In recent years, with the rapid development of blockchain technology, more and more entrepreneurs have turned to the Web3 field, trying to find opportunities in this blue ocean. However, for domestic Web3 entrepreneurs, in order to open up a path of sustainable development in the gap between policies and market environment, they need to solve not only the problems related to the business content itself, but also complex legal compliance challenges.
This article summarizes the more frequent legal questions that Lawyer Shao will be asked in his daily work, hoping to provide some ideas or inspiration for Web3 entrepreneurs.
Author: Lawyer Shao Shiwei
0 1. What are the red lines when starting a Web3 business in China?
According to the 94 Announcement, 924 Notice and other policy regulations, there are currently three negative lists for Web3-related entrepreneurial projects in China: issuing coins, operating virtual currency exchanges and mining . Web3 entrepreneurs must remember not to touch the minefield.
Token issuance projects are often prone to risks related to illegal fundraising. On September 4, 2017, seven ministries and commissions issued the "Notice on Preventing Risks of Token Issuance and Financing" (Notice 94), requiring that all types of token issuance and financing activities should be stopped immediately from the date of the announcement, thus halting all ICO activities in my country.
According to policy regulations, virtual currency-related businesses are illegal financial activities, and virtual currency exchanges engage in the exchange of legal currency and virtual currency, and between virtual currencies.
Virtual currency "mining" activities refer to the process of calculating and producing virtual currency through dedicated "mining machines", which consumes large amounts of energy and emits large amounts of carbon. The 2021 "Notice on Regulating Virtual Currency "Mining" Activities" stipulates that it is prohibited to develop virtual currency "mining" projects under any name.
0 2. What are the legal risks that need to be paid attention to in the Web3 project model?
Criminal charges such as opening a casino, organizing and leading pyramid schemes, etc. are common and high-incidence criminal legal risks in cryptocurrency projects.
Taking Web3 games (also known as GameFi, blockchain games) as an example, for Web3 game entrepreneurs, they will be subject to dual constraints of game laws and regulations and blockchain-related policies in my country. Lawyer Shao believes that if such entrepreneurial projects are done in China, the legal risks are still very high. Because the tokens issued in foreign Web3 games are generally on the chain, allowing users to trade freely, while China prohibits both the issuance of tokens and the withdrawal of tokens in games. Therefore, if Web3 games are made in China, there may be gambling risks if game companies recover game props directly or indirectly (in cooperation with silver merchants). If there is a promotion model similar to pyramid schemes in the promotion level or game model, such as obtaining profits through multi-level distribution and recruiting people, there may be pyramid scheme risks.
0 3. During the operation of Web3 projects, it is necessary to guard against financial crime risks
Web3 platforms may be used by criminals to conduct money laundering activities. Due to the anonymity of transactions, it is difficult for exchanges and encrypted digital wallets to trace the source of each transaction to ensure that it is legal and compliant. Because transactions are not restricted by geographical location, the customer base may be spread all over the world. At the same time, consistent with the traditional financial industry, this is also an industry closest to money. Therefore, in future anti-money laundering supervision, Web3 industry entrepreneurs will be subject to higher responsibilities and obligations than other industries. Once a business operation is deemed a crime by a country, possible consequences include but are not limited to paying a huge fine, the actual controller being punished, and the project being ordered to withdraw from the country's market.
Therefore, establishing an effective anti-money laundering internal control system and fulfilling the legal obligations of anti-money laundering are important issues that Web3 entrepreneurs need to pay attention to.
0 4. When Web3 projects go overseas, do they still need to comply with relevant domestic laws and regulations?
There are four principles for criminal jurisdiction in my country: the territorial principle, the personal principle, the protection principle, and the universal principle. In other words, the scope of application of Chinese criminal law is very large. As long as any part of the business model has some connection with China, it is theoretically possible to be subject to the jurisdiction of Chinese criminal law. Adding foreign-related factors to the business model, such as the company's main body is a foreign company and the nominal operator is a foreigner, etc., formally seems to reduce the probability of criminal risks, but if the Web3 business operated is prohibited by relevant domestic laws and policies, and the project is still facing users in mainland China, then even if the project is registered overseas, as a Web3 project that is actually operated by Chinese people, there will still be relevant criminal legal risks.
0 5. When starting a Web3 business overseas, how can funds be legally repatriated to the country?
A common problem for Web3 entrepreneurs is that most of the company's operating income is in overseas companies, or the financing received can only be converted into legal currency in a compliant manner overseas. However, the company's main team is in the mainland, and the operating expenses are mainly in the mainland. In this context, how can the legal operating income and financing income of overseas companies be repatriated to the mainland? One way is through foreign direct investment (FDI).
FDI can be understood as investment activities directly carried out in China by foreign natural persons, enterprises or other organizations (hereinafter referred to as foreign investors) using cash, physical objects, technology, etc. Common FDI situations include: (1) foreign investors establishing foreign-invested enterprises in China alone or jointly with other investors; (2) foreign investors acquiring shares, equity, property shares or other similar rights and interests in enterprises in China.
At present, my country implements the pre-entry national treatment and negative list management system for FDI. In short, except for certain specific areas where the state implements special management measures, foreign investors and domestic investors enjoy the same rights and obligations for other foreign investments. In short, the entrepreneurial fields commonly used by Web3 entrepreneurs, such as public chain development, cross-chain technology, DAPP, DID or other on-chain infrastructure construction, can safely apply FDI[i].
0 6. Information protection and data security issues need to be taken seriously
Although the core of blockchain is decentralization, Web3 projects still involve data management and cross-regional data linkage in actual operation. Therefore, if Web3 projects do not pay enough attention to user information protection and data security, it may cause security incidents caused by hacker attacks.
For example, on November 16, 2024, the cryptocurrency trading platform DEXX was attacked by hackers. According to relevant news, more than 100 million US dollars of user assets were stolen by hackers. After in-depth technical analysis by the BitJungle monitoring system, the DEXX trading platform had the following serious security issues: private key storage (although the DEXX platform claims that it is not a custodial wallet, it records the user's private key. Once the system is attacked, hackers can easily obtain the user's private key and steal the user's assets) and private key export and plain text transmission (the DEXX platform did not take any encryption measures when the user exported the private key, resulting in the private key being exposed in plain text during the transmission process, which is very easy to be intercepted by hackers).
As for Web3 projects operating in my country, they need to follow the requirements of the Personal Information Protection Law, the Cybersecurity Law and the Data Security Law, formulate and implement a comprehensive data security management system to ensure the security of data during storage, transmission and processing. Web3 projects operating overseas, if they are aimed at domestic users, must not only comply with the laws of my country, but also the relevant laws and regulations of the country where the project is located.
0 7. Are there any legal risks in operating virtual currency agency investment business?
Although policies such as Announcement No. 94 and Announcement No. 924 define virtual currency-related businesses as "illegal financial activities", in practice, legal disputes involving virtual currency entrusted financial management are common. If Web3 entrepreneurs act as an agency to raise funds from investors for virtual currency investment and financial management activities, they may face pressure from investors to protect their rights in the event of investment losses.
Although according to my country's policy regulations, virtual currency-related businesses are illegal financial activities, and under specific business circumstances, the legality of such cooperative transactions between the agent and the principal is also highly controversial, it is still recommended that both parties sign a written entrusted investment agreement before cooperating. Based on our experience in handling related cases, this can reduce the criminal risk of the agent to a certain extent. In addition, the clarification of the jurisdiction clause (the choice of jurisdiction and place of jurisdiction) can also help resolve disputes.
0 8. Is it okay if the company is registered overseas and the employees are in China?
If the company's business operations violate my country's criminal law, overseas projects cannot completely avoid domestic criminal risks. If employees are in China, there are two main risks. First, employees are not stable. Since domestic employees may be investigated as criminal suspects at any time, their job stability is not guaranteed, and it also affects labor costs. Second, after the investigation, the company's overall operations will be affected. If an employee is investigated, according to the relevant provisions of China's criminal law on commutation of sentence, surrender, and meritorious service, the employee will disclose relevant information he knows. Therefore, the company's core secrets such as business secrets and senior management may be leaked, affecting the company's normal operations.
0 9. Last words
For Web3 entrepreneurs and practitioners, before deciding to engage in related businesses, they should first understand the bottom line of the law. High-risk criminal businesses must not be touched. Even if you go overseas to do business, if the business is for domestic users, you need to comply with relevant regulations in both China and the country where the project is located. I hope this article can provide clear ideas and practical suggestions for practitioners in the industry, helping everyone to move forward steadily in the blue ocean of Web3.
