Author: Xiao Sa lawyer
How to issue cryptocurrency (ICO) in compliance has always been a major concern for Web 3 builders. After all, from the perspective of project initiation, governance, sustainable operation and generating economic value, issuing coins is not a sickle that can only "cut leeks", but a tool that plays an important supporting role in the crypto ecosystem. However, due to the scars brought to investors, communities and even the entire society by the wild growth of the currency circle a few years ago, the mainland of my country still maintains a strict restriction on the issuance of coins. The "9.4 Announcement" issued in 2017 and the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" (referred to as the "9.24 Notice") in 2021 have always been a sword hanging over the heads of Chinese Web 3 industry practitioners.
However, we have also seen that since 2021, the entire crypto asset market has undergone several rounds of reshuffles and reconstructions. The underlying blockchain technology has made great progress, Web 3 projects have gradually begun to operate in compliance, and even traditional financial institutions have found a path of mutual symbiosis with crypto assets through financial operations such as issuing cryptocurrency EFTs.
So, today, the Sajie team will talk to you about whether it is still possible to issue coins in compliance with the current Web 3 industry? If you want to issue coins, what are the precautions?
In 2024, will it still be possible to issue coins?
Let me first state a simple conclusion: it is not feasible to issue currency in mainland my country, and issuing currency overseas requires careful selection of jurisdictions.
At present, there is a great criminal risk in issuing coins in my country. According to Article 1, Paragraph 2 of the 9.24 Notice: "Virtual currency-related business activities are illegal financial activities. Virtual currency-related business activities such as the exchange of legal currency and virtual currency, the exchange of virtual currencies, the purchase and sale of virtual currencies as a central counterparty, the provision of information intermediary and pricing services for virtual currency transactions, token issuance financing, and virtual currency derivatives transactions are suspected of illegal financial activities such as illegal sale of token tickets, unauthorized public issuance of securities, illegal operation of futures business, and illegal fundraising. They are strictly prohibited and resolutely banned in accordance with the law. Those who engage in related illegal financial activities that constitute a crime shall be held criminally liable in accordance with the law."
Under the clear characterization of the 9.24 Notice, we can basically judge that the issuance of coins in the general sense of a project (i.e. the initial issuance of project tokens to raise legal tender, Bitcoin, Ethereum and other general cryptocurrencies, and other valuable assets) is an illegal financial activity in mainland my country. The Sajie team believes that in the absence of clear legal provisions or regulatory documents to "open" the way for the issuance of coins, no one can issue coins or issue coins in disguise in mainland my country, otherwise there is a greater risk of criminal offenses.
Overseas, in countries or jurisdictions that have not passed legislation or other normative documents to prohibit the issuance of coins, it is theoretically possible to issue coins. But everyone needs to pay attention that the times are different now. It is no longer an era where crypto assets can grow wildly. Even in countries or jurisdictions that allow the issuance of coins, it is necessary to be licensed and meet a series of compliance requirements. Below, the Sajie team will share with you some universal compliance points for overseas coin issuance based on the practical experience accumulated in serving various project clients.
Summary of the key points of universal compliance for overseas coin issuance
1. Distribution is both the core narrative of crypto assets and the consensus of the community, creating space for compliance
In the process of providing compliance services for overseas projects of multiple clients, the most intuitive feeling of the Sajie team is that decentralization is the essential feature, narrative core and community consensus of crypto assets and even blockchain technology. A well-distributed project has higher transparency and immutability of assets, which increases the trust of investors, can not only achieve long-term development, but also create a space for compliance survival and withstand the scrutiny of regulators.
At present, the world's major economically active jurisdictions mainly regulate by defining crypto assets as "securities" and coin issuers as "entities that issue financial products without registration." Today, we will use Uniswap, a typical successful case of distributed architecture, to look at the compliance space created by distributed architecture for coin issuance.
Uniswap Labs, the main operating team of Uniswap, first defined itself as a DAO and provided services to users by creating the Uniswap Protocol. The open source code of the Uniswap Protocol allows users to conduct open market transactions while self-custodying their property. In the class action lawsuit Nessa Risley Vs. Uniswap decided by the United States District Court for the Southern District of New York in 2023, the judge clearly stated that "transactions on Uniswap are not subject to securities laws." This is mainly because it does not meet the relevant requirements of the Howey test and it cannot be concluded that it is subject to securities-related legal constraints.
The Howey Test in the United States originated from the famous case of SEC v. W.J. Howey Co. (SEC v. W.J. Howey Co.). Through precedents, the court clarified four requirements for determining whether a product is a "security": (1) whether it is an investment of money; (2) whether the investment expects the generation of profits; (3) the investment is in a common enterprise; and (4) the generation of profits is due to the efforts of the issuer or a third party rather than the purchaser himself.
Katherine Polk Failla, a district judge in the Southern District of New York, ruled that there is no investment agreement or commitment between the purely open-source Uniswap Protocol and Uniswap Labs, which is mainly responsible for front-end maintenance and operation, and its issued governance tokens are naturally not subject to the U.S. Securities Act of 1933 and the Securities Exchange Act of 1934. In her ruling, she wrote: "... the plaintiff can only argue that Uniswap Labs facilitated the relevant transactions, but the protocol does not have a centralized ownership structure..." "This case is more like making the developer of self-driving cars responsible for the owners' violations of traffic rules or bank robbery."
Based on this, this landmark case in the United States also sends an important signal to the market: open source developers (distributed entities) should not be held responsible for the actions of third parties on the distributed protocols (smart contracts) they create.
(II) Careful selection of the region where the currency is issued is the key to success
At present, if we exclude countries and jurisdictions that prohibit the issuance of coins, the Sajie team believes that the regions available for overseas coin issuance can be divided into three categories: (1) strictly compliant and regulated; (2) clearly prohibited; and (3) free and unrestrained.
Sister Sa’s team suggests that we first exclude the third type of free and unrestrained countries. Most of these countries are countries where the crypto asset industry started late, have underdeveloped economies, or have unstable political regimes. Although these countries meet some of the conditions for the wild growth of crypto assets, the security of their assets and even the personal safety of the project operators themselves cannot be guaranteed, so they are not suitable for long-term consideration.
Therefore, the best option for entrepreneurs is to choose a country or jurisdiction with strict compliance or clear prohibitive regulations.
Strict compliance type, with Hong Kong as a typical example. After the release of the Crypto Manifesto, Hong Kong, my country, under the leadership of financial regulators, established a set of crypto asset licensing and supervision systems that operate under the "Anti-Money Laundering and Terrorist Financing (Amendment) Ordinance 2022" and the "Guidelines for Virtual Asset Trading Platform Operators", referring to the traditional financial industry's separate supervision model. The system requires all central trading platforms operating in Hong Kong or promoting virtual asset services to Hong Kong citizens to obtain a license issued by the Securities and Futures Commission (SFC). Issuing currency in this jurisdiction has high compliance costs and large initial investment, but the advantage is that the regulatory norms are clear enough and the long-term benefits are predictable.
Explicit prohibition regulations, take the United States as an example. The United States is currently not like Hong Kong and the European Union, where a series of laws or local regulations to guide and regulate crypto assets are established through legislative bodies. Instead, different regulatory agencies (mainly the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission) supervise crypto institutions and the crypto assets they issue on their own authority. Once it is found that they do not comply with the relevant laws and regulations on securities and futures, comprehensive judicial measures will be taken against them. The advantage of issuing coins in such jurisdictions is that the threshold is low, and if the project is small, it is difficult to attract regulatory attention. But the disadvantages are also obvious. The relatively uncertain regulatory norms bring about vague legal risks-limiting the imagination of those who comply with the regulations, but indulging speculators in killing pigs. In addition, profit-seeking law enforcement is even more prevalent in such countries. The recent experience of a leading crypto asset trading platform is an example.
Therefore, on the whole, the Sajie team recommends that the issuer choose a strictly compliant country or jurisdiction to issue the currency.
Conclusion
In the Web 3 era, the compliance issuance of cryptocurrencies (ICOs) has become a complex and critical issue. Although the crypto asset market has undergone several rounds of reshuffles and reconstructions, and blockchain technology has made great progress, the challenges of compliant coin issuance remain severe. The Sajie team believes that compliant coin issuance requires project parties to have in-depth market insights, strict legal awareness, and a high sense of responsibility. When choosing a location for issuance, it is important to consider carefully to ensure that the project can develop healthily in a legal and stable environment. At the same time, we also look forward to more compliance channels and regulatory frameworks in the future to provide strong support for the prosperity and development of the Web 3 industry.
That’s all for today. Thanks to my readers!
