Written by Huang Peng and Rao Weitong, Mankiw LLP
As we all know, virtual currency exchange business is not allowed in mainland my country, which has led to most exchanges founded by Chinese people choosing to go overseas, flying to Singapore, Japan, South Korea, Southeast Asia and other places to avoid supervision in China. However, Chinese programmers are talented and highly skilled, which has led to the current status of the exchange industry: overseas exchanges outsource or hire domestic technical teams.
So, what legal issues do these technicians need to pay attention to and deal with? First, Attorney Mankiw will take you through common technical service scenarios.
Technical service scenarios
Scene 1
Xiao A is a programmer in China, employed by a technology network company. On the surface, this company is an ordinary software development company, but in fact it is a shell company set up in China by a virtual currency exchange. All employees of this company are responsible for the development and operation and maintenance of the exchange platform. This type of company often signs labor contracts with employees and pays five insurances and one housing fund.
Scene 2
Xiao B is also employed by an overseas exchange. Unlike Xiao A, this exchange did not set up a company in China, but directly signed a labor contract with Xiao B, stipulating that Xiao B provide technical services in the form of labor. But in fact, Xiao B is a formal employee of the company, providing technical services for the virtual currency exchange in the form of remote work.
Scene 3
C is an independent technology company that specializes in serving the Web3 industry. The company has reached a cooperation with an overseas exchange, and C is responsible for the technical development and operation and maintenance of the exchange platform.
So what legal issues do small companies A, B and C need to pay attention to respectively?
Core compliance issues assessment
Regardless of the above scenarios, one of the core issues that will cause legal compliance is the legal risks brought by serving virtual currency exchanges, which largely depends on the compliance level of the virtual currency exchange's business activities. As a partner, you should ensure that you can prove to the relevant authorities at any time that you have fulfilled your prudent obligations and that you are not aware of or should have been aware of the possible criminal behavior of the virtual currency exchange. The following three compliance requirements for virtual currency exchanges should be included in the scope of due diligence before cooperation.
Whether to provide services to residents of mainland China
The "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" issued on September 15, 2021 clearly states that the services provided by overseas virtual currency exchanges to residents in my country through the Internet are also illegal financial activities. Domestic staff of relevant overseas virtual currency exchanges, as well as legal persons, non-legal organizations and natural persons who knowingly or should have known that they are engaged in virtual currency-related businesses and still provide them with marketing, payment settlement, technical support and other services, shall be held accountable in accordance with the law.
The absence of users in China means that there are no Chinese resident victims. Then, the destructiveness of potential criminal activities such as fraud, pyramid schemes, illegal fund-raising, and market manipulation to the personal and property safety of our citizens will be significantly reduced.
Whether RMB and virtual currency exchange services are provided
Virtual currency exchanges can easily become channels for money laundering and illegal foreign exchange transactions, disrupting financial order and endangering financial security. This is also the reason why U-commerce currently has a high incidence of criminal risks.
In December 2023, in the typical case of foreign exchange-related crimes jointly released by the Supreme People's Procuratorate and the State Administration of Foreign Exchange, the "Illegal Business Case of Zhao Mou and Others", the court held that: the perpetrators used virtual currency as a medium to earn exchange rate differences by providing cross-border exchange and payment services, and used the special attributes of virtual currency to circumvent national foreign exchange supervision. Through the exchange of "foreign exchange-virtual currency-RMB", the value conversion of foreign exchange and RMB was realized, which was a disguised foreign exchange purchase and sale, and they should be held criminally responsible for the crime of illegal business in accordance with the law.
Therefore, if the virtual currency exchange provided cuts off the "virtual currency-RMB" exchange chain, the corresponding criminal risks will be greatly reduced.
Is it legal in the place of business?
By examining the first two criteria, it is basically clear whether the first condition is met; the next most important thing is to see its legal status in the place of operation. According to China's criminal jurisdiction rules, overseas virtual currency exchanges are subject to the jurisdiction of my country's criminal law only if they meet the following three conditions at the same time:
Crimes committed against the state or citizens of the People's Republic of China;
According to China's criminal law, the minimum sentence is three years in prison;
Be punished according to the laws of the place where the crime was committed.
Take Japan as an example. On May 25, 2016, the Japanese Senate passed the revised Payment Services Act, which recognized virtual currency as a legal means of payment and incorporated it into the legal system. The Japanese Financial Services Agency adopted a registration system to supervise virtual currency trading institutions. If a Japanese virtual currency exchange is registered with the Japanese Financial Services Agency, it will at least have formal legality.
Other legal issues assessment
Contract performance issues
For Company C, if there are accounts receivable and the other party cannot pay as agreed, it is necessary to consider the issue of remedies. In the context of the relatively cautious domestic judicial policy on virtual currency, if the contract dispute is submitted to the court for trial, it may face major disputes over the effectiveness of the contract. If the court finds it valid, it means that it has implicitly recognized the legality of the operation of the virtual currency exchange, the other party to the contract. I am afraid that this is a considerable burden for the court. In order to reduce the risk of breach of contract, it is more appropriate to collect all or most of the contract amount before providing services, and at the same time agree to the jurisdiction of the dispute with an international arbitration institution. At the same time, in the text of the contract, the virtual currency exchange can also be allowed to "prove its innocence" in the terms of the clause or the commitment clause to show its legal operating status, so as to show that the technical service provider has fulfilled its review responsibilities.
Labor dispute risk
For technical staff of virtual currency exchanges like Xiao B who work remotely in China as individuals, they face risks in protecting their labor rights and interests. my country's labor laws only protect the legal relationship between domestic companies and employees. If you work directly for a foreign company or sign a relevant contract, it is difficult for you to enjoy the various protections of the labor law. For example, in the case of layoffs, whether employees can get compensation after being fired depends on the conscience of the company. In addition, if the salary payment method involves virtual currency, if there are salary deductions, salary cuts, deductions of bonus commissions, etc., it is difficult for employees in China to get corresponding protection for their claims.
In addition, because Xiao A and Xiao B may be regarded as internal employees of the exchange, they need to pay more attention to the compliance of the exchange business itself than external service partners. Because they are closely connected with the exchange, they know the actual operation of the exchange better than external partners. If there are non-compliance in the exchange, the employees are also likely to be held accountable for the corresponding legal responsibilities.
Administrative supervision risks
After all, Company C can only conduct a formal review of the exchange's compliance. During the cooperation period, it is possible that the exchange may engage in illegal or criminal activities or hidden illegal activities may be exposed in the future, which may trigger the intervention of Chinese regulators. In addition to cooperating with the investigation, the company's normal business may also be affected, and the company should prepare risk plans in advance.
Attorney Mankiw recommends
Based on the above possible legal issues, for companies and individuals who intend to provide technical services to overseas virtual currency exchanges, Mankiw Lawyer hereby recommends that they examine the exchanges from the following multiple dimensions:
Judging from registration, KYC, deposits and withdrawals, platform agreements, etc., whether the virtual currency exchange provides services to Chinese residents and whether it provides RMB and virtual currency exchange services.
According to the laws of the place where the exchange operates, examine whether it meets the local virtual currency exchange operating requirements.
The exchange is required to provide principal information, compliance information, commitments and other information as part of the contracting process.
Properly design transaction models to reduce the risk of breach of contract; pay attention to contractual jurisdiction agreements to increase the possibility of relief.
Retain evidence of fulfillment of due diligence obligations for future external demonstration.
For employees who intend to provide technical services to overseas virtual currency exchanges, they can refer to the above suggestions, while paying attention to the differences in legal risks brought about by different positions and different employment methods.