The government of the People’s Republic of China (PRC) has formally announced a suspension to all ICOs and token offerings and financing activities by releasing two notices, namely, the Notice of Seven Ministries Including the People’s Bank of China on Guard against Risks of Token Offering and Financing (Joint Notice) and Notice on the Rectification of Token Offering and Financing Activities (Zheng Zhi Ban Han  No.99)( Notice 99). Further, there is speculation that formal government action suspending virtual currency trading platforms is imminent, which has already caused major China-based trading platforms to suspend their activities.
In the two formal notices, the Chinese government has identified initial coin offerings (ICOs) as essentially an unapproved illegal public financing highly suspected of facilitating illegal fund-raising, illegal securities offerings, illegal offering and sale of tokens, financial fraud, and pyramid schemes. Accordingly, these documents provide that all types of token offering and financing shall come to a halt. The organizations and individuals who have completed the token offering and financing should plan to withdraw and make other arrangements, protecting the interests of investors and handling the risks properly.
After the issuance of these two notices, BTCChina, one of China’s largest bitcoin trading platforms based in Shanghai, announced on September 14, 2017 that it would stop all trading from September 30, 2017, and it will stop registration of new users from the date of the announcement. BTCChina cited the PRC government’s formal notices as the basis for its decision. (As of the date of this article, the other two major Chinese bitcoin exchanges, Huobi and OkCoin, have not yet made public announcements of their intentions.) It has also been reported that China’s Bitkan is suspending its over-the-counter (OTC) bitcoin and bitcoin cash trading services as of September 14, 2017.
Meanwhile, Chinese media have reported that the Shanghai Finance Bureau recently issued a “verbal notice” to several bitcoin trading platforms in Shanghai. According to reports, the “verbal notice” ordered that the platforms shall close their trading platforms and exit the market. The notice specified the deadline as the end of September and emphasized that the notice shall be strictly implemented. No public or formal government announcement, however, has been made to date. (BTCChina is based in Shanghai.)
Regulatory authorities in Beijing reportedly are now holding meetings attended by bitcoin trading platforms based in Beijing, and the Beijing-based platforms are likely to make similar announcements shortly.
This update provides a summary of the PRC government’s recent directives, with additional background information, current status, and regulatory trends in connection with the suspension.
Summary of the Recent Formal PRC Government Notices
Notice of Seven Ministries Including the People’s Bank of China on Guard against Risks of Token Offering and Financing (released on September 4, 2017)
Characterization of Token Offerings and Financing
- Financing activity where the financing entities illegally sell, circulate and raise “virtual currencies” from investors.
- Essentially an unapproved illegal public financing involving illegal sale of token, illegal securities issuance and illegal fund-raising, financial fraud, pyramid schemes and other criminal activities.
Characterization of Virtual Currency
- Virtual currency is not legal tender, does not have power of the sovereign and other monetary properties, and does not enjoy equivalent legal status with currency, and thus, it cannot and shall not be circulated as currency.
Rectifying Measures against All Token Offerings and Financing
- All types of token offerings and financing shall come to a halt.
- The organizations and individuals who have completed the token offering and financing shall plan to withdraw.
- Relevant authorities will strictly investigate and prosecute the ongoing token offering and financing which does not cease in response to this notice.
Rectifying Measures against Token Financing and Trading Platforms
- Stop any exchange business among fiat money, token, and virtual currency.
- Stop trading token or virtual currency directly or trading as a central counter party.
- Stop providing pricing, information intermediary, and other services for token trading.
- If the platform is involved in illegal activities, the telecommunications authority shall close its online platform and mobile applications, the internet authority shall remove its mobile applications from the application store, and the industry and commerce department shall revoke the platform license, upon requests made by the financial regulatory authority.
Rectifying Measures Against Financial and Non-Financial Payment Institutions
- Shall not directly or indirectly provide account opening, registration, trading, liquidation, settlement and other services for token offerings and financing.
- Shall not underwrite insurance business related to token and “virtual currency.”
- Shall not include token and “virtual currency” in the insurance coverage.
- Shall report any illegal transactions regarding token offerings and financing to relevant authorities in a timely manner.
Risk Alert for Investors
- Investors shall assume the risks by themselves.
- Regarding any illegal financing activities by the name of any “token”, the public shall strengthen their risk awareness and report any illegal activities in time.
Requirement on Industry Associations
- Study and analyze relevant policies.
- Urge members not to participate in illegal financial activities associated with token offerings and financing.
- Educate investors and help maintain the financial stability.
Notice on the Rectification of Token Offering and Financing Activities (Zheng Zhi Ban Han  No.99)(circulated internally on September 2, 2017 by the Office of Internet Financial Risks Rectification Working Group among its local offices)
Characterization of Token Offerings
- Same as that provided by the Joint Notice.
Conduct a Thorough Investigation
- Local offices of Internet Financial Risks Rectification Working Group are required to conduct a thorough investigation on ICO platforms and token offering activities with a list of 60 ICO platforms attached to the notice as a reference.
- ICO platforms are required to report to the local office with jurisdiction and copy local offices of China Banking Regulatory Commission, China Insurance Regulatory Commission, and China Securities Regulatory Commission before close of business on September 4, 2017 any token offering and financing activities, including financing entities, the executives, financing volume, and timing.
Halt All New Token Offering and Financing Activities
- The Notice requires each local office to halt all new token offering and financing activities within its jurisdiction and to establish a monitoring mechanism of token financing activities as soon as possible.
Study and Research Completed ICOs
- On a case-by-case basis.
- Local offices shall enforce the law strictly and crack down any illegal activities.
- Regarding complex cases, each local office shall establish a joint working group within its jurisdiction to clean up and rectify token financing activities accordingly.
Measures against Platform Executives
- Each local office in the place of registration of the platform shall interview platform executives, monitor them and their accounts, and freeze their assets when necessary.
Why Now? Background and Context
Rational Investment or Speculation
In recent periods ICO projects have become extremely popular in China and have attracted a great number of lay and unsophisticated investors, including middle aged and elderly people who have little knowledge of blockchain technology or its applications. There have been concerns expressed that these investors are too keen to make a quick fortune overnight and only focus on the discount they can get when subscribing the tokens and when they can exit by selling their tokens. The Chinese government’s action appears in part to address the problem that by taking advantage of these layman investors, some ICO projects have been launched to illegally raise funds and some are highly suspected of financial scams.
In addition, these notices were issued in the context of the National Financial Work Conference where President Xi Jinping stated: “Finance is an important core competitiveness of the country, financial security is an important part of national security, and the financial system is an important economic and social development of the basic system.” Furthermore, the 19th National Congress of the Communist Party of China (a meeting that takes place only once every five years) is upcoming in October. Thus, the halting of ICO projects is consistent with the central government’s stated policy of maintaining financial order and its timing may, at least in part, be the result of these political considerations.
Analysis and Implications
“Illegal Public Financing” Per the above-mentioned two notices, ICOs are deemed illegal public financing without regulatory approval. This suggests that ICOs shall be done in China in the future by obtaining advance approvals from the relevant authorities. In addition, according to the regulatory authority and some legal experts, ICOs with more than 200 investors, without any requirements on the sophistication of the investors, and/or associated with illegal continuous bidding, constitute illegal financial activities. Many ICO projects have nothing to do with the development of blockchain projects and are highly suspected of financial fraud. These concerns may be among the key subjects to be addressed during the legislative process expected in the near future.
Unclear Penalties for Violating These Notices. Article 2 of the Joint Notice states that relevant authorities shall strictly investigate and penalize the ongoing token offering and financing activities which do not cease in response to the notice. The Joint Notice also states: “The relevant authorities will closely monitor its [token financing] development and trends, strengthen cooperation with the judicial departments and local governments, step up law enforcement and rectify the chaos and disorder in accordance with the existing working mechanism. It will be transferred to judicial authority for handling if suspected crimes were found.” Also, there are no specific penalty provisions set forth in the Notice on the Rectification of Token Offering and Financing.
Possible Penalties for Illegal Token Offering and Financing Activities. Article 3 of the Joint Notice provides that regarding token financing and trading platforms involved in illegal activities, the financial regulatory department shall ask the telecommunications authority to close online platforms and mobile applications. Meanwhile, it shall ask the internet authority to remove the mobile applications from the application store and ask the industry and commerce department to revoke the platform license. In addition, article 15 of the draft Regulations on Disposal of Illegal Fundraising (Draft for Comments released on August 24, 2017)(Draft Regulations) provides that fund-raising in the name of virtual currency shall be subject to the administrative investigation conducted by the functional departments for disposing of illegal fundraising if the activity was not approved or in violation of relevant provisions of the State. One interpretation of this Article is that if the tokens issued represent shares of a company, the ICO constitutes an activity of issuing securities and thus without authorization reflects a violation of existing securities law and, potentially, criminal law. In contrast, it could be argued that the issuing of tokens which represent the right to use the Blockchain product, where the issuer recommends the ICO project via crowdfunding, falls within the scope of activities intended to be newly regulated by the Draft Regulations because there is currently no approving authority for this type of ICO in China.
Follow up on the Foreign Platforms Identified in the List. Three non-Chinese platforms are identified on the list 60 ICO platforms attached to the notice: TokenCapital, ALLCOIN, and bitcoinworld. TokenCapital is a non-Chinese platform with an unidentified operator on which Chinese domestic ICO projects are launched. Its website now prompts, before logging in, an important announcement to all TokenCapital users that “all ICO projects listed on our platform shall be ceased immediately till further notice and all deposit shall also be suspended.” In the case of ALLCOIN, a Canadian company doing business in China, it has posted a “Notice for Refunds of Allcoin’s ICO Projects” on its homepage under Announcements saying that “Allcoin has contacted with every ICO official team to decide the programs dealing with refunding.” As for bitcoinworld, a platform with unknown nationality of the operator but with domestic PRC projects, there is not any notice of the suspension of ICOs. Currently these three are the only non-Chinese platforms identified by the Chinese government, and these platforms have domestic (PRC) projects or do business in China. It is possible that additional platforms will be added to the list issued by the Office as a result of this investigation.
Outlook and Observations
The promulgation and issuance of several critical government directives and proposals over the course of the last several weeks — the draft Regulations on Disposal of Illegal Fundraising issued on August 24, the two formal notices halting ICO activity issued on September 2 and 4, and the more recent indications of Shanghai and Beijing regulatory authorities directing the suspension of exchange activities — collectively signal the PRC government’s intention to pause, at least temporarily, the broad range of financing, offerings, token issuance and currency trading activities which rely on Blockchain technology but do not currently fall squarely within any existing regulatory framework in China.
Many industry observers see this as a temporary measure and not a permanent ban, and one that is largely driven by societal concerns over fraudulent schemes, rampant speculation and harm to unsophisticated investors. For example, Mr. Hu Bin, Deputy Director of the Institute of Finance of Chinese Academy of Social Sciences, has emphasized that China has suspended but not banned ICOs. According to Mr. Hu, “the ICOs targeted are the illegal ones. China has realized the demand and the justification for ICOs. However, we need to caution against token speculations. Thus, the government needs to rectify this field to protect the interests of the investors and make relevant laws and regulations to guide the development of ICOs in China.”
In this view, the PRC government has decided that a ceasing of all related activity is necessary to give the government sufficient time to develop its approach to regulating issuers, defining regulatory authority, establishing approval processes, and implementing comprehensive investor protections, in order to provide a healthy environment for ICOs and a sound system to monitor and control risks so that ICOs better serve the welfare of Chinese society.
U.S. observers with an interest in the ICO sector have also stated that they expect that Chinese exchanges will resume operations by the end of the year. Matt Roszak, the chairman of Washington-based Chamber of Digital Commerce, an industry advocacy group, has stated that he anticipates that “China is preparing to provide licensure for less than a handful of exchanges as it grapples with the meteoric increase in cryptocurrency trading, and speculation on ICOs — licensure and engagement with government will help propel this industry forward.”
Finally, cross-border ICOs and virtual currency transactions may continue to present challenges for the PRC government’s regulatory goals. The government’s September 4 Joint Notice did not specifically include any provisions regarding cross-border IPOs, and the Joint Notice appears, from its language, to be focused on domestic Chinese ICO activities. It is, furthermore, practically difficult for domestic PRC regulatory authorities to control and regulate cross-border ICO activities if the platform and financing entity are both outside of China, where publication occurs through overseas websites and social media, and no publication, solicitation or fundraising activities take place in China. Emil Chan, vice-president of the Hong Kong Blockchain Society, has been quoted as saying that it would be difficult for PRC regulators to outlaw bitcoin trading altogether: “There is no option to restrict cross-border sales of bitcoin. It is a smarter move to maintain the operation of the local exchanges if the central bank’s goal is to minimize the outflow of yuan.”
Note: Perkins Coie LLP is based in the United States and is duly registered as a foreign law firm in the PRC. Consistent with applicable PRC regulations, the discussion herein is not, and should not be construed as, a legal opinion regarding the application of Chinese law.
 “Bitcoin Crashes After Chinese Exchange Says It Will Halt Trading,” Bloomberg Technology (Sept. 14, 2017), https://www.bloomberg.com/news/articles/2017-09-14/bitcoin-tumbles-as-chinese-exchange-says-it-will-halt-trading; “Bitcoin exchange BTCChina says to stop trading, sparking further slide,” Reuters (Sept. 14, 2017), https://www.reuters.com/article/us-china-bitcoin-btcc/bitcoin-exchange-btcchina-says-to-stop-trading-sparking-further-slide-idUSKCN1BP1J8
 “Bitcoin in free fall after China’s Bitkan suspends over-the-counter trading,” South China Morning Post (Sept. 13, 2017), http://www.scmp.com/business/china-business/article/2110889/bitkan-suspends-over-counter-bitcoin-trading-services
 The Office of Internet Financial Risks Rectification Working Group (Office) and its local offices were established in 2016 to rectify P2P, equity crowdfunding, third party payment, and related matters. The national working group is located at the People’s Bank of China (PBOC) and consists of representatives from the China Securities Regulatory Commission, China Banking Regulatory Commission, China Insurance Regulatory Commission, State Administration for Industry and Commerce, and several other related departments. Each local group at the provincial and municipal level is located at the finance bureau of the same level or the branch of the PBOC in the provincial capital and above. The local working groups consist of representatives from a number of relevant municipal departments.
 Zhong Guan Cun Blockchain Industry Alliance, “Blockbuster/ICOs Included in the Internet Financial Risks Rectification Campaign, Rectification Initiated by Document No.99,” https://mp.weixin.qq.com/s/cz99FHsvZqDWAXZAcizbJQ