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. On 11 March 2021, the National People’s Congress of the PRC launched the Outline of the 14th Five-Year Plan for National Economic and Social Development and the Long-Range Objectives Through the Year 2035 for the PRC (the Plan), in which blockchain is listed as one of the seven key industries of digital economy. The Plan fully reflects the great importance attached to blockchain technology and industrial development by the PRC government.

On 27 May 2021, the Ministry of Industry and Information Technology (MIIT) and the Central Cyberspace Affairs Commission issued Guiding Opinions on Accelerating the Application of Blockchain Technology and the Development of the Blockchain Industry, calling for the promotion of pilot deployments of blockchain applications and more tax incentives and government procurement preferences for blockchain enterprises and applications. The number of blockchain-related standards, patents and enterprises also surged in 2021.

At the same time, the PRC significantly escalated its controls over cryptocurrency-related businesses in 2021, which had a profound effect on cryptocurrency exchanges providing services to Chinese residents and cryptocurrency mining operations in China (see 2.1 Regulatory Overview). These regulations also cast a shadow over adjacent fields such as non-fungible tokens (NFTs) and decentralised finance (DeFi). As a result, although there are still discussions on whether NFTs should be exempt from the bans issued in 2021, many Chinese NFT platforms are cautiously distinguishing their businesses from cryptocurrency-related ones by sacrificing important functions such as trading.

For the next 12 months, all types of cryptocurrency-related businesses are expected to continue to face great obstacles and regulations, whereas blockchain-related businesses unrelated to cryptocurrencies will receive various forms of government support. Significant uncertainty exists regarding blockchain-related businesses in fields adjacent to cryptocurrencies, such as NFTs and DeFi – if and how the PRC regulators will define the legal boundaries of such businesses will have crucial implications on their development.

PRC businesses’ uses of blockchain include cryptocurrency/digital asset exchanges, cold/hot wallet providers, and crowdfunding and e-payment solutions.

Until recently, the PRC’s blockchain market was dominated by private companies and start-ups operating a variety of public and private blockchain services.

DeFi businesses related to cryptocurrencies (excluding the Digital Currency Electronic Payment (DCEP), or e-RMB) in China face extremely high enforcement risks, if not complete prohibition, especially as China further tightened its control over cryptocurrencies in 2021 with the promulgation of Notice No 237 (see 2.1 Regulatory Overview).

However, the PRC government is heavily promoting other uses of blockchain technology in the financial sector.

The landscape of the NFT market in China differs significantly from the rest of the world. As China has banned all types of activities related to cryptocurrencies, Chinese NFT platforms are cautiously distinguishing NFT creation, selling and other services that they offer from cryptocurrency-related services by embodying different features. For example:

• many platforms intentionally avoid using the phrase “NFT” and instead refer to NFTs as “virtual collectibles” to downplay their tokenised nature;
• NFTs are priced and traded in RMB rather than cryptocurrencies on almost all platforms;
• most platforms are built on consortium blockchains, giving the platforms a centralised authority to govern, which is in stark contrast to popular global NFT platforms built on public blockchains; and
• many platforms prohibit users from reselling or trading NFTs, although they may allow the gifting of NFTs.

All of these characteristics are evident in the top-tier NFT platforms operated by Chinese technology giants, such as Alibaba's Jingtan, Tencent's Huanhe and JD.com's Lingxi.

However, there are platforms that are more similar to global counterparts. The most notable one is NFT creation and trading platform NFTCN, which allows the reselling and trading of NFTs and is said to be built on an Ethereum sidechain, but still has NFTs on it priced and traded in RMB.

Remarkably, the Hangzhou Internet Court recently awarded the protection of NFTs, in what is commonly known as the first NFT infringement case in China; see 3.5 Non-fungible Tokens. While there are still uncertainties surrounding the legitimacy of NFTs, this judgment seems to lay a significant cornerstone in the protection of NFTs in judicial practice.

The PRC government appears to have two different attitudes towards blockchain technology and cryptocurrencies. On the one hand, it has been promoting blockchain technologies through multiple policies and initiatives in a wide range of industries, including government affairs. On the other hand, cryptocurrencies are closely scrutinised by the PRC regulatory authorities.

Blockchain Measures

The Administrative Measures on Blockchain Information Service (Blockchain Measures) were issued by the Cyberspace Administration of China (CAC) on 10 January 2019 and became effective on 15 February 2019; they 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 about the implementation of blockchain technology, so uncertainties still remain with respect to implementation.

Given the PRC government’s positive attitude and encouragement towards the development of blockchain, further clarifications and implementing measures are expected to be issued in relation to blockchain technology and cryptocurrencies.

Scope of regulation

The Blockchain Measures apply to any organisation operating as a “blockchain information service provider” (blockchain provider) in the PRC. Blockchain providers are defined to include:

• entities or nodes that provide information services to the public by way of blockchain technology; or
• institutions or organisations that provide technical support to the above entities or nodes.

Blockchain provider obligations

A blockchain provider is subject to a series of obligations under the Blockchain Measures, notably including:

• registration with the CAC;
• content control obligations to monitor information that is prohibited by applicable PRC laws and regulations;
• user real-identity verification by way of a corporate registration number, individual ID number or PRC mobile telephone number;
• having valid user terms and conditions/policies in place;
• conducting a security assessment before launching a new product, application or function, etc;
• the retention of data logs for at least six months; and
• the provision of necessary technical support and assistance with regulatory investigations, etc.

The most important feature of the regulations is the requirement to maintain “real-name registration of blockchain information service users”; users cannot remain anonymous.

Penalties

Violation of the Blockchain Measures could be subject to an order to rectify, warnings, suspension of business, administrative fines or even criminal liability if the offence is sufficiently severe.

Regulations on Cryptocurrencies

Notice No 289 in 2013 and Announcement No 94 in 2017

Under the Notice of the People's Bank of China (PBC), the MIIT, the China Banking Regulatory Commission, the China Securities Regulatory Commission (CSRC) and the China Insurance Regulatory Commission on Preventing Bitcoin Risk, issued on 3 December 2013 (Notice No 289), and the Announcement of the PBC, the CAC, the MIIT, 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 Risks, issued on 4 September 2017 (Announcement No 94), any digital assets such as bitcoin or other cryptocurrencies are not issued by monetary authorities in the PRC. They do not have any monetary attributes such as legal compensation and a compulsory nature, so do not have equal legal status as currencies and are prohibited from being circulated and used in the market as currencies.

On such basis, financial institutions and non-banking payment institutions in the PRC are prohibited from carrying out business services relating to digital assets. This includes:

• buying and/or selling digital assets;
• underwriting activities with digital assets;
• accepting digital assets as a payment and settlement tool;
• carrying out digital asset foreign currency exchange services;
• providing custody services of digital assets;
• issuing digital asset-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 the PRC. Announcement No 94 stipulates that the offering and exchange of cryptocurrencies constitute illegal fundraising and are criminal offences.

Announcement No 94 also prohibits cryptocurrency trading platforms from converting legal tender into cryptocurrencies, or vice versa. Trading platforms are prohibited from purchasing or selling 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.

Notice No 1283 and Notice No 237 in 2021

China further tightened its control over cryptocurrencies by issuing a series of notices and announcements in 2021.

On 3 September 2021, the National Development and Reform Commission, together with ten other government authorities, issued the Notice Regarding Cryptocurrency Mining Activities (Notice No 1283). The notice bans any and all new cryptocurrency mining projects and requires local governments to push existing cryptocurrency mining projects to wind down by implementing measures such as imposing punitive electricity prices and stopping all fiscal support and tax incentives.

On 15 September 2021, the PBC, together with nine other government authorities, issued the Notice Regarding Further Prevention and Management of Risks Associated with Cryptocurrency Trading Hype (Notice No 237), which provides that:

• all transactions of cryptocurrencies are illegal, including:
1. exchanging legal tender for cryptocurrencies or vice versa;
2. exchanging one cryptocurrency for another;
3. buying and selling cryptocurrencies as a central counterparty;
4. providing information and pricing services for the trading of cryptocurrencies;
5. issuing tokens to raise funds; and
6. trading cryptocurrency derivatives;
• it is illegal for overseas cryptocurrency exchanges to provide services to Chinese residents via the internet, and for individuals and organisations in China to work or provide services for overseas cryptocurrency exchanges; and
• where any person invests in cryptocurrencies and related derivatives in violation of public order and good morals, the relevant acts are legally invalid, and any losses arising therefrom shall be borne by that person.

Industry Standards

The PBC issued a guideline in respect of the security specifications for distributed ledger technology in the finance sector in 2020 (the Guideline). The Guideline sets out the technology requirements regarding issues such as basic hardware/software, encryption, data, protocols and privacy.

The MIIT has been working on drafting the industry standards for blockchain technology, and aligning the PRC standards with international standards. The bulk of the industry standards are still being drafted. In April 2020, the MIIT established the National Blockchain and Distributed Ledger Technology Standardisation Technology Commission to facilitate the publication of the PRC’s industry standards. The commissioners are drawn from university faculties and major online technology companies.

The PRC has not yet implemented standards applicable to the blockchain sector proposed by international bodies such as the Financial Action Task Force or the Bank for International Settlements. The MIIT has been working on drafting the industry standards for blockchain technology in order to align with international standards imposed by organisations such as the International Organization for Standardization or the International Telecommunication Union.

Regulatory bodies relevant to blockchain and cryptocurrencies include the CAC, the PBC, the MIIT, the Public Security Bureau (PSB), the China Banking and Insurance Regulatory Commission (CBIRC) and the CSRC. As explained in 2.1 Regulatory Overview, the CAC regulates blockchain and the internet in the PRC.

The PBC is the PRC’s central bank and the regulator in charge of cryptocurrency and digital asset-related affairs. The PBC considers virtual currencies to be illegal because they are not issued by any recognised monetary institution and do not have any legal status that makes them equivalent to money.

In addition, the PBC has started trials on its own digital currency in major PRC cities, including Beijing, Shanghai, Shenzhen, Hangzhou, Suzhou and Chengdu. This digital currency, commonly known as the “e-RMB” or “e-CNY”, has been widely used to settle payments in a broad range of situations, including payments for public transportation, food and retail. As of the end of 2021, there were 261 million users in the extended trial who had made USD13.8 billion worth of transactions. The PBC will be the sole issuer of this digital currency when it is officially launched.

The PSB is the regulator for security assessments under the Blockchain Measures; it also investigates criminal offences in relation to the use of blockchain technology.

The CBIRC and CSRC regulate anti-money laundering and other matters in relation to financial risk.

The National Internet Finance Association of China (NIFA), the China Banking Association (CBA), the Securities Association of China (SAC) and the Payment & Clearing Association of China (PCA) are trade associations in the financial sector and have promulgated regulations governing their members in respect of blockchain technologies. For example, the NIFA, the CBA and the PCA issued an announcement in 2021 that requires all of their members, including major banks and other financial and payment institutions, not to engage in cryptocurrency-related activities. The NIFA, the CBA and the SAC issued a non-binding initiative about handling NFT risks in 2022. See 3.5 Non-fungible Tokens.

There are also several fintech and blockchain research institutions throughout the country, most of which are research centres formed by large-scale PRC research universities, leading PRC technology companies 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 and do not have any formal status as anything other than research institutes.

Trading of Cryptocurrencies

PRC courts have divergent views about whether rights and interests related to the trading of cryptocurrencies should be protected. However, the courts may become more reluctant to extend protections as a result of the promulgation of Notice No 237.

In some cases, the PRC courts consider cryptocurrencies to be “virtual property” that could be protected. For example, in a January 2020 case the Futian District People’s Court of Shenzhen stressed that, although cryptocurrency (including ether) is not fiat currency in the PRC, ether constitutes property under the PRC Criminal Law because it “has financial worth”, and an ether owner may manage, charge fees for, transfer and publicly trade the ether.

However, other courts have adopted the opposite approach, ruling that debts arising from the purchase of cryptocurrencies or mining machines are illegal. For example, in a case decided by Guangzhou Internet Court in 2021, a number of people worked together to invest in Xin coins, but one person deleted the private key, meaning none of them were able to withdraw the Xin coins. The court rejected the plaintiffs' claim for damages against the person who deleted the private key, reasoning that investments in cryptocurrencies are not protected and they must bear all risks and losses themselves.

It should be noted that Notice No 237 provides that any investments in cryptocurrencies and related derivatives in violation of the public order and good morals are legally invalid, and losses arising therefrom shall be borne by the person. As such, PRC courts could be more reluctant to extend protections to rights and interests related to transactions of cryptocurrencies in the future.

Use of Cryptocurrencies for Payment

In a case decided by a court in Shanghai in 2021, the plaintiff who had paid cryptocurrencies according to a car purchase agreement sued the vendor, requesting specific performance by delivering the car as provided under the agreement. The court ruled against the plaintiff, holding that the agreement providing for cryptocurrencies as the payment method should be found invalid.

Mining of Cryptocurrencies

PRC courts previously extended protections to rights and interests related to the mining of cryptocurrencies. For example, in a case decided by a court in Zhejiang in June 2019, an individual sought to invalidate a sale and purchase agreement and requested a refund for bitcoin mining machines he ordered from the defendant. He argued that the subject matter of the agreement violated the applicable laws and regulations because it was forbidden to trade bitcoin, and therefore the agreement should be invalidated. The court dismissed his claim and held that, unlike using bitcoin for payments, trading bitcoin as commodities and bitcoin mining machines are both permitted, so the sale and purchase agreement for the mining machines did not violate any laws and regulations, and should bind both parties.

However, after the promulgation of Notice No 1283 on 3 September 2021 that declared the crackdown on cryptocurrency mining, the courts have been inclined to deem mining-related contracts invalid.

In a case decided by Dongcheng District People's Court of Beijing in October 2021, the plaintiff sued the operator that it engaged to manage its bitcoin mining machines for loss of profits due to a power outage of 107 days. The court declared their contract invalid based on the illegality of crypto mining and rejected the plaintiff’s claim. Again, in December 2021, Chaoyang District People’s Court of Beijing declared a bitcoin mining service contract invalid based on the illegality of crypto mining and therefore rejected the plaintiff’s demand for the mining machine operator engaged by the plaintiff to pay the bitcoins mined. The court also informed the local regulator, suggesting that it should investigate the bitcoin mining activities by the operator. The judgments of both cases referred to Notice No 1283. The latter case was reported by several major state-run media outlets, including the People's Court Daily run by the Supreme People's Court, which may further signal the judicial system's position on this issue.

Blockchain Evidence

PRC courts have recognised the validity of blockchain evidence in several cases. For example, in 2018 Hangzhou Internet Court admitted evidence of copyright infringements saved by a third party platform using blockchain technology, which was selected as one of "Ten Typical Internet Cases" by the Supreme People's Court. In June 2020, a local court in Shanghai admitted evidence created by blockchain technology, ruling that the transaction -related electronic data that was saved in the judicial platform using blockchain technology constituted electronic evidence under PRC law.

On 6 July 2018, the PBC indicated that PRC authorities had identified 88 cryptocurrency trading platforms and 85 ICO platforms, all of which have since been shut down. As of May 2021, 211 cryptocurrency trading platforms had been shut down in the PRC.

From January 2019 to November 2019, PRC 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 major cities including Beijing, Shanghai and Shenzhen declared they would conduct full investigations into cryptocurrency trading platforms, and call for rectifications thereof.

This type of enforcement is expected to continue on a routine basis, especially after the promulgation of Notice No 237 in September 2021. In fact, immediately following the promulgation of Notice No 237, many overseas exchanges, including Huobi and Binance, suspended new registrations from China, to avoid potential enforcement actions.

Meanwhile, China escalated its crackdown on crypto mining operations in 2021, which was also signalled in Notice No 1283 (see 2.1 Regulatory Overview), mainly for energy saving purposes. China banned power generation companies from supplying bitcoin, effectively stopping all mining. China adopted measures including imposing punitive electricity prices on crypto mining projects, and stopping all fiscal support and tax incentives therefor. The crackdown is even stricter in certain areas: for example, it was reported in December 2021 that 49 existing mining projects in Inner Mongolia had been closed.

Pursuant to the Fintech Development Plan (2019–2021) issued by the PBC, a fintech regulatory sandbox was first launched in Beijing in December 2019; sandboxes have since been established in cities such as Shanghai, Chongqing, Shenzhen and Hangzhou. Licensed financial institutions and technology companies can apply for their financial services or finance-related technology products to be placed in the sandboxes. PBC and other relevant authorities will take a fault-tolerant regulatory approach to the services and products in the sandboxes, and seek information disclosure, project disclosure and mutual supervision.

The PRC’s tax regime does not contemplate the use of blockchain or cryptocurrencies, nor does the PRC have any specific tax laws or regulations that refer to blockchain or cryptocurrencies.

In addition, although certain local tax incentives might have been made available to blockchain-related enterprises in some areas, Notice No 1283 (see 2.1 Regulatory Overview) has expressly required local governments to stop all fiscal support and tax incentives for crypto mining projects.

The PRC government has recently formed its National Blockchain Standardisation Committee, which will work on setting industry 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.

On 13 April 2020, the MIIT issued the “Public Notice on the Formation of a National Blockchain and Distributed Ledger Technology Standardisation Technical Committee” (全国区块链和分布式记账技术标准化技术委员会组建公示), which notes that the new committee will be comprised of 71 people from political, industrial, academic and research organisations, and be chaired by MIIT vice-minister Chen Zhaoxiong (陈肇雄).

Questions regarding the ownership and transfer of a digital asset will depend on whether the digital asset is deemed to be “property” under PRC 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.

The PRC Civil Code, which took effect on 1 January 2021, provides that digital and online virtual assets can be protected to the extent such protection is provided in any laws. This provision is widely read as a principle that digital and online virtual assets are entitled to protection as property, with implementation rules on the protection of virtual assets expected to be enacted at a later stage. This 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.

The PRC considers that the DCEP (or e-RMB or e-CNY), which is the national digital currency issued by the PBC and the PRC’s only digital currency, is legal tender in the PRC. Other types of cryptocurrencies such as bitcoin or ether are not legal tender or valid currencies, and are not entitled to protection under PRC law.

Currently, only the DCEP (or e-RMB or e-CNY), which is issued by the PBC, is pegged to the Chinese yuan (RMB), the PRC’s national currency. The DCEP is the PRC’s only digital currency and is legal tender in the PRC, and is intended to have the same legal effect as the RMB. The DCEP adopts a centralised management model, and users of the DCEP must complete a real-name verification.

In October 2020, Shenzhen’s government, together with the PBC, launched the pilot DCEP programme, issuing RMB10 million of DCEP to users that can be used in physical stores. Shortly thereafter, Suzhou’s government launched another DCEP programme issuing RMB20 million of DCEP that could be used in both physical and online stores.

There are no laws or regulations specific to privately issued stablecoins. However, PRC news reports 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. Notice No 237, which further tightens controls on cryptocurrency-related activities, clearly sets out that it shall apply to USDT, which is a stablecoin, and prohibits it from being used and circulated as a currency in the market.

There are no distinctions made between stablecoins backed by deposits of fiat currency and algorithmic stablecoins that use a formula to maintain their peg.

Payments are allowed to be made in the PRC using the DCEP, which has currently been deployed for trials in major PRC cities. The PBC expects to issue DCEPs to the four major state-owned banks, but there is no precise timeline on when this will be completed.

Other cryptocurrencies (eg, bitcoin or ether) are prohibited from being used and circulated as currencies in the market – ie, from being used for payment. A court in Shanghai denied the legal effect of such payment in 2021 (see 2.5 Judicial Decisions and Litigation).

As far as is known, there are no laws or regulations that are specific to the creation, marketing or sale of NFTs. Under general laws and regulations, legal requirements that are highly relevant to the creation, marketing and sale of NFTs include the following (without limitation):

• no investment returns shall be promised in any form when offering NFTs, otherwise it may be considered illegal fundraising and lead to criminal penalties;
• NFTs shall not be divided into equal shares for public offerings; and
• NFTs shall not be traded in the manner of centralised trading (eg, with centralised bidding or a market maker).

That being said, a non-binding group standard titled "NFT Platform and Product Evaluation" is being drafted by a working group that was set up by the Technology Market Association of China in October 2021 and includes leading players in China's NFT market, such as Tencent and JD.com. NFT Platform and Product Evaluation is claimed to be intended to standardise the divergent practices across different NFT platforms and products in terms of security, compatibility, extendibility and compliance. The NIFA, the CBA and the SAC issued a non-binding initiative on handling NFT risks on 13 April 2022, suggesting that their members should:

• not issue or trade financial products in disguised forms by including securities, insurance, credit, precious metals and other financial assets in the underlying assets of NFTs;
• not conduct ICOs in disguised forms by weakening the non-fungible nature of NFTs through ownership division or batch creation;
• not set up illegal marketplaces in disguised forms by providing services such as centralised trading (centralised bidding, electronic matching or anonymous trading), continuous listing and trading and standard contract trading for NFT transactions;
• not use cryptocurrencies as the means of pricing and settlement;
• require customers issuing, selling or issuing NFTs to conduct real-name authentication, keep identity materials and issuance and transactions properly, and co-operate with anti-money laundering; and
• not directly or indirectly invest in NFTs, nor provide financing for investments in NFTs.

However, the Hangzhou Internet Court has made a ground-breaking judgment (Shenzhen Qice Diechu Cultural Creation Co., Ltd. v Hangzhou Yuanyuzhou Technology Co., Ltd. (2022) Zhe 0192 Civil First Instance No 1008, Hangzhou Internet Court, 20 April 2022) in which the trading of NFTs was found to be the purchase and sale of digital contents and NFTs were classified as property. While this judgment is not binding on future cases, it seems to suggest that the judicial system is in a position to protect NFTs as a digital asset.

ICOs and the trading of cryptocurrencies are banned in China; this includes a ban on trading on domestic cryptocurrency exchanges. In 2021, following the promulgation of Notice No 237, which is intended to crack down on overseas cryptocurrency exchanges providing services to Chinese customers, many such exchanges, including Huobi and Binance, suspended new registrations from China.

However, the issuance of NFTs is not expressly prohibited in China, and NFT trading is a grey area. See 1.4 Non-fungible Tokens for more details about the NFT market in China.

Also, some PRC cities have expressed interest in creating “blockchain digital asset exchanges”, and 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 crypto and fiat currencies. The same applies for cryptocurrency-to-cryptocurrency exchanges.

The Blockchain Measures require blockchain providers to conduct real-identity verification by way of corporate registration numbers, individual ID numbers or PRC mobile telephone numbers. Blockchain providers must 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 about 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 PBC branches to “seriously consider the money laundering risks” in facilitating trade in these virtual assets.

Notice No 289 states that PBC branches should conduct the following KYC/AML procedures:

• bringing lawfully established organisations that provide bitcoin registration or exchange services (Bitcoin Service Providers) within its KYC/AML monitoring ambit; and
• actively supervising Bitcoin Service Providers with respect to the improvement of their KYC/AML measures.

Obligations

Notice No 289 also stated the KYC/AML-related obligations for each Bitcoin Service Provider, which include 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 Centre and the PSB, and Bitcoin Service Providers should co-operate with the PBC’s money laundering investigation activities in this respect. However, this is less relevant now, as anything that may be considered 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 PBC, CBIRC and CSRC provides the regulatory framework for licensed financial institutions that provide internet financial services in the PRC. In particular, a financial institution shall register on the Internet AML and Counter-Terrorism Monitoring Platform operated by the PBC, establish its own internal control mechanism, and report any suspicious transactions or transactions with a large amount.

There is no available market in the PRC for digital assets (excluding NFTs), as the PRC authorities have prohibited all of the main ways in which users would typically interact with digital assets outright.

Digital asset exchanges are prohibited from re-hypothecating digital assets to third parties under PRC 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 on 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 for digital assets.

Under Announcement No 94, ICOs are prohibited in the PRC, and fundraising through the creation and sale of tokens is not allowed.

PRC laws prohibit fundraising through the sale of tokens.

PRC laws prohibit fundraising through the sale of tokens. If the launch or distribution of tokens is via a mechanism that distinguishes itself from fundraising activities of any kind (eg, airdrop for free), the risk is generally lower and may arguably fall in a grey area.

According to Notice No 289 and Announcement No 94, investment funds and collective investment schemes in the PRC are prohibited from investing in bitcoin and other cryptocurrencies. In practice, it is generally understood that investment in other digital assets is similarly prohibited in the PRC, even though this is not expressly addressed in Notice No 289 and Announcement No 94.

Under Announcement No 94, fundraising and trading platforms for cryptocurrencies in the PRC (including, without limitation, any app or website for such purposes) are prohibited from facilitating any trade between fiat currencies and cryptocurrencies or between two cryptocurrencies, or from otherwise buying or selling any cryptocurrencies or acting as a market maker in relation thereto, or providing pricing, information intermediary or other services in connection with any cryptocurrency. “Fundraising and trading platforms for cryptocurrencies” are not defined in Announcement No 94, but are interpreted broadly in practice.

As far as is known, there are no 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 (an institution affiliated to the MIIT) adopts a relatively conservative attitude to "smart contracts” and raises a number of concerns. First of all, there is no legal definition of smart contracts and their validity remains unclear, although it is technically feasible to enter into smart contracts. Secondly, the confidentiality of the terms of the smart contracts might become a concern to PRC regulators as the smart contracts will be accessible to all of the nodes of a network. Thirdly, there is no generally applicable plan for the oracle mechanisms to ensure that the information embedded in the blockchain is true and accurate. Finally, smart contracts may only work for predictable obligations, as opposed to open-ended provisions or rights and obligations that are not clearly defined at the time of execution.

Under the Blockchain Measures, blockchain providers must comply with the 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 the PRC, which is a civil law jurisdiction, to determine the liability of developers.

The operation of DeFi platforms related to cryptocurrencies in the PRC faces extremely high enforcement risks, if not complete prohibition. 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 within the ambit of Announcement No 94.

The position under the PRC law is unclear regarding how a lender would take effective security in digital assets pledged as collateral for a loan.

As far as is known, there are no laws, regulations or judicial interpretations in the PRC which clearly state that digital assets are capable of being taken as security.

It should also be noted that PRC courts may become more reluctant to protect security interests in cryptocurrencies as a result of the promulgation of Notice No 237 (see 2.1 Regulatory Overview).

Although the ownership of digital assets is not banned outright in the PRC, the main ways in which users would typically interact with digital assets are prohibited outright. 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 for digital assets.

The key obligations under PRC Data Protection Laws (including the Cybersecurity Law, the Personal Information Protection Law, the Data Security Law and relevant regulations and standards) include the following:

• providing appropriate notice and obtaining explicit consent from individuals to collect, use and disclose personal information – separate consent is also needed if personal information is to be used for direct marketing, disclosure to third parties or transferred overseas;
• not collecting excessive or unnecessary personal information, ensuring the accuracy of data processed and not keeping personal information for longer than is necessary;
• adopting technical measures to ensure data security and keep personal information confidential – there are now quite prescriptive data security and cybersecurity technical guidelines and standards in the PRC;
• responding to data subjects’ requests to exercise their rights, including those to withdraw consent (at any time) to the processing of their personal information or to delete their personal information (in certain circumstances), or to access or correct their personal information;
• conducting personal information impact assessments for certain data processing activities, including disclosure to third parties and overseas transfers;
• putting contractual safeguards with data processors (if any) in place; and
• taking into account the implications of the data localisation rules.

There are no data protection laws or regulations that specifically target blockchain-based products, and no data privacy enforcement in respect of blockchain-based products or services, as far as is known.

See 8.1 Data Privacy.

According to Notice No 1283, the mining of cryptocurrencies is not allowed in the PRC; see 2.1 Regulatory Overview.

There are no special PRC regulations that apply to the staking of crypto-assets.

No PRC law or regulator has specifically addressed DAOs, so the legality or legal nature thereof in the PRC is still unclear. That said, fundraising through the sale of tokens, including via DAOs, is strictly prohibited in the PRC.

There are a few emerging DAOs in the PRC, including SeeDAO, a DAO dedicated to promoting research on and development of projects related to web3 (especially NFTs), and DAOrayaki, a decentralised media and research organisation self-governed by readers, researchers and funders.

Governance structures differ between DAOs.

For example, SeeDAO governance happens off-chain and is run by membership NFT holders. Such tokens are allocated according to the decisions of guilds and project groups within SeeDAO. Every membership NFT holder has equal rights to vote.

As most DAOs in China are interest groups rather than organisations conducting business activities at this stage, they have little need to interact with non-blockchain native entities and rarely use legal entity structures.