Discussion on the Perfection of ICO Regulatory Legal System—Take the“Belt and Road”Initiative as the Perspective

Chen Wen

(Master of Law Education Center,East China University of Political Science and Law,Shanghai 201620)

Abstract：Technological progress and Internet development have brought vitality to finance,however,Chinese financial regulatory legal system has not kept pace with the times.Based on the background of the Belt and Road,this paper discusses the international community and Chinese regulatory means to ICO,analyzes the current situation of the legal deficiency in Chinese financial supervision,and puts forward a series of suggestions to improve the legal system of financial supervision according to the status,in order to prevent and defuse systemic financial risks,so as to better promote the construction of the Belt and Road and establish financial legal risk prevention and control mechanism.

Keywords：the Belt and Road;ICO;financial supervision

The Belt and Road is not only the booster of international cooperation for economic development,but also the lubricant to promote the joint development of economic globalization.The“Belt and Road”initiative benefits the country and the people,and is the key to building a global economic system and a community of shared future for mankind.However,the existing problem that the regional economic development is unbalanced needs huge and systematic financial instruments to support[1].Finance is the core of modern economic development,and financial security concerns the overall situation of Chinese future economic development.Based on this,this paper takes ICO financial supervision as the starting point to discuss how to improve the do-mestic financial supervision legal system under the background of the Belt and Road.

I.The Basic Theory of ICO

(i) The Concept of ICO

1.ICO is a Means of Coin Offerings

ICO,Initial Coin Offerings,is a project crowdfunding form derived from blockchain technology,which means the financing subject(the initial established firm or project of blockchain)raise so-called“virtual currencies”such as bitcoin and ether from investors through illegal sale and circulation of tokens[2].ICO project sponsors will first publish the project content through the project website and the coin exchange website,including project white paper,team background,amount of issuance,project development,project objectives,ICO timetable and other specific details,prospective investors need to exchange virtual currency for cryptocurrency of the project through specified channels within a specified time.After the project is launched,cryptocurrency can be traded on the virtual currency exchange.

ICO has been in a legal vacuum for a long time,almost without threshold for subscription,and doesn’t have any restrictions on the amount,location and lock-up period of the initial investment,which has led to the rush of the initial established project groups and individual investors.ICO has been developing rapidly in the world.In 2015,the global financing amount of ICO has reached 14 million dollars,in 2016,it reached 200 million dollars,and in the first half of this year,it exceeded 1.2 billion dollars.And in China,ICO financing has reached 2.616 billion dollars,and 105,000 participants in the first half of 2017.Until September 4th,when the central bank called a halt,the total domestic financing is about 6 to 7 billion RMB.However,unfortunately,about 90%of ICO projects have been reduced to“Ponzi Schemes”,investors are still dreaming of getting rich overnight,which worries supervision department.In September 4th,2017,the central bank and other seven ministries and commissions jointly issued the“Notice on Preventing the Financing Risks of Coin Offerings”,taking the sword of Damocles,halted all the initial coin offerings and completely shattered the“ICO bubble”,making the splender ICO failed.

2.The Differences between ICO and IPO

IPO,Initial Public Offerings,refers to the initial sale of stocks by a limited liability company to the public,through the way of entrusting commission brokers and market makers in accordance with the prospectus and agreed terms issued by the China securities regulatory commission for the purpose of raising funds.ICO and IPO are very similar,both are the means of raising funds that issued to the public for the first time and investors can freely choose to subscribe,and both involve the secondary market.The tokens bought by ICO investors can be traded on the token exchange and the stocks bought by IPO investors can be traded on the stock exchange.The mechanisms of the two are very similar,while they are different in essence,which explains the reason why ICO is more popular than IPO.

(1)Financing and Negotiability are Different

From the point of issue,the issue object of IPO is stock,what investor obtains is a kind of ownership certificate,it is the negotiable securities that stock company issues to each shareholder as holding certificate for raising funds so as to obtain dividend and bonus.Whereas the issue object of ICO is token,which is a tool generated based on the verification of advanced encryption technology and represents the value flow of the platform.ICO entrusting the right of use to the tokens,the investors have the right to use some functions of the platform at the cost of paying tokens.

From the point of subscription,IPO is subscribed in legal tender,and ICO is subscribed through bitcoin,ether and other virtual currencies.As the circulating currency of a country,legal tender is strictly controlled by the government.The distribution amount and circulation amount are relatively stable due to the need to adapt to the social demand,so the amount of legal currency for IPO is relatively stable.However,virtual currency is an asset existing in electronic form,which has a very strong self-derivative function,and the price of the token will also rise with the development of ICO project,instead of consuming the services provided by the program,investors would sell the tokens on the exchange to earn the difference,which led to the great negotiability of the tokens.Therefore,in general,the transaction,negotiability and convenience of ICO is much higher than IPO.

(2)Financing Subject and Investment Subject are Different

The financing subject of IPO is a mature and large limited liability company for the purpose of listing.Its investment subject is generally a qualified investor with strong risk identification,assessment and endurance ability,whose investment purpose emphasizes the acquisition of equity.However,the financing subject of ICO is generally the blockchain technical team or individual,which cannot have the qualification of legal entity,including the team transforming from the digital currency investor,the technical team derived from the exchange or mining pool,etc.The range of its investment subject is wide,besides professional investors,trust institutions and hedge funds,there are a large group of individual investors with low professional level and irrationality who have obvious purpose of speculation.

(3)Different Degrees of Supervision

As a relatively mature securities market behavior,IPO has been regulated by the“Corporation Law”,“Securities Law”and other laws,as well as the rules and regulations such as“Measures for the administration of initial public offering of stocks”.China Securities Regulatory Commission recently also said that the review of the IPO would be strict,so as to protect the interests of investors,maintain the long-term stable development of the capital market.However,there is no explicit provision to include tokens into the scope of securities in China,so for a long time,ICO has no applicable laws and regulations,nor strong supervision by CSRC or other institutions,drifting in the legal gray area,but it is easy to touch the legal red line.

(ii) The Legal Nature of ICO

The determination of legal is of great significance.According to existing laws and regulations,legal concepts and terms,the nature and facts of ICO are identified and analyzed,so that it can be classified into a specific legal category to be regulated.This paper firstly conducts a qualitative analysis from the perspectives of economic law,civil law and criminal law.

From the perspective of economic law,securities issuance refers to the sale of securities representing certain rights to investors by the government and enterprises in order to raise funds,including the issuance of stocks,bonds,equity securities and so on.Securities are defined under U.S.securities law as any debt instrument or certificate issued by an enterprise for the purpose of raising capital,including stock in a for-profit company,membership interest in a limited liability company,and interest in a limited partner.Meanwhile,according to Howey Test,an investment contract is'a contract,transaction or plan that an individual invests his assets into an ordinary enterprise and expects to gain profits only through the efforts of the initiator or a third party',which can also be classified as securities[3].It can be seen that the attributes of tokens are similar to securities,and the essence of ICO is actually the issuance of securities.From the perspective of the primary market,ICO issues tokens to non-specific public to raise virtual currency,which is essentially a financing behavior.From the secondary market,investors transfer tokens to earn profits,so that tokens have the property of investment.The financing and investment nature of ICO determines that it cannot escape the fate of being regulated,and the malicious evasion of the law will not escape the legal sanctions.

From the perspective of civil law,the central bank explicitly negates the monetary attributes of tokens and virtual currencies in ICO,and makes a legal distinction between them and legal tender,considering that it is not issued by the monetary authority,which means it doesn’t have monetary attributes such as legal compensation and mandatory,nor the same legal status as money,and cannot and should not be used as money in the market[4].The Internet finance association of China also explicitly stipulates that virtual currency has no real value basis,but in view of the exchange and consumption attributes of virtual currency,it basically conforms to the definition of virtual goods.Article 127 of the“Gen-eral Provisions of the Civil Law of the People's Republic of China”,which came into effect on October 1st,2017,clearly stipulates the protection of virtual property,therefore,as virtual property,virtual currency should be protected by law.

In addition,the'capital'in illegally fund raising crime includes money,also includes other possessions.Under certain conditions,virtual currency has a certain value and use value,and have the trading function,which can be regarded as the“other assets”of property privately owned by citizens in article 92 of the criminal law,so there is nothing wrong with being classified as an illegal fund-raising scam.

II.Financial Supervision Status of ICO at Home and Abroad

(i) Chinese ICO Penetration Regulation Process is Slow

The penetrating regulation process of ICO in China is from loose to strict gradually,from form to substance gradually.As for bitcoin,the source of ICO,Chinese regulatory authorities issued“Notice on Preventing Risks of Bitcoin”in 2013,clarifying the nature of its virtual goods rather than legal tender,and requiring banks and third-party payment institutions to shut down more than a dozen bitcoin trading platforms.In August 2017,the state council issued“Disposal of Illegal Fund-raising Ordinance(Consultation Draft)”,which investigated illegal fund raising activities in the name of bitcoin such as fund raising,equity transfer,insurance sales,financial leasing,mutual fund assistance and other asset raising activities.On September 2nd in the same year,the leading group office of the Internet financial risk special rectification work issued“Notice on the Clean-up of Coin Issuing and Financing”,which further included ICO into the Internet financial risk rectification work.Until September 4th,the seven ministries and commissions jointly issued“Notice on Preventing the Financing Risks of Coin Offerings”,and suspended the growth of all ICO,regardless of good or bad,the trading platform of tokens were closed,and the clearing of tokens will be completed in the supervision.

(ii) International Supervision

Not only in China,since the technical level of the regional chain in ICO has“gone bad”,in the international community it also has a fever,in order to change the three states of'no regulatory departments,no access restrictions,no operating standards',countries have issued regulatory means,the overall regulatory intensity is getting stricter.

The United States Securities and Exchange Commission(SEC)states that The DAO token has the characteristics of decentralized venture capital fund and should be regarded as securities,and identifies“The DAO”,this ICO project,as securities issuance,making it clear that it needs to be regulated by the federal securities law of the United States.Its issuance needs to be registered,and strictly abide by the principle of information disclosure.The SEC revealed the risks of ICO to investors,warning them to be wary of listed companies using ICO to“drive up shipments”and“manipulate the market.”

The UK uses a'regulatory sandbox'for regulation in terms of the regional chain technology,the origin of ICO.The regulatory sandbox is a safe space for financial innovation.For financial innovation institutions,they can test their innovative products and services within the scope stipulated by the regulators.They are subject to relatively loose regulation,but still cannot violate the law;for law makers and regulators,regulatory sandbox is a pilot area of relevant laws,regulations and regulatory policies.We can grasp the relationship between regulation and innovation from a dialectical perspective,find the balance point of interests between them,and promote financial innovation while preventing financial risks.In terms of ICO,according to the UK financial market conduct authority(FCA),tokens belong to the private currency under British law.Whether ICO accepts its supervision or not requires specific analysis of whether the project involves conventional investment,and warns initiators to understand and assume legal risks and responsibilities by themselves,and warns investors that ICO is a'speculative investment with high risks',and those found suspected of fraud can report to FCA.The monetary authority of Singapore(MAS),like the UK,has included blockchain technology in its regulatory sandbox.In terms of ICO,Singapore adopts the principle of case-by-case evaluation.If tokens belong to products that should be regulated in chapter 289 of“Securities and Futures Ordinance”,the legalization of token trading platform requires the authorization of MAS.In addition,MAS warned the public to be careful to avoid falling into multi-layer pyramid schemes that promising high returns and commissions,such as the One Coin token trap.

Switzerland defines tokens as assets.As“tax avoidance heaven”,the ICO regulation is relatively loose and issuing tokens does not require special permission or approval.However,relevant enterprises need to be approved by the Swiss financial regulatory authority(FINMA)to conduct business.Businesses within the scope of anti-money laundering laws such as bitcoin operation need to be registered as financial institutions or self-regulatory organizations,which are subject to laws and regulations.

III.The Legal Deficiency in Chinese Financial Supervision under the Background of the“Belt and Road”

To study the prevention and control of financial legal risks at home and abroad under the background of the“Belt and Road”,we must first start from ourselves and consider the legal deficiency under the background of Chinese financial supervision,so as to improve the ICO regulatory legal system.The introduction and implementation of“Securities Law”,“Corporation Law”,“Law of Insurance”,“Commercial Bank Law of the People's Republic of China”and other laws in China,as well as“Suppression of Interaction Between Illegal Financial Institutions and Illegal Financial Operations”and“Penalties for Financial Infractions”indicate that Chinese financial supervision legal system has been basically established,the regulatory system of“One Bank and Three Commissions'has been basically established with the Central Bank conducting overall supervision.The Banking Regulatory Commission,the Insurance Regulatory Commission and the Securities Regulatory Commission shall separately supervise the securities industry,banking industry and insurance industry.However,this actively ICO regulatory process once again exposed the shortcomings of Chinese financial regulatory legal system in terms of regulatory legislation,regulatory methods,regulatory institutions and other aspects.

As the financial industry changes,new financial phenomena emerge in an endless stream,and the business,products and financing channels of the capital market are innovating with each passing day.P2P,third-party payment,crowdfunding,artificial intelligence and ICO mentioned in this paper are all newborn in the financial field.The current regulatory legal issues in this field are as follows.

(i)A violation of existing laws.Aristotle had a famous quote,the rule of law should contain two meanings:The established law obtains universal obedience,and the law to which all submit should itself be a good law[5].Although new financial phenomena emerge in an endless stream,most of them are still regulated by law.Its essence is the combinations or reorganizations of the original legal relations,without new creation,and can be basically regulated according to the existing civil and commercial law.

(ii)Lack of legislation.Some new financial phenomena have created new legal concepts and legal relations.The prerequisite for financial supervision is to identify and confirm the nature and characteristics of financial models[6].However,not all new phenomena are covered by existing laws because lawmakers cannot predict the future,as well as regula-tory laws are lacking.

(iii)Lack of legal interpretation.The relative stability of the law limits the synchronic change of the law,which requires the application of legal interpretation to solve this contradiction.Legal interpretation needs to be consistent with social development as much as possible,which is a repeated and long-term process,but Chinese legal interpretation is obviously lagging behind.Some new phenomena in the financial field lack of legislative interpretation and judicial interpretation,leading to the failure of financial supervision.

In addition,China is in the wave of separate operation stepping to mixes operation,in particular,the financial technology represented by big data,artificial intelligence and block chain technology has reshaped and innovated the traditional business model,constantly integrating and overlapping industries,and industry supervision has to innovate accordingly,to continue to use the legal means of separate supervision to deal with the mixed operation pattern will only be full of problems.On the one hand,it will lead to a serious phenomenon of'playing the rubber ball'.If the regulatory bodies continue to be determined according to the types of financial institutions,there will be a lack of legal definition,which will easily lead to buck-passing and being unable to deal with the situation among regulatory departments,making it difficult to unify regulatory standards,resulting in a regulatory vacuum and systematic financial risks.In particular,the emerging financial phenomenon represented by ICO will be free from the regulatory system;on the other hand,the supervision is inefficient.The lack and delay of information communication between regulatory departments will lead to duplication of supervision,waste of supervision resources,increasing operating costs of the financial system,and making it difficult for the existing coordination mechanism of financial supervision to achieve the expected effect.At the same time,the financial industry is the lifeblood of the national economy,it also has the characteristics of high risk,highly contagious,involving a wide range of hazards.At present,under the general trend of mixed operation,the boundaries between financial businesses are blurred,and financial institutions are inextricably linked.The risk exposure of different types of financial institutions is gradually increased,and the correlation between the assets of financial institutions and the financial market gradually improved[7],the contagion and resonance effect among markets,industries and regions leads to the rapid expansion of financial risk transmission and the formation of cross-market systemic risk contagion mechanism.Due to the lack of information sharing mechanism,it is difficult to form a unified macro risk monitoring and early warning mechanism and dynamic risk monitoring mechanism in the financial supervision legal system based on separate supervision.In the face of crisis,it is unable to effectively and decisively introduce unified and quick response measures,exposing the drawbacks of separate supervision.

IV.Suggestions on Improving the Legal System of Financial Supervision in China under the Background of the Belt and Road

In the context of the“Belt and Road”construction,finance,as an important support of the“Belt and Road”initiative,brings many risks and challenges while serving the construction of the“Belt and Road”.[8]The first step to prevent financial legal risks is to perfect the financial legal system in China according to the domestic situation.As for the financial and legal risks that will appear in the construction of the“Belt and Road”initiative,China should not only coordinate international rules and host country's laws and regulations,but also ensure the core leading role of green finance with the rule of law.

(i)Soft Law Goes First,Hard Law Brings Up the Rear Rear

Financial regulation needs a buffer zone,with the tough measures are detrimental to social stability,soft law needs to be piloted first.Soft law is a process of social autonomy and a fundamental work in the field of supervision.Through the endogenous order,soft law first rises from enterprise standard to industry standard[9]and plays a role in regulating market behavior,then keeps up with the pace of social practice to constantly improve and innovate itself.After the soft law precipitation is completed,the administrative supervision layer conducts extensive research,solidifies into the national law by the legislative body,endue it with national compulsory force,and rises to the hard law level.If the existing rules cannot achieve the balance of various social relations and restore or rebuild a social order,new laws and regulations must be formulated[10].When formulating the hard law of financial regulation,we should abandon the traditional financial regulation thinking and comprehensively consider the interest demands of various subjects from the financial sector.Therefore,it is necessary to reach agreement and consensus on regulatory laws through democratic consultation.The means of regulatory authorities to achieve regulatory objectives should no longer be imperativeand compulsorycontrolmeans,but should emphasize dialogue,consultation and cooperation between public power and private subjects.In addition,we should respect existing hard laws,crack down on illegal and criminal activities in the financial sector by using existing laws,and strictly observe the bottom line of laws.

(ii) Financial Regulatory Legislation should be Coordinated with Financial Innovation

The formulation of financial regulation laws needs to set up the concept of innovation and appropriateness,achieve coordination between regulation and innovation,treat different natures of financial innovation differently,and make sure that it is well handled.Firstly,illegal financial innovation should be strictly banned,including non-prudential supervision institutions engaged in the banking business that should be prudently supervised,for example,under the banner of financial innovation,some P2P platforms illegally develop capital pool business;and some regulatory arbitrage activities that evade the laws apparently,for example,some financial products are nominally development of direct financing,but in fact,they are disguised credit replacement products invested in restricted areas.Secondly,for financial innovation with real value,we should give strong support to it,strive to create a new environment for financial innovation,optimize new measures for financial innovation,construct a new pattern of financial innovation,and guide it to develop towards the direction of benefiting the people.Thirdly,for financial innovation with unclear positioning,the model of'regulatory sandbox'can be adopted,take a pre-planned,pre-determined regulatory approach that isolates risk while encouraging innovation.

(iii) Principle of Legal Harmonization of Financial Supervision

China intended to set up an independent financial development and stability commission with entity institutions.In order to implement the principle of coordination of financial supervision and regulation,China needs to formulate relevant laws and regulations to ensure that on the one hand,it is the highest level financial supervision institution in the country and coordinates the supervision functions of the Central Bank,CBRC and CSRC,the central and local supervision functions,and the domestic and foreign supervision functions,establishes an information sharing mechanism,ensures resource sharing,information exchange and joint defense interaction,and works to improve the effectiveness of supervision and avoids regulatory arbitrage;on the other hand,strengthen coordination and cooperation with other departments,such as supervises financial information with ministry of Internet and information technology,works with the ministry of finance to supervise local government debt,so as to avoid waste of supervision resources,strengthens the pertinence and professionalism of supervision,and improve the efficiency of supervision.

(iv)Financial Regulation Laws should Servee the Real Econoommyy

The real economy is the lifeblood of finance and the fundamental and core of modern economy.Financial supervision should return to serve the real economy through legal regulation.First of all,we need to improve the benchmark of market operation through legal means,including interest rate,treasury bond yield curve and RMB exchange rate,so as to guide it to develop in the direction of marketization;reduce the high debt ratio and leverage ratio caused by'equity mismatch'and'maturity mismatch'in the financing market,increase the proportion of direct financing,increase long-term capital supply,and further improve the multi-level capital market;vigorously develop inclusive finance,improve financial infrastructure,and provide efficient and convenient financial services to all sectors of society,especially local and disadvantaged groups,the key is to open up private credit and develop Internet finance;improve the market-based risk management mechanism,improve the commercial insurance system,the deposit insurance system and the market withdrawal mechanism of financial institutions,and make full use of the market's ability to defuse risks;finally,while promoting the transformation from institutional supervision to functional supervision,the quality and efficiency of supervision should be improved to form regulatory synergy and protect consumers and investors.After all,differences in financial development between countries are directly related to the level of consumer and investor protection[11].

V.Conclusion

As the“Belt and Road”advocate,China has the obligation and need to take the lead in improving the financial regulatory mechanism,so as to play a leading role in the model role,to ensure that countries along the route or countries supporting the development of the“Belt and Road”can avoid the risk of financial development brought by regulatory measures.China should clarify the deficiencies of the legal system and strengthen relevant legislation as soon as possible,so as to provide comprehensive legal basis and guarantee for Chinese enterprises'overseas investment[12].We should study the prevention and control of the“Belt and Road”financial legal risk,and form corresponding economic legislation mode,so as to be used for reference by more and more countries inside and outside the“Belt and Road”[13].