Friday, March 04, 2022

Aleksandr Alekseenko on "Regulation of Cryptoassets in Mainland China, Hong Kong, Macau & Taiwan" (European Chinese Law Research Hub)


The folks over at the European Chinese Law Research Hub (with thanks to Marianne von Blomberg, Editor ECLR Hub, Research Associate, Chair for Chinese Legal Culture, University of Cologne) have posted  a new paper by Dr. Aleksandr Alekseenko (Associate Professor in the Faculty of Law of the Saint-Petersburg State University), "Regulation of Cryptoassets in Mainland China, Hong Kong, Macau & Taiwan," which will appear as a Note in the Columbia Law Review.
Marianne von Bloomberg explains:

Cryptocurrencies became one of the main targets in China's recent regulatory crackdown. While the PRC experiments with its sovereign digital Yuan, it deems cryptocurrency speculation a serious risk to the country's economic and financial order, not least because it may facilitate financial crimes. Aleksandr Alekseenko offers a comparative perspective on the regulation of cryptoassets in mainland China, Hong Kong, Macau and Taiwan and finds that Hong Kong may serve as a de facto bridge for investors from the mainland.

Pix Credit: "From Barter to Bitcoin"
I have been fascinated with the always Pyrrhic efforts of large authoritative collectives to suppress markets in activities, objects, or activities that are viewed as threats, inconveniences, or challenges to the expansion of their authority, or the perfection of their leadership (in accordance with whatever normative system propels that quest forward).  I have considered this in the context of the institutionalization of collective activity to serve strong but suppressed demand for goods and services (The Drama of Corporate Law: Narrator between Citizen, State, and Corporation (Michigan State L Rev, Winter 2009)). Morals and money have always been high on the list of objects, the control of which is deemed essential for the greater glory of the (now) the state. At the same time, the greater the power of state and other legitimate collectives to assert ever greater control, the greater the challenge to that control at the margins (and sometimes as a corrupting force right in the center of power domains). Prostitution provides a good example of this challenge at the center and the margins of "respectable" society and its organs (as are the creation and enforcement of other taboos on the management of the body and the mechanics of pleasure). But it is in the management, control, and suppression of challenges to dominion over productive forces that states and other "respectable" collectives devote a substantial amount of effort--and rightly so--in the defense of their authority (and sometimes in the quest for its expansion). The result is invariably a stalemate of sorts.  The state is never able to completely suppress an activity or forms of collective organization that challenge its authority, but those challengers are hardly ever able to penetrate to the heart of state power. And sometimes, the state and its challengers learn to live with and profit from each other. This is especially the case where markets for suppressed activity emerge and are sustained as a result of persistent demand--taboo sex, gambling, drugs--and cryptocurrencies. These are uneasy and dynamic stalemates as both sides constantly push and test the strengths of the other and as demand rises and falls.

Pix Credit HERE
This dynamic applies with equal force to the battles over control of mediums of change within and between collectives. The power to set and manage --to identify, control, and make available--those objects or symbols through which wealth is measured and then used in transactions among actors, is an essential attribute of the power of institutions to manage their collectives. It suggests not merely the power to set values (and its measure) and to tax transactions, but to monitor activity and, most potently, to allow actors to use the medium of exchange for ordering their economic lives.  Currency creates borders and separates collectives as efficiently and as thoroughly as fences or walls at territorial boundaries. The essence of that power was at the heart of the financial sanctions imposed on Russia by the United States and its allies (eg here, and  here); it is a powerful weapon by entities like Sovereign Wealth funds when they exercise power to bar actors form their investment universe (eg here).  At the same time, the power to avoid the state--to set up alternative (sometimes micro and some macro) systems of alternative modalities of managing exchanges--is essential not merely as a counter to state authority, but also to manage transactions in suppressed markets and by suppressed collectives.Anything can serve the purpose, from the most primitive system of bartering exchanges (as a subversive tool in centrally planed and tightly controlled economies of developing states and others), to the use of specific objects (stones, metals, artwork, heroin, etc.) as the markers of a rationalized system of exchange. 

Pix Credit HERE
Now through the miracle of technology it is possible to challenge the state as a monopoly holder of the power to construct and control systems of exchanges through "money" in a potentially more comprehensive way.  In the form of so called crypto-currencies, it is now possible to develop digitized  forms of objects that can serve as mediums of exchange among a community  that adheres to its rules. These crypto-currencies (like the currencies of states) are worth what the community f users determines, but unlike states do not have the complex web of cross subsidies and protections against volatility, manipulation or subsidy built into the global system of financial (currency) stability. Still a marginal currency, a hedge currency, a challenge currency poses substantial challenge for states--especially respecting their ability to control their economies and to tax its activities. At its limits, it can be the basis for financing not merely transactions in suppressed markets, but also political activity against a state.  And that has produced a strong set of countermeasures by the state to both compete (public crypto currencies ) and to suppress competitor private systems. It is in this context that Dr. Alekseenko's study is both fascinating and timely.  At the same time it suggests that states both must pursue this course to preserve the integrity and power of their own systems of controlling value creation and exchanges among its collectives, and why that effort will never be completely (or satisfyingly) successful.  Indeed, the essay reminds us that there may well be an inverse relationship between the fury of state regulatory counter thrusts and the likelihood of suppression. Yet that may not be the object.  Instead all this regulation is perhaps meant to raise the costs of transactions in forbidden currencies enough to make the state currency more desirable.

I am cross posting the essay below. The original ECLRH post may be accessed HERE. And as a plug for the marvelous work at the European Chinese Law Research Hub: if you have observations, analyses or pieces of research that are not publishable as a paper but should get out there, or want to spread event information, calls for papers or job openings, or have a paper forthcoming- do not hesitate to contact Marianne von Bloomberg.



Regulation of Cryptoassets in Mainland China, Hong Kong, Macau & Taiwan

A new paper by Aleksandr Alekseenko
This file is licensed under the Creative Commons Attribution 2.0 Generic license.

Investors increasingly diversify their investment portfolios by investing in cryptocurrencies. Cryptocurrencies however are not a safe haven for investors. Bitcoin is extremely volatile and can bring both exceptionally high profits and terrible losses, seemingly due to market manipulations. The question of how cryptoassets should be regulated is approached differently by jurisdictions. This paper compares the current regulatory frameworks for cryptoassets of Mainland China, Hong Kong, Macau and Taiwan.

China is among the world’s leaders in e-commerce and FinTech, but despite this fact the Peoples Bank of China (PBOC) banned cryptocurrencies and initial coin offering (ICO). From 2013-2021 the PBOC issued several notices which obliged financial institutions not to provide transactions of digital financial assets. The People’s Republic of China also proclaimed that Bitcoin and ICO’s are tools for illegal fundraising, money-laundering, and scamming, and that therefore all activities using them violate national laws and regulations. The worries are not unfounded: In one case tried before the Heilongjiang High Court, the defendant had exchanged illegal gains money from RMB into 1,200 Bitcoins and transferred them to Macau, there converted the Bitcoins into Hong Kong Dollar and consequently exchanged them for RMB to transfer the money back to mainland China.

In addition, PRC authorities have pointed out that cryptocurrency production requires a lot of electricity. At the same time, energy is needed by organizations that produce goods and suffer from a shortage of electricity. Therefore, the second reason for prohibition is energy efficiency and concern for the environment. In order to discourage citizens from investing in projects based on digital tokens, Mainland Chinese courts do not protect the rights of investors, indicating that investors themselves are violators who expect to receive illegal income.

Macau’s authorities closely cooperate with mainland China to prevent money laundering through digital financial assets and therefore prohibited transactions with Bitcoin and banned ICO. It reduces opportunities for illegal activities and protects investors from investing in projects that exist as a pyramid scheme. In comparison with Mainland China and Macau, Taiwan has a more liberal approach to cryptoassets regulation and restricts only financial institutions from dealing with Bitcoin. Other companies may sell and buy goods for Bitcoins.

In Hong Kong, cryptocurrency and tokens are only strictly regulated by the Hong Kong Securities and Exchange Commission (SEC) if they have the characteristics of securities, bonds or futures. The SEC doesn’t regulate Bitcoin because it is neither a means of payment nor any other regulated asset. Hong Kong’s authorities pay most attention to digital platforms, which provide opportunities for ICO’s and cryptofundraising. In this regard, the SEC has issued some standards that clarify the licensing procedure for cryptocurrency exchanges and organizations that manage digital financial assets.

Thus, although Hong Kong does not create a liberal haven for crypto business, an entire segment of Hong Kong’s digital assets market is in a regulatory “gray” area. As a result, both Taiwan and Hong Kong de facto serve as bridges from the market of digital financial assets to the PRC. Mainland investors may use them as a “crypto-hub”. For the case of Hong Kong, this situation fully fits the principle of “one country – two systems.”

Find Dr. Aleksandr Alekseenko’s paper, published with the China and WTO Review, here. Dr. Aleksandr Alekseenko is an Associate Professor in the Faculty of Law of the Saint-Petersburg State University, with a research focus on Commercial Law, Investment Law and Legal Regulation of digital Financial Assets. He received his LL.M from the Far Eastern Federal University (Vladivostok) and a PhD in laws from the Ural State Law University (Yekaterinburg). He studied Chinese language at the Linyi Normal University and is the principal investigator and participant of scientific project of Russian Foundation for Basic Research on the topic of e-commerce legal regulation and new technologies in the sphere of investments.

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