The Hong Kong "Stablecoin Regulation" is making headlines, but many places are issuing warnings about illegal fundraising?

Original Author: Lawyer Xu Qian

####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 warrant high vigilance.

Why are emerging concepts such as stablecoins frequently exploited by criminals, becoming tools for illegal fundraising, fraud, and other criminal activities?

Why are stablecoins becoming a tool for illegal fundraising risks?

Stablecoins are inherently a neutral technological tool, designed to address the volatility issues of the cryptocurrency market. The emergence of stablecoins as a tool for crime in the new era is related to the current trends in blockchain, the cryptocurrency digital economy, and so on. However, their essence is consistent with early "illegal fundraising" tools, such as "shopping rebates," "referral commissions," "planting," and "pension," which do not provide real content and use methods such as selling at cost and agreed repurchase as tools for illegally raising funds.

Stablecoins also have their own characteristics, such as anonymity, cross-border flow, convenient transfers, delayed regulation, strong financial attributes, and high market enthusiasm, making stablecoins a more efficient, more concealed, and more broadly harmful tool for crime.

(1) Increased Difficulty in Combating Due to Anonymity and Cross-Border Movement

Although the blockchain ledger is open and transparent, the actual identity of the controller behind the address is anonymous, and it can be further dispersed to multiple anonymous wallets through mixing and cross-chain bridges. Stablecoins can be easily transferred instantly in a peer-to-peer manner globally, breaking through traditional geographical boundaries and foreign exchange controls.

This is a "convenience" that cannot be provided by the traditional banking system for criminals who need to transfer quickly and hide huge amounts of money. Once the scam is about to collapse or attract regulatory attention, the project team can instantly transfer all funds to overseas exchanges or anonymous wallets at almost zero cost, and close the website and dissolve the community, leaving investors with nothing but a string of untraceable hash code.

(2) Using "trends of the times" and "global strategic tools" as a guise for deception

The value of stablecoins designed for "stability" is more suitable for settlement and circulation. An increasing number of 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 traditional banking systems. Some unscrupulous individuals exploit these international trends and human greed, depicting prosperity, creating illusions, and enticing investors to believe this is a "shortcut to wealth," pursuing high returns.

(3) Innovative model qualitative ambiguity, legal regulation lag

Stablecoins, staking, DeFi, RWA and other innovative models currently lack precise regulatory provisions within existing laws and regulations. This ambiguity allows for more operational space for actors. Whether at the level of a specific country or global regulation, there is a tendency for gaps or lagging characteristics, making it more likely for wrongdoers to set up their teams, registration locations, servers, etc., in jurisdictions with lenient or absent regulations.

####How to be alert to the risks of "illegal fundraising"?

Some entities disguise themselves with terms like "financial innovation," "blockchain," and "Web3," taking advantage of the public's lack of understanding of stablecoins and other related concepts. They induce the public to engage in investment trading speculation by issuing so-called "digital assets" or "pegging to certain mainstream currencies," disturbing the economic and financial order, and are likely to breed illegal fundraising and other criminal activities, seriously jeopardizing the property safety of the public. Potential investors need to be vigilant and should not invest impulsively. They can assess whether a stablecoin project is "compliant" by examining aspects such as the issuer's economic model for minting and redeeming stablecoins, the reserve custody institution, auditing agencies, and regulatory bodies.

(1) Is there a commitment to "repay the principal and pay interest or provide returns"

Some projects claim to use the stablecoins deposited by users for providing "liquidity staking," "arbitrage trading," etc., and distribute the so-called "profits" to users in the form of platform tokens. This model conceals the essence of their promised returns through packaging and is highly likely to be deemed "enticement" by judicial authorities. "Enticement" is one of the four core characteristics that constitute 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 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 constituting the crime of illegal absorption of public deposits or fundraising fraud. The "promise" here can be explicit (such as clearly stating the annual yield in white papers or promotional materials) or implicit (such as through models like "dividends" or "commissions"). DeFi (Decentralized Finance) has significant market volatility, and no one can guarantee stable returns. Investors encountering similar "pies" should consider whether they are "traps."

(2) Whether there is a financial license issued by regulatory authorities and whether there is a regulatory mechanism

In mainland China, "stablecoin" projects cannot provide financial licenses. In Hong Kong, to issue stablecoins, it is necessary to apply for a license from the Hong Kong Monetary Authority, while also complying with the regulatory mechanism of "100% fiat reserve + independent custody + monthly audits." This means that in terms of project compliance, there are requirements such as having a license, real reserves, non-mixing of funds, and transparency of information.

Many illegal fundraising projects usually 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 promises of high returns and lack of licenses, the risk points that need to be audited during the operation process include "how funds are raised" and "where the funds are directed". This directly touches upon the red line of financial management in our country. Participants in such activities face risks that go beyond just the loss of principal; they may also inadvertently step into legal minefields, potentially involving illegal operations, 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 rhetoric, 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 gateway connecting the crypto world. Against the backdrop of regulatory frameworks being introduced in the EU, the US, and Hong Kong, which vigorously promote the development of stablecoins, they carry the international trend of enhancing financial efficiency, but due to their characteristics, they have also become a "tool" for the rampant abuse in illegal fundraising activities.

In the face of dazzling projects that promise to achieve financial freedom, we might as well calmly ask, "What exactly is your core business? Besides using the money from later investors to pay the returns of earlier investors, how do you actually make money?" Stay away from investment projects with vague business models but high return promises. Adhere to the principle of "not being greedy, not trusting, and not touching," and safeguard your wallet safely.

Note: This article is for general information only and does not constitute legal advice in any jurisdiction. Specific projects should conduct targeted due diligence and compliance plan customization after signing a confidentiality agreement.