As a China based lawyer (and an occasional business man) who has been advising on cryptocurrency, blockchain, and ICO’s related to all aspects of China business, I was personally pleased by the announcement the People’s Bank of China recently its decision to introduce a halt on ICOs, a move that sent what I believe can only be described as unwarranted hysteria throughout the world (based upon my email inbox at the law firm). As the American poet Robert Frost wrote: “Good fences make good neighbours”. The PBOC pronouncement and the Chinese government now begins to create sensible boundaries to foster a healthy future for cryptocurrency, blockchain and even ICO’s.
I have been an admirer, friend and counsel to the elusive Satoshi Nakamoto since before the beginning in 2009. Blockchain/cryptocurrency is the future, just not everyone knows it yet. Not everyone knows how to regulate it or conduct safe business models yet, the Americans (where I was born) and the Chinese (where I reside) included. All the others who I like to call “fellow-global blockchain-geeks” are running around like decapitated chickens. China regulation I tell them is a GOOD thing, the “sky is not falling”. As a lawyer resident in China for decades, this is just good old fashioned pro-active measures taken by the Chinese to manage the second-largest economy in the world and protect its citizens and its businesses. Many have voiced themselves, both good and bad, parsing out thoughts on this this China decision and its potential consequences. The Chinese government has things in hand, the future is going to be bright, this is all a part of growing pains to eliminate bad actors.
The “naysayers” believe it will impede innovation, making access to funds to launch new ideas to business more difficult this is unfounded. Naive folks and the uninformed have been making what are incorrect assumptions that Chinese businesses will relocate to other markets. As a lawyer I have been opining on the legal issues of blockchain, cryptocurrency since 2009. Now we are working on China legal and regulatory issues related to ICO’s, all the time, with my “boots on the ground” in mainland China dealing in this very specialized area (at the intersection of business, economy, law, policies and regulations). Sure there are implications, and they will be vast, but this is a good thing not a bad thing. This is a Chinese pro-active governmental measure to make things safer, not prohibitive nor restrictive.
With much public input, the People’s Bank of China (PBOC) had made what was appropriate investigations into China based ICO’s whereby it shall punish illegal fundraising-related activities in Renminbi 人民币. As a result of the investigation, and because China wishes to promote itself as a country that abides by the “Rule of Law” it shall also seek to remedy legal violations in already completed ICOs.
The PBOC along with other regulatory and administrative agencies, individuals or organizations that have completed illegal ICO fundraising should make arrangements to return the funds. In mainland China we have “civil law system” (based upon the German Code of 1896) so it is unclear how the money might to be paid back to investors. Implementing these regulations and coordinating agencies and regulators is a bit like turning around a ship, it takes time to get the government and the public to organize, but I am certain it will be performed in a thoughtful way. Unlike “common law” whereby case law can create law, this is a longer and more some would say thoughtful process of implementing laws, policies and regulations. So PBOC needs to be able to work in concert with other agencies to implement their intentions as a practical matter.
What we have seen in our practice dealing with lean-start-ups ICOs, are generally deployed by lean start-ups for fundraising. We have also been part of ICO’s whereby we draft “smart” contracts. Although this is a small fraction of our business as lawyers there is an unprecedented growth over the past year, reportedly raising $1.6 billion globally, with China accounting for around $400 million (through 43 to 65 ICO platforms, depending upon what one defines as China).
Why the PBOC announcement? In my opinion it was because ICO’s are widely seen as a way to sidestep venture capital funds and investment banks. But more importantly, ICOs have undeniably served as a breeding ground for frauds, which often include market manipulation or “pump-and-dump” schemes carried out by publicly companies on different bourses that claim to develop and launch some new technologies. The large amount of money collected so quickly has also attracted cyber criminals.
PBOC understand that ICO’s may disturb financial order and needed to be regulated. What is to be noted is apart from conducting ICOs, digital token financing and trading platforms no longer have the right to do conversions of coins with fiat currencies. Correspondingly, digital tokens cannot be used as currency on the market and banks are forbidden to take part in, or contribute to initial coin offerings’ activities.
As a legal professional in China dealing with these matters, it is my belief China wishes to allow responsible ICOs in China, on approved platforms and in safe formats. This is going to happen, this is not the end, just the end of the beginning in my opinion. A more “Chinese approach” in my opinion is that Chinese authorities will be checking projects individually and learning and developing what will become a safe market. In fact the PBOC, itself continues to explore the viability of issuing their own digital currencies. The Chinese are clever they know this is the future and they will implement a system to better their place in the world as a financial hub, this may be just the opportunity to surpass other traditional financial hubs. Once they have a plan, they will go full steam, I have no doubt.
So what happened? China joined the long list of countries which have made their official statements about ICOs whereby it clarifies matters for everyone in what had been a “grey area”. Same as USA, same as Singapore, what is the big deal? Clarity from PBOC regulators that tokens may be considered as securities and, as such, the sale of these ICO token’s in local currency the Renminbi (人民币) ICO not legal if it does not follow the law of the land. The earth has not moved, this is no different than such places like the USA. This is much ado about nothing for those who take legal advice with the laws, policies and regulations of China. The law/ban is completely misunderstood by my fellow cryptocurrency, blockchain, ICO legal advisers not in mainland China.
Despite the recent past, Chinese people are born merchants at heart. This is a population of 1.3 Billion (heck, the city where I live has 25 million people) with all levels of varying education. The system has changed rapidly and even us so-called experts have a hard time keeping up with the changes and challenges of new technology. The rules are good, they are to provide clarity for all of us resident in what has become the greatest economic transformation in the history of the world.
As a legal professional resident in China for decades, advising on cryptocurrencies, blockchain and then on the flurry (tulip craze) on discussions as to what I refer to as Chinese-cowboy ICO’s no one “in the know” can deny there have been a lot of ICOs recently that were conducted in violation of Chinese laws. It is a very important and positive development that the Chinese government are better defining through the transparency of the legal system for the ICO “market players” as we call them here know with certainty and unambiguity the “rules of the China game”, and what regulations companies and individuals need to obey. This is not bad, this is a good thing. Legitimate organizations and ICO’s which are not raising funds in RMB are unaffected. Good news does not “sell” as there has been so much progress with financial businesses and models within the Shanghai Free Trade Zone. My best advice is to be well informed, get professional advice and proceed fearlessly. The Chinese government is controlling growth and its citizens. This should be lauded not feared. This miscommunication that all ICOs are illegal, is a good headline but it is misinformed and fails to follow up on the details and the nuance. Of course, in China tokens could still be sold to public as long as their sale complies with the relevant Chinese laws, policies and regulations. China includes, Hong Kong SAR, Macau SAR, and Taiwan. These over pronouncements by folks not informed and not resident in China working with the details of these matters is just plain silly. The PBOC declarations will just help to reshape the ICO market, it will not destroy it. The future is bright in my opinion. Get advice and keep it steady. Do not panic.