Article source: Mankun Blockchain
In the past week, many friends around Mankun Lawyer have been discussing a matter: the Shanghai High Court published an article (What is the end of high financing of issuing virtual currency?), in which the author explicitly stated that individual possession of virtual currency is not illegal.
*Image source: WeChat article screenshot
Once this article was published, the domestic crypto circle seemed to be 'celebrating the New Year', with various self-media outlets writing articles to promote this favorable news, as if the publication of this article represented the start of loosening restrictions on virtual assets in our country. Here, Mankun Lawyer has to 'pour cold water' on everyone, slightly reducing everyone's enthusiasm for investing in virtual assets, and awakening rationality.
First basin of cold water: Holding has always been legal
If we carefully review our country's policy documents on virtual currency, we will find that for a long time, individual possession of virtual currency has not been illegal.
Currently, the qualification of many illegal activities related to virtual currencies originates from the '924 Notice' issued in 2021. In this document, the People's Bank of China and ten other ministries clearly stated: Virtual currency does not have the legal status of legal tender and lacks legal compensation; activities related to virtual currency are considered illegal financial activities, including providing trading services, exchange services, and issuing virtual currency. However, this document does not mention the illegality of 'individual holding virtual currency' throughout.
In other words, holding virtual currency is currently in a legally gray area. The article from the Shanghai High Court actually just reiterates this point and does not represent a policy loosening.
Although the law does not explicitly prohibit individuals from holding virtual currency, its legality has not been fully recognized. However, in some cases, virtual currency has been regarded as a type of virtual property. For example, in 2019, the Hangzhou Internet Court ruled that Bitcoin has property attributes and conforms to the legal characteristics of virtual property, ultimately ruling in favor of the plaintiff's request for the defendant to return illegally transferred Bitcoin; similarly, in 2021, the Nanshan District Court in Shenzhen pointed out in a case involving Litecoin (LTC) that although virtual currency does not have the status of legal tender, it can be regarded as virtual property in specific contexts, ruling in favor of the plaintiff's return request.
As a type of virtual property, virtual assets are similar to QQ coins and rare game items, and holding them is certainly not illegal.
Second basin of cold water: The premise of holding is obtaining
However, many people overlook a key issue: the basis of holding is 'obtaining'. Currently, there are many ways to obtain virtual assets. Although most of the acquisition channels are not directly illegal, in some situations, legal risks may arise due to operational methods or sources of funds. Below are the main acquisition channels listed by Mankun Lawyer for everyone's understanding:
1. Self-purchase
Buying virtual currency is one of the most common ways to acquire virtual assets. From a legal perspective, according to the **'924 Notice'**, virtual currency does not have legal compensation and is not legally protected, but the document does not explicitly state that the 'purchase behavior' is illegal. Therefore, individuals purchasing virtual currency by themselves is not illegal under existing laws. However, it must be noted that the trading activities of virtual currency are not legally protected, meaning that once a transaction occurs, if there is a loss of funds, it is extremely difficult for individuals to defend their rights, and they may even not receive legal support.
Moreover, the 'legality' of purchasing behavior also depends on the compliance of specific transaction methods and sources of funds. For example, purchasing coins through overseas exchanges, while the behavior itself is not illegal, may involve issues such as foreign exchange management and tax declarations; while obtaining virtual currency through over-the-counter (OTC) trading may pose higher compliance risks due to anonymity and lack of third-party guarantees. Especially in OTC trading, information asymmetry can easily lead to fraud or loss of funds.
At the same time, a common illegal situation in the buying and selling of virtual assets in our country is that the source of transaction funds is unclear, even involving 'dirty money'. If a buyer unknowingly purchases virtual currency that is suspected to be illegal, even if the purchase behavior itself is not illegal, they may face account freezing issues due to indirectly participating in illegal fund flows.
2. Participate in mining
Obtaining virtual currency through mining was once one of the main ways for investors, especially during the Bitcoin and Filecoin craze. However, with changes in policy, the legality of mining has gradually become complicated.
From a policy perspective, the notice issued in 2021 (on the rectification of virtual currency 'mining' activities) clearly classified mining as an industry to be eliminated and required a comprehensive cleanup of new mining projects, accelerating the exit of existing projects. This means that large-scale mining activities have been explicitly restricted by national policy. If mining activities result in high energy consumption or environmental destruction, or even involve illegal electricity issues, they may be deemed to violate public order and good customs or green principles and thus be deemed invalid. For example, in a contractual dispute case between a company in Shanghai and a company in Beijing, the court ruled that the mining activities were invalid due to high energy consumption, high risk, and being contrary to national green development goals.
So, does personal mining constitute illegal activity? Currently, there are no direct legal provisions prohibiting personal small-scale mining in our country. Theoretically, if individuals purchase mining machines through legal means and use their own electricity resources for mining, it does not violate existing laws. However, in practice, some mining activities may involve illegal means or improper operations that may touch the legal bottom line. For example:
· Illegal electricity issues. Some miners mine by stealing electricity resources, such as by tampering with electric meters to reduce electricity recordings or directly tapping into illegal power grids. These actions not only constitute civil infringement but may also involve theft.
· Illegal use of others' computing resources. Mining through malicious programs that control others' computers may constitute the crime of damaging computer information systems, which falls under criminal offenses.
· Financial compliance risks. If the virtual currency obtained from mining involves illegal transactions or fund flows, such as money laundering or tax evasion, miners may be held accountable for relevant legal responsibilities.
3. Participate in investment
Acquiring virtual currency through investment projects is another relatively common method, especially in the early blockchain industry, where ICOs (Initial Coin Offerings) were once all the rage. However, the 'legality' of this method varies based on specific operational modes and has higher potential legal risks.
First, from a legal perspective, ICOs in China are clearly defined as illegal financial activities. As early as the '94 Document' (Announcement on Preventing Risks of Token Issuance Financing) issued in 2017, the People's Bank of China and seven other ministries explicitly prohibited fundraising through ICOs and required the cleanup of existing projects. ICOs are seen as unlicensed fundraising activities, suspected of illegal fundraising and illegal issuance of securities. Investors participating in such fundraising activities may suffer economic losses if the project party absconds.
Unlike ICOs, in recent years, participating in investments as a VC to obtain project tokens has gradually become a popular financing model. Investors inject funds directly into blockchain projects to obtain tokens distributed by the project party as a return. Although this method seems to avoid the compliance risks of ICOs, its legal pitfalls should not be ignored:
· First, projects participated in by VCs will inherently involve compliance issues, such as if the investment project is suspected of illegal issuance of securities.
· Secondly, the transparency and legality of token distribution are equally important. If the tokens obtained through VC investment do not clearly stipulate their purpose or rights, disputes may arise. For example, some projects attract funding through inflated token valuations, only to lead to investor rights being harmed when the project stagnates or operates poorly in the later stages.
4. Participate in activities
Obtaining virtual currency through participating in activities organized by project parties, such as airdrops and recruitment rewards, may seem like the least costly and simplest way on the surface, but it may hide various legal and compliance risks behind the scenes.
From a legal perspective, airdrops (Airdrop) are not illegal in themselves, especially when users do not pay consideration or commit specific obligations. However, many projects use airdrops as a cover, with the actual goal of expanding influence and attracting users to participate in subsequent illegal activities. For example, some projects guide users to download DApps through 'airdrop tokens', ultimately using these platforms for fraudulent transactions, money laundering, or other illegal activities.
Recruitment rewards are another common activity model, especially in some projects that need to rapidly expand their user base. Such activities typically use the number of referrals or transaction amounts as reward criteria to attract users to continuously recruit others. However, models that reach three levels of rebates or more are easily recognized as pyramid schemes. If the project uses the number of people recruited directly or indirectly as the basis for rewards, it may be suspected of being illegal, and participants may thus bear legal responsibility.
In addition, some activities also induce users to recharge or invest by promising high returns. Such behaviors often use 'more recruitment, more rewards' as a guise, but lack actual value support, making them typical Ponzi schemes. In such cases, whether participating in promotion or unintentionally participating, one may get entangled in legal disputes.
Mankun Lawyer suggests
· Compliance first, choose reasonable channels
When investors buy, mine, or participate in activities, they must ensure the legality of transaction methods and sources of funds, avoiding cooperation with funds or projects of unknown origin. Choose reputable platforms and projects, and keep transaction records to reduce legal risks.
· Stay away from illegal activities and avoid high-risk projects
Avoid participating in clearly prohibited ICOs and other illegal fundraising activities or high-yield promise recruitment rewards and pyramid schemes, beware of Ponzi schemes, and ensure investment actions comply with legal requirements.
· Seek professional legal support
For complex legal issues related to virtual currencies, such as cross-border transactions, tax compliance, and asset protection, it is advisable to consult professional lawyers in a timely manner to ensure that one's rights are protected.
The development of virtual currency is full of opportunities but also accompanies risks. As investors, it is essential to remain sensitive to laws and regulations, act cautiously, and invest rationally, seeking a balance between innovation and compliance.