenario, where Chinese residents independently seek out and request the services of offshore exchanges without being actively solicited, is prohibited.  Therefore, while the rules prohibit offshore virtual currency exchanges from actively marketing to Chinese residents, they do not explicitly prohibit the reverse solicitation situation where Chinese residents themselves proactively seek to use the services of these offshore exchanges.