China's ICO Ban: Questions Remain Regarding the Assets Available to Projects for Further Development

WE ARE NOT A LAW FIRM AND NOTHING THAT FOLLOWS SHOULD BE CONSTRUED AS LEGAL ADVICE. YOU SHOULD CONTACT YOUR ATTORNEY WITH REGARDS TO HOW CHINESE SECURITY LAW MAY IMPACT AN INVESTMENT IN CRYPTOCURRENCIES PRIOR TO MAKING AN INVESTMENT.

On September 4, 2017, China released a statement to protect the rights of investors and prevent financial risk in response to the proliferation of token fundraisers. Some of the identified risks include, false asset risk, risk of business failure and risk of investment speculation. The statement defined “token fundraising” as a process where projects distribute digital tokens to investors who make contributions in the form of fiat currencies and/or cryptocurrencies, such as bitcoin and Ether. The statement described this process as an illegal financing business activity that involves illegal securities issuance, financial fraud, pyramid schemes, and other criminal activities.

As of the date of the announcement, China requires that all token fundraising activity stop immediately. It further requires that any project that has completed its fundraising arrange to “repatriate” the funds collected from investors. Platforms involved with token fundraising are also prohibited from facilitating the trade of legal currency for digital tokens and all financial and non-bank institutions are prohibited from carrying out business activities related to token financing transactions, such as account opening, registration, trading, liquidation, settlement services.

Between the fundraiser and the date of the announcement, the price of bitcoin and Ether increased significantly. A key question is whether the projects must return the value of the investment as of the date of the investment or the value of the investment plus any appreciation of the token used to make the investment. Under the Securities Law of the People’s Republic of China, Chapter XI, Article 175, any “issues [of] securities without verification or examination and approval by the statutory authority […] shall be ordered to cease issuance and refund the funds thus raised, together with bank deposit interest for the same period, and shall also be fined not less than one percent but not more than five percent of the amount of the illegally raised funds.”

This suggests that projects may get to keep some of the appreciation of the cryptocurrencies collected minus the “bank deposit interest” and the fine. However, most investments are made in legal currencies that do not fluctuate significantly, so it is unclear whether this law should apply and whether keeping any appreciation would violate the spirit of the law. The answer to this question will have a significant impact on the resources available to token projects to continue development.