On September 4, 2017, the People’s Bank of China and seven other departments jointly issued the Announcement on Preventing the Risks of Token Issuance and Financing (hereinafter referred to as the September 4 Announcement), which clearly prohibits the act of token issuance and financing and cracks down on virtual currency speculation. As defined in the aforementioned announcement, token issuance and financing refers to the raising of bitcoin, ethereum and other so-called “virtual currencies” from investors through the illegal sale and circulation of tokens, which is essentially a kind of unapproved illegal public financing, suspected of illegal sale of tokens, illegal issuance of securities, illegal fund raising, financial fraud, pyramid schemes and other illegal criminal activities. It is suspected of illegal sale of tokens, illegal issuance of securities, illegal fund raising, financial fraud, pyramid schemes and other illegal criminal activities. Beijing Internet Financial Industry Association “on the prevention of “virtual currency” “ICO” “STO” “stable coin “and other variants of the name of illegal financial activities risk tips”, strictly prohibited to issue coins for the purpose of soliciting money, trading speculation appreciation as a lure, the use of “integral coins” and other forms of speculation blockchain concept, illegal fund-raising activities.
According to the September 4 announcement, the following elements need to be met simultaneously to constitute ICO financing.
(1) The financing entity sells tokens issued by the project party to investors, or otherwise makes such tokens circulate with liquidity.
(2) The financing entity publicly absorbs digital tokens from investors, including mainstream digital tokens such as bitcoin and ethereum, but also non-mainstream digital tokens.
(3) For the purpose of financing.
(4) The aforementioned acts are not approved.
Obviously, the September 4 announcement does not distinguish between alliance chains and public chains. So the question arises, is it possible that issuing consumer points on an alliance chain constitutes ICO financing?
First, it is common in practice for issuers to give consumer points to consumers, and such points can be circulated within a certain range, including the platform operated by the issuer. Does such circulation constitute the liquidity in the first constituent element mentioned before?
In the SEC’s April 2019 public response to a public offering of tokens by a T Corporation engaged in aircraft charter services, it was confirmed that the company’s token offering was not an SEC-integrated securities offering on the grounds, among others, that the tokens issued by the company could only be transferred in and out of its own wallet software, and not to other wallets outside of the platform operated by the company.
Referring to this idea, if the points issued by the alliance chain points issuer are only in the wallet of the issuer’s operating platform, and cannot be transferred to other wallets, cannot be withdrawn, and only circulate in the issuer’s system, then the circulation is weak, and in practice, it is less likely to be considered as circulation by the regulatory authorities.
Second, if the points issuer absorbs digital tokens from investors, it clearly constitutes the second constituent element mentioned above, regardless of whether it absorbs nominally other kinds of points or various types of digital currencies such as bitcoin.
Third, the purpose of financing is a subjective element, how can it be proven in practice, in addition to the issuer’s public promotion in white papers and promotional activities? Generally speaking, ICO is a project by absorbing bitcoin, ethereum and other mainstream digital tokens in exchange for fiat currency to develop projects or services, that is to say, the financing “capital” when the general project or service does not yet exist, or is still in the initial incubation state, or relatively small scale, financing is to make the project on the ground or expand the scale.
In the scenario of issuing affiliate chain points, can it be inferred that if the issuer has provided goods or services, the points issued can be exchanged for goods or services provided by the issuer at any time when a certain number of points are accumulated, which can prove that it does not have a financing purpose?
This logic was also used by the SEC in the aforementioned public email in which the SEC determined the nature of the tokens issued by T. Another reason why the SEC believes that these tokens are not securities-based tokens is that the tokens acquired by customers are immediately redeemable for the corresponding services. In other words, there is a product or service in place, rather than a token being issued to raise funds to develop a project.
Fourth, regarding the element of non-approval, it is worthwhile for old friends to note whether the criminal risk can be completely isolated after the approval of the provincial financial regulatory authorities?
At the wrongful level, can criminal illegality be blocked? The September 4 announcement does not specify the subject of approval. Which level of regulatory authority should approve the issuance of affiliate chain points? Does the provincial regulator have the authority to approve it? According to seven provincial-level local financial supervision and management regulations in Sichuan, Hebei, Beijing, Inner Mongolia, Guangxi, Shanghai and Tianjin, such local regulators have the authority to license the establishment of local financial organizations such as local trading venues. If a province does not take the form of legislation, but rather administrative permission from the regulator, or even red-headed documents, permitting or encouraging enterprises to issue union chain points, without further specifying the red lines of specific business models, can its approval completely deter administrative violations and crimes? Sara’s team believes that a specific analysis of its behavior needs to be conducted on a case-by-case basis, and it should not be considered as resting on its laurels after being licensed by local regulators. In practice, it is not uncommon for some licensed institutions to be sentenced to administrative penalties or even constitute crimes.
At the level of responsibility, whether the fact that a license has been obtained from the local financial regulatory authority and that it has not exceeded the licensed scope of operation to engage in relevant business activities constitutes a mistake of perception of illegality due to trust in the authority, this issue deserves the continued attention of the regulator and the practitioner’s old friends.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/pass-throughs-how-far-from-illegal-public-financing/
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