Foreclosure of all illegal gains by Richway
By Mr. Liu Honglin
Today's big news about the financial sector is worth a close look at by the encrypted money industry。
ON 22 MAY, IT WAS ANNOUNCED THAT THE COMPANY HAD RECEIVED A NOTICE OF INVESTIGATION FROM THE CHINA SECURITIES COMMISSION AND ITS SHENZHEN BRANCH OFFICE, AS WELL AS AN ADVANCE NOTICE OF ADMINISTRATIVE FINES. CERTAIN WEALTHY ENTITIES IN MAINLAND CHINA AND HONG KONG, CHINA, OPERATE SECURITIES, PUBLIC FUND SALES AND FUTURES OPERATIONS IN MAINLAND CHINA WITHOUT OBTAINING THE REQUIRED PERMITS OR APPROVALS, IN VIOLATION OF THE SECURITIES ACT, THE SECURITIES INVESTMENT FUND ACT AND THE FUTURES AND DERIVATIVES ACT OF THE PEOPLE ' S REPUBLIC OF CHINA. CSRC INTENDS TO ORDER THE COMPANIES CONCERNED TO CORRECT OR STOP SUCH ACTS, CONFISCATE THE ILLEGAL PROCEEDS AND IMPOSE A FINE TOTALLING APPROXIMATELY RMB 1.85 BILLION. IN ADDITION, CSRC INTENDS TO IMPOSE A PERSONAL FINE OF $1.25 MILLION ON MR. LI HUA, FOUNDER AND CEO OF THE COMPANY. FULWAY HOLDINGS STATED THAT THE PROPOSED FINE WAS STILL PENDING FURTHER PROCEDURE AND FINAL DECISION BY CSRC。
The license plate is not a talisman
This news, if only in the voucher business, can certainly be understood as a cross-border securities restructuring. But if it were to be seen in a broader cross-border financial regulatory framework, it would be more than a mere “rich road, tiger penalty”. Its real signal is that, even if offshore financial institutions have obtained a licence abroad, it is possible for Chinese regulators to evaluate your conduct in accordance with Chinese law as long as you provide financial services to residents of mainland China。
This logic is a real source of alarm for an encrypted currency exchange。
Many may ask the first question: why can the Mainland of China control the fact that Futao is a Hong Kong coupon holder and that tigers have offshore licences and are legally operating abroad? The question is simple, but crucial. The answer is not complicated, because regulation is not about where you're registered, not just where you get your license, but about who you're offering your financial services to, and whether it's being regulated in the interior of China。
The Hong Kong licence addresses the issue of “Can you do securities business” within Hong Kong's regulatory framework, but it does not automatically resolve the question of “Can you do securities business for residents of China? Your compliance in Hong Kong does not mean your compliance in the interior; your compliance in Dubai does not mean your compliance in the interior. Financial plates are not amulets, let alone global passes. It is essentially a judicial authority that permits you to carry out specific financial operations within your jurisdiction。
And that's why it's so easy to think of an encrypted currency exchange. Many encrypted money exchanges now say that we have licences in Dubai, are registered in Europe, are applying for or have obtained some virtual asset-related licences in Hong Kong. But the question is, if these exchanges continue to provide services such as registration, trading, contracts, money management, borrowing, documentary and promotion services for residents of mainland China, will Chinese regulators consider you to have entered the territory of mainland China
In regulatory logic, the answer is probably yes。
What's the difference
However, there is also a need to pay particular attention to a legal difference. Fungway, Tiger, Long Bridge, etc., have been penalized because of the pre-established securities legal system in mainland China. The Securities Act makes it clear that securities companies operate securities brokerage, securities financing, etc., with the approval of the securities supervisory authority of the State Council and with a licence to operate securities; with the exception of securities companies, no company or individual may engage in securities underwriting, securities bonding, securities brokerage and securities financing. Any person who engages in the illegal operation of securities in violation of the relevant provisions may be ordered to correct, confiscate the proceeds of the offence and be fined more than twice the proceeds of the offence and not more than ten times the proceeds of the offence, or a fine of not less than one million dollars if there is no proceeds of the offence or less。
This is typically the “law, permit, violation of the law, basis for punishment”. So the SEC can say that you have a Hong Kong license, but you don't have a license to conduct securities in China, and you offer securities brokerage services to domestic investors, in violation of the Chinese securities law. Where's the money coming from? From your unauthorized securities operations under Chinese supervision. Since the proceeds of an offence can be identified and the law authorizes the supervisory authority to confiscate the proceeds of an offence, the penalty can be found in law。
But the situation is more complicated in the case of encrypted money exchanges。
There is currently no “encrypted currency exchange licence system” in mainland China. In other words, it is not for you to meet certain conditions to apply for a virtual currency exchange licence in the interior of the country and then legally provide services to users in the interior. On the contrary, China ' s basic approach to virtual currency transactions is to define virtual currency-related operations as illegal financial activities through regulatory policies and sectoral notifications。
IN 2013, THE PEOPLE ' S BANK OF CHINA, AMONG OTHERS, ISSUED A CIRCULAR ON THE PROTECTION AGAINST THE RISKS OF BITCOIN, MAKING IT CLEAR THAT BITCOIN WAS NOT ISSUED BY MONETARY AUTHORITIES, DID NOT HAVE MONETARY ATTRIBUTES SUCH AS LEGAL INDEMNITY AND COMPULSORYNESS, AND WAS NOT A REAL CURRENCY, AND THAT FINANCIAL INSTITUTIONS AND PAYMENT AGENCIES WERE NOT ALLOWED TO CARRY OUT BUSINESS RELATING TO BITCOIN. IN 2017, THE SEVEN DEPARTMENTS ISSUED THE CIRCULAR ON PROTECTION AGAINST THE RISK OF FINANCING THE ISSUANCE OF CURRENCY, CALLING FOR THE SUSPENSION OF ICO, REQUIRING THAT THE VARIOUS PLATFORMS FOR THE FINANCING OF CURRENCY TRANSACTIONS SHOULD NOT ENGAGE IN EXCHANGE BETWEEN FRENCH CURRENCY AND CURRENCY, VIRTUAL CURRENCY, TRADE IN OR TRADE IN TOKEN OR VIRTUAL CURRENCY AS A CENTRAL COUNTERPART, OR PROVIDE SERVICES SUCH AS PRICING, INFORMATION INTERMEDIATION, ETC. IN 2021, 10 DEPARTMENTS ISSUED A CIRCULAR ON FURTHER PROTECTION AGAINST AND DISPOSAL OF RISKS ASSOCIATED WITH VIRTUAL CURRENCY TRANSACTIONS, FURTHER CLARIFYING THAT VIRTUAL CURRENCY DOES NOT HAVE THE SAME LEGAL STATUS AS STATUTORY CURRENCY AND THAT VIRTUAL CURRENCY-RELATED OPERATIONS ARE ILLEGAL FINANCIAL ACTIVITIES. IN ITS FOLLOW-UP RESPONSE TO THE PUBLIC COMMENTS, THE PEOPLE ' S BANK ALSO EXPLICITLY QUOTED THE CIRCULAR, STATING THAT VIRTUAL CURRENCY COULD NOT BE TRADED IN THE COUNTRY AND THAT THERE WAS A LEGAL RISK。
Thus, there are similarities and differences between encrypted currency exchanges and Hong Kong issuers。
THE SAME IS TRUE OF THE FACT THAT THEY ARE ALL OFFSHORE SUBJECTS, OR AT LEAST THROUGH THEM, PROVIDING FINANCIAL SERVICES TO RESIDENTS OF THE MAINLAND. ONE PROVIDES SECURITIES FUTURES SERVICES SUCH AS HONG KONG DOLLAR SHARES, FUNDS, FUTURES, FINANCING VOUCHERS, AND ONE PROVIDES VIRTUAL CURRENCY SPOT, CONTRACTS, FINANCIAL MANAGEMENT, BORROWING, PLEDGE, DOCUMENTARY, FORWARD CURRENCY, OTC, ETC. THEY ARE FACED WITH USERS IN CHINA, WHO CHARGE TRANSACTIONAL FEES, INTEREST, POOR POINTS, PLATFORM SERVICE FEES OR OTHER EARNINGS. INTUITIVELY, THESE OPERATIONS ARE NOT ORDINARY INTERNET SERVICES, BUT SERVICES WITH DISTINCT FINANCIAL, FINANCIAL AND INVESTMENT ATTRIBUTES。
The difference is that the voucher business has a complete legal system in China, and the encrypted currency exchange does not “run a business that could have applied for a licence without a license” in China, but continues to operate in a business space that is already rejected as a whole by the regulatory policy. The former is “You cannot do securities business because you do not have a Chinese securities license” and the latter is closer to “This business is not allowed in the interior of China itself, so you cannot do it for users in China”。
This explains why we cannot simply say that, since the CSRC can confiscate all the illegal gains of the rich, China’s regulatory authorities will be able to seize all the illegal gains of foreign exchanges, such as Money Ann, OKX, and Bybit, in the same way tomorrow. Legally, no such rough analogy. Since the securities business has a clear mandate under the Securities Act and rules for forfeiture of the proceeds of crime, the virtual currency exchange area is more based on regulatory notices, departmental regulations, risk-disposal policies and the legal framework that may apply in specific cases, such as criminal, foreign exchange, money-laundering, illegal collection, gambling, fraud, assistance in information cybercrime activities。
But that is why an encrypted currency exchange should not feel secure, but rather panic。
WHY? BECAUSE THE SECURITIES BUSINESS HAS AT LEAST A COMPLIANCE PATH. IF YOU WANT TO CONDUCT SECURITIES OPERATIONS IN THE INTERIOR, YOU CAN APPLY FOR THE APPROPRIATE AUTHORIZATION, BE SUPERVISED BY THE CSRC AND ENTER THE STATUTORY FINANCIAL SYSTEM. OF COURSE, IT IS NOT EASY FOR OFF-SHORE ISSUERS TO OBTAIN A LOCAL NAME PLATE DIRECTLY, BUT AT LEAST THE LEGAL FRAMEWORK FOR SECURITIES ITSELF IS CLEAR. ENCRYPTED MONEY EXCHANGES FACE USERS IN CHINA AND THE INTERIOR WITHOUT EVEN A COMPLIANCE PATH. YOU CAN’T SAY THAT I HAVE A LICENSE IN HONG KONG, SO I CAN OPEN UP CONTRACTUAL TRANSACTIONS TO THE MAINLANDERS, OR THAT I AM COMPLIANT IN DUBAI, SO I CAN PROMOTE CHINESE IN THE MAINLAND OF CHINA, KOL HOME WORKERS, OFFLINE ACTIVITIES, COMMUNITY OPERATIONS AND OSC SERVICES. BECAUSE MAINLAND CHINA DOES NOT RECOGNIZE THE LEGAL SPACE FOR SUCH SERVICES。
From this point of view, the rich-way affair is a real reminder to the encrypted money exchange that, instead of “ tomorrow’s supervision will surely result in the forfeiture of all your illegal gains”, three other sentences are used: first, that offshore licences cannot be used against mainland China; secondly, that services to residents of mainland China may trigger Chinese regulatory evaluation; and thirdly, once the regulator decides to see through the substance of his business, the offshore structure, its subjects, and its licence plates do not automatically isolate the risk。
The risk is on people
IN REALITY, MANY ENCRYPTED MONEY EXCHANGES ARE INDEED ALSO TARGETING USERS IN MAINLAND CHINA IN VARIOUS WAYS. ON THE FACE OF IT, THEY MAY HAVE CLOSED THE REGISTRATION OF MAINLAND CHINESE MOBILE PHONE NUMBERS OR STOPPED PUBLICLY CLAIMING SUPPORT FOR CHINESE USERS. IN PRACTICE, HOWEVER, THE CHINESE-LANGUAGE INTERFACE IS STILL IN PLACE, THE CHINESE-SPEAKING COMMUNITY IS STILL IN EXISTENCE, THE CHINESE-LANGUAGE KOL IS STILL IN EXISTENCE, THE SYSTEM OF RETURN TO WORK IS STILL IN PLACE, AND EVEN MANY OF THE EXCHANGE’S GROWTH TEAMS, BUSINESS TEAMS, MARKET TEAMS, AND TECHNICAL TEAMS ARE STILL INEXTRICABLY LINKED TO MAINLAND CHINA。
Legal evaluation would be relatively complex if only mainland Chinese users were able to access the offshore platform themselves, without active marketing, no Chinese operations and no service arrangements for Chinese users. However, if the platform, while speaking openly about “non-serving domestic users”, continues to receive visitors through agents, KOL, communities, home leavers, lectures, offline activities, Chinese kits, micro-messages, Telegrams, the regulator may well believe that this is not passive access, but rather a proactive approach to the domestic industry。
AT THIS POINT, THE QUESTION IS NOT JUST WHETHER THE PLATFORM WILL BE BLOCKED BY DOMAIN NAMES, THE APP, THE CUT-OFF ROUTE. A MORE REALISTIC RISK IS THAT THE PERSON CONCERNED MAY FACE VERY SPECIFIC LEGAL CONSEQUENCES IF HE OR SHE IS IN CHINA, OR IF HE OR SHE ENTERS THE COUNTRY IN THE FUTURE。
THERE IS ALSO A DISTINCTION BETWEEN ADMINISTRATIVE AND CRIMINAL RISKS. NOT ALL ENCRYPTED MONEY TRANSACTIONS FOR INLAND USERS WOULD CERTAINLY CONSTITUTE A CRIMINAL OFFENCE. CRIMINAL RESPONSIBILITY MUST BE JUDGED BY REFERENCE TO THE SPECIFIC ACT, THE SPECIFIC AMOUNT, THE SPECIFIC LEVEL OF PARTICIPATION AND THE CONSEQUENCES OF THE PARTICULAR HARM. FOR EXAMPLE, THERE IS ONLY MARGINAL TECHNICAL SUPPORT FROM ORDINARY EMPLOYEES, AND LEGAL RISKS ARE CERTAINLY NOT AT THE SAME LEVEL AS MANAGERS, EXECUTIVES, CORE OPERATORS, FUND CHANNEL MANAGERS, OTC MANAGERS, CONTRACT MANAGERS, AND PLATFORM MANAGERS。
HOWEVER, IF AN ENCRYPTED CURRENCY EXCHANGE PROVIDES LONG-TERM, LARGE-SCALE, ORGANIZED TRANSACTIONAL SERVICES TO RESIDENTS OF THE MAINLAND, ESPECIALLY IN THE AREAS OF CONTRACTUAL LEVERAGE, FINANCIAL ACCESS, OTC ACCESS MONEY, AGENCY RETURN, CURRENCY EXCHANGE, ETC., IT IS POSSIBLE THAT THE PERSON IN CHARGE, THE EXECUTIVE OR THE HEAD OF THE CORE BUSINESS MAY FACE CRIMINAL RISK IF HE IS LOCATED IN THE MAINLAND。
Many friends wonder why? In the framework of China ' s criminal law, the illegal operation of securities, futures, insurance or the illegal payment and settlement of funds, without the approval of the competent national authorities, disrupts market order and, in serious circumstances, may trigger the offence of illegal business. However, the question of whether a virtual currency exchange can be treated as an offence of illegal dealing in general is not a matter of simple conclusion in practice. It depends on whether the specific business is considered by the judicial authorities to be the illegal operation of certain types of financial business, whether there is a settlement of payments, the characteristics of the securities futures, the characteristics of the exchange of funds and whether the aggravating circumstances are met。
The article, of course, is not intended to be alarming, but I would like to state that there is no legal space for secret currency exchanges to operate in the interior of China, and that there is a clear regulatory policy risk in the first place if the operations are directed at the population in China, and that the general regulatory risk may rise from a general regulatory risk to a criminal risk if the operations further pile up the pool, the leverage contract, the illegal collection of funds, the distribution of the pedagogues, the money-laundering route, the fraudulent flow of funds. In particular, the risks of long-term participation in decision-making, organization, profitability and the direction of the internal marketing industry cannot be confused with those of ordinary users and employees。
The Supervisor will keep an account
This is also the most valuable inspiration for the encryption industry in the case of the Rich Path: regulation does not necessarily start at the outset, but does not mean that regulation will not account for it。
Internet coupons such as Futomo and Tiger are not only being monitored today. As early as 2021, the CVM has spoken out through the media about its regulatory approach; in November 2021, the CVM interviewed Fulbright and Tiger executives, explicitly calling for the legal regulation of cross-border securities operations for domestic investors; and in 2022, regulation continued to promote “effective containment and orderly resolution of stocks”. In other words, it is not a sudden punishment, but rather a process of repeated release of regulatory attitudes, of corrective requirements and of eventual administrative sanctions。
THE SAME IS TRUE OF THE ENCRYPTED CURRENCY EXCHANGE. CHINA ' S REGULATORY APPROACH TO VIRTUAL CURRENCY, FROM 2013, 2017 TO 2021, HAS BEEN VERY CLEAR. MANY EXCHANGES AND PRACTITIONERS ARE NOT UNAWARE, BUT SELECTIVE. EVERYONE KNOWS THAT THE MARKET IS LARGE IN CHINA AND CHINA, THAT THERE ARE MANY USERS, THAT TRADE IS DYNAMIC, THAT THERE IS A STRONG DEMAND FOR CONTRACTS, AND THAT KOL IS EFFICIENT IN ITS TRANSFORMATION. THE PROBLEM IS THAT REGULATORY DOCUMENTS DON'T EXIST BECAUSE YOU PRETEND NOT TO。
FOR AN OFF-SHORE ENCRYPTED CURRENCY EXCHANGE, WHAT REALLY NEEDS TO BE DONE IS NOT TO LOOK AT HOW TO MAKE THE EXCULPATORY STATEMENT BETTER, BUT TO JUDGE IN SUBSTANCE WHETHER OR NOT IT IS ORIENTED TOWARDS MAINLAND CHINA. FOR EXAMPLE, IS REGISTRATION AND KYC ALLOWED FOR USERS OF MAINLAND CHINA? IS THERE A CHINESE TEAM DEDICATED TO THE MAINLAND MARKET? DO YOU HAVE ACCESS TO MAINLAND USERS THROUGH THE KOL, AGENCY, HOME SERVICE SYSTEM? ARE UNDERGROUND ACTIVITIES ORGANIZED? ARE THERE DOMESTIC EMPLOYEES INVOLVED IN PROMOTION, SERVICE, OPERATION, TRANSACTION SUPPORT? IS ACCESS TO THE OTC ACCESSIBLE TO USERS IN THE INTERIOR? ARE REGULATORY IDENTIFICATION CIRCUMVENTED THROUGH TECHNICAL MEANS? MANY PLATFORMS HAVE THEIR OWN MINDS TO ANSWER THESE QUESTIONS CAREFULLY。
THIS EVENT IS ALSO A REMINDER FOR INLAND USERS. MANY PEOPLE WHO USE OFFSHORE ISSUERS AND OFF-SHORE EXCHANGES HAVE A NATURAL FEELING THAT THE PLATFORM IS LARGE, THERE ARE MANY LICENCE PLATES, THERE ARE MANY ADVERTISEMENTS, AND KOL IS PUSHING. BUT THE MOST TROUBLE WITH FINANCIAL SERVICES IS THAT PLATFORM COMPLIANCE DOES NOT MEAN YOU USE PATH COMPLIANCE, AND PLATFORM SECURITY OUTSIDE THE COUNTRY DOES NOT MEAN YOU HAVE SECURITY IN THE INTERIOR. IN PARTICULAR, WHEN IT COMES TO THE ENTRY AND EXIT OF FUNDS, THE USE OF FOREIGN CURRENCY, THE SALE OF VIRTUAL CURRENCY, THE FREEZING OF BANK CARDS, THE FRAUDULENT INFLOW OF FUNDS AND THE RISK TO THE OTC COUNTERPARTY, ORDINARY USERS ARE OFTEN THE WEAKEST LINK IN THE RISK CHAIN. THE PLATFORM CAN CHANGE DOMAIN NAMES, SUBJECTS, COUNTRIES, USERS ' BANK CARDS, IDENTITY INFORMATION AND FINANCIAL FLOWS WITHIN THE COUNTRY。
So, the title of this article, “The encrypted currency exchange is in a state of panic”, does not mean that regulation will follow the logic of securities law tomorrow, and that all illegal gains of all exchanges will be punished. Instead, we would like to remind you that the rich-way affair has once again shown the encrypted money exchange a very realistic regulatory logic: holding a licence abroad is not tantamount to ignoring China; operations abroad are not equal to the absence of risk; and in China, users may look back on the user, money, extension, team, technical services, and the actual profit chain。
In the past few years, there has been a popular saying in the encryption industry that “we are a platform for globalization, not for Chinese users”. If that is true, it can certainly be part of the compliance boundary. However, the firewall has a very limited effect if it is simply a disclaimer posted on the official web, and the actual business continues to revolve around Chinese users. It looks at facts, not slogans; it looks at business flows, money flows, user flows, promotion flows, not what you write online。
FROM A LAWYER’S POINT OF VIEW, IT WILL BECOME INCREASINGLY DIFFICULT TO EXPLAIN ALL FUTURE CROSS-BORDER FINANCIAL SERVICES, WHETHER SECURITIES, FUNDS, FUTURES, OR VIRTUAL CURRENCY, STABLE CURRENCY, RWA, CHAIN-MANAGEMENT, AND ENCRYPTED PAYMENTS, FOR USERS IN THE MAINLAND. THE ESSENCE OF FINANCIAL REGULATION IS THE MANAGEMENT OF FUNDS, RISKS AND INVESTORS. AS LONG AS YOUR SERVICES ARE INTENDED FOR RESIDENTS OF MAINLAND CHINA, YOU CANNOT REMAIN ENTIRELY OUTSIDE CHINESE SUPERVISION AS LONG AS THE SUBSTANCE OF YOUR BUSINESS AFFECTS CHINA ' S FINANCIAL ORDER, FOREIGN EXCHANGE MANAGEMENT, MONEY-LAUNDERING, PERSONAL INFORMATION PROTECTION AND SOCIAL STABILITY。
THE ENCRYPTION INDUSTRY CERTAINLY HAS ITS TECHNICAL AND COMMERCIAL VALUE, STABILIZING CURRENCY, CHAIN PAYMENTS, GLOBAL ASSET FLOWS, AND RWA, WHICH MAY INDEED REPRESENT PART OF THE FUTURE FINANCIAL INFRASTRUCTURE. BUT THE MORE THE FUTURE INDUSTRY, THE LESS LIKELY IT WILL BE TO BE BUILT ON A LONG-TERM BASIS IN A REGULATORY ASH ZONE AND A SENSE OF LUCK. A TRULY MATURE INDUSTRY IS MARKED BY THE BEGINNING OF KNOWING WHERE THE BORDER IS, WHAT MONEY CANNOT BE EARNED, WHAT USERS CANNOT TOUCH AND WHAT BUSINESS CANNOT BE DONE IN THE WRONG PLACE。
This sentence is understood by traditional issuers, as well as by encrypted money exchanges。
