The Hong Kong "Stablecoin Regulations" are trending, yet many regions are issuing warnings about illegal fundraising! Don't fall into this trap.

Introduction With Hong Kong passing the “Stablecoin Regulation,” the market has sparked a “stablecoin craze.” Financial departments in multiple regions including Beijing, Zhejiang, Shenzhen, Suzhou, Chongqing, and Ningxia have consecutively issued risk warning announcements, emphasizing that “stablecoins” are being exploited by criminals as a guise for illegal fundraising, financial fraud, and other criminal activities, and their potential risks deserve high vigilance. Why are emerging concepts such as stablecoins frequently exploited by criminals and become tools for illegal fundraising, fraud, and other criminal activities? Why do stablecoins become tools for illegal fundraising risks? Stablecoins themselves are a neutral technological tool, designed to address the volatility issue in the cryptocurrency market. The emergence of stablecoins as tools for crime in the new era is related to current trends such as blockchain and the cryptocurrency digital economy. However, their essence is consistent with early “illegal fundraising” tools, such as “shopping rebates,” “referral commissions,” “planting,” and “pension,” which do not sell real content and use methods like repaying the principal and agreed buyback as tools for illegal fundraising. Stablecoins also have their own characteristics, such as anonymity, cross-border flow, convenient transfers, regulatory lag, strong financial attributes, and high market popularity, making stablecoins a more efficient, more concealed, and more widely harmful tool for crime. (1) The anonymity and cross-border movement increase the difficulty of combating. Although the blockchain ledger is open and transparent, the actual identity of the controller behind the address is anonymous and can be further dispersed to multiple anonymous wallets through coin mixing and cross-chain bridges. Stablecoins can easily facilitate instant peer-to-peer transfers globally, breaking through traditional geographical boundaries and foreign exchange controls. For criminals who need to quickly transfer and conceal large sums of money, this is a “convenience” that traditional banking systems cannot provide. Once a scam is about to collapse or attract regulatory attention, the project team can almost instantaneously transfer all funds to overseas exchanges or anonymous wallets at almost no cost, then shut down the website and disband the community, leaving investors with nothing but a string of untraceable hash codes. (2) Using “trends of the times” and “global strategic tools” as a guise for the scam. The value of stablecoins, designed for “stability”, makes them more suitable for settlement and circulation. More and more countries and regions are legalizing stablecoins through legislation, incorporating them into the financial service system and expanding the boundaries of fiat currency credit. As an emerging digital financial tool, stablecoins have a profound impact on fiat currencies and the traditional banking system. Some criminals take advantage of these international trends and human greed, exaggerating prosperity, creating illusions, and enticing investors to believe that this is a “shortcut to wealth” in pursuit of high returns. (3) Innovative model is qualitatively ambiguous, and legal regulation is lagging behind. Innovative models such as stablecoins, staking, DeFi, and RWA currently lack precise regulatory provisions within existing laws and regulations. This vague qualitative definition provides more operational space for actors. Whether at the national level or global regulatory perspective, there is a characteristic of being blank or lagging, which makes it more appealing for criminals to set up their teams, registrations, servers, and other operations in jurisdictions with lenient or absent regulations. How to be vigilant against the risks of “illegal fundraising”? Some entities disguise themselves under terms like “financial innovation”, “blockchain”, and “Web3”, taking advantage of the public's lack of understanding about stablecoins and similar concepts. They entice the public to participate in investment trading speculation by issuing so-called “digital assets” or “anchoring to certain mainstream currencies”, thereby disrupting the economic and financial order. This could very likely lead to illegal fundraising and other criminal activities, posing a serious threat to the safety of public property. Potential investors must remain vigilant and avoid impulsive investments. They should assess whether a stablecoin project is “compliant” by examining aspects such as the economic model for minting and redeeming stablecoins by the issuer, reserve custodians, auditing institutions, and regulatory bodies. (1) Is there a commitment to “repay principal and interest or provide returns”? Some projects claim to use the stablecoins deposited by users for providing “liquid staking”, “arbitrage trading”, etc., and distribute the so-called “profits” to users in the form of platform tokens. This model obscures the essence of their promised returns through packaging and is very likely to be recognized by judicial authorities as having “enticement characteristics”. “Enticement characteristics” is one of the four core features constituting illegal fundraising activities. According to the provisions of the Criminal Law and the “Interpretation by the Supreme People's Court on Several Issues Concerning the Specific Application of Law in the Trial of Criminal Cases Involving Illegal Fundraising,” the promise of “repayment of principal and interest or payment of returns” is a key element in constituting the crime of illegally absorbing public deposits or fundraising fraud. The “promise” here can be explicit (such as clearly stating the annualized return in white papers or promotional materials) or implicit (such as through models like “dividends” or “commissions”). DeFi (Decentralized Finance) has significant market fluctuations, and no one can guarantee stable returns. Investors encountering similar “pie-in-the-sky” offers should consider whether they are “traps.” (2) Whether there are financial licenses issued by regulatory authorities and whether there are regulatory mechanisms. In mainland China, “stablecoin” projects cannot provide financial licenses. In Hong Kong, issuing stablecoins requires applying for a license from the Hong Kong Monetary Authority, and it must comply with the regulatory mechanism of “100% fiat currency reserve + independent custody + monthly audit.” This means that in terms of project compliance, there are requirements for having a license, real reserves, non-mingled funds, and transparency of information. Many illegal fundraising projects generally require investors to directly transfer funds into accounts or wallets controlled by them, mixing the funds to form a pool, which opens the door for misappropriation and running away. In contrast, compliant projects ensure asset security through independent custody, allowing investors to check the reserve status at any time. (3) Whether to provide personal virtual currency trading or whether to break through foreign exchange controls. When identifying the risks of illegal fundraising related to “stablecoins”, in addition to characteristics such as high returns and lack of licensing, the risk points that also need to be audited are “how funds are raised” and “where the funds flow”, which directly touches the red line of financial management in our country. Investors participating in such activities face risks that go far beyond just the loss of principal; they may unintentionally step into legal pitfalls, involving illegal operation, money laundering, fundraising fraud, and more. (4) Are there real application scenarios? Analyzing whether a “stablecoin” project is a true technological innovation or a scam requires penetrating its glamorous white paper and promotional language, examining whether it has built real, sustainable application scenarios and business models. Stablecoins can generally be divided into fiat-backed stablecoins, cryptocurrency-backed stablecoins, and algorithmic stablecoins. Common application scenarios for stablecoins include cryptocurrency trading, cross-border payments, DeFi, and value storage. Conclusion Stablecoins are not only an extension of fiat currency credit in the digital space but also a key entry point connecting the crypto world. Against the backdrop of the European Union, the United States, and Hong Kong implementing regulatory frameworks and vigorously developing stablecoins, they embody the international trend of enhancing financial efficiency while also becoming a “tool” that is wantonly abused in illegal fundraising activities due to their inherent characteristics. In the face of dazzling projects that promise to achieve financial freedom, we might as well calmly ask: “What is your core business? Besides paying the returns of early investors with the money from later ones, how do you actually make a profit?” Stay away from investment projects with vague business models that promise high returns. Adhere to the principle of “do not be greedy, do not believe, do not engage,” and safely protect your wallet. Note: This article provides general information and does not constitute legal advice for any jurisdiction. Specific projects should undergo targeted due diligence and compliance plan customization after signing a confidentiality agreement.

Original Author: Lawyer Xu Qian