On May 18, 2021, the three financial agencies in China, the National Internet Finance Association, the China Banking Association, and the Payment and Clearing Association of China, issued a prohibition on China’s financial institutions and payment companies from offering any services in relation to virtual currencies, just weeks after Turkey had issued a similar ban. China has been experimenting with its Central Bank Digital Currency (“CBDC”), the digital Yuan, and in November 2020 had even amended the People’s Bank of China Law, to introduce Article 19 which provides legal tender recognition to the digital currency.
However, the new restrictions have once again made China’s stance on cryptocurrency clear, that the only legitimate digital currency it considers is the Digital Yuan. Under the new restriction, banking, financial, and payments institutions will not be allowed to offer any services relating to cryptocurrencies, such as trading, clearinghouse facilities, and registration or loan activity including pledging or trust services. The institutions would be further being restricted from issuing any crypto-assets based product. The three agencies state that cryptocurrencies pose significant risks to consumers, being susceptible to manipulation, and having no real value. While neither the agencies nor the People’s Bank of China (“PBOC”) has issued any ban on individuals from holding cryptocurrencies, they have restricted institutions from providing exchange services between virtual currencies and China’s fiat currency, requiring banks and payment companies to closely monitor activities relating to virtual currencies. Hence, even though individuals may hold cryptocurrencies, it will be more difficult for virtual currency traders now to utilise financial channels to trade in crypto assets.
What has changed from the 2017 ban?
China’s new restriction has advanced the earlier 2017 and 2019 bans, which restricted initial coin offerings (ICO) as a means of fundraising in China, and blocked access to cryptocurrency exchange websites. In 2017, the PBOC had also directed organisations that had already conducted fundraising through ICOs to return the funds to all investors. The 2021 ban reiterates some of the earlier restrictions by the PBOC and expands on it by adding that financial institutions may now not provide any storage or custody, or mortgage facilities, and further may not engage in activities relating to virtual currencies being used as a payment and settlement tool. Financial institutions are required to immediately terminate all relevant transactions, adopt reporting mechanisms, and ‘strengthen the monitoring of virtual currency transaction funds’.
Further, internet platforms are restricted from providing any services relating to marketing or commercial display of virtual currency-related business activities. While the notification does not explicitly bar individuals from holding virtual currencies, it does provide a risk prevention insight, where the three agencies urge consumers to not engage in any activity relating to virtual currencies, and not utilise their personal bank accounts for this purpose.
The three agencies shall also strengthen financial institutions' self-discipline supervision and take sanctions if any institution is found not to conform with regulations relating to virtual currencies.
Authored by Shivani Agarwal, Founder and Samaksh Khanna, Co-founder.
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