Author: Lawyer Liu Honglin
A major news event in the financial industry today is worth a serious look from the cryptocurrency industry.
On May 22, it was reported that Futu Holdings announced that the company received an investigation notice and an administrative fine pre-notification letter from the China Securities Regulatory Commission and its Shenzhen branch. Certain entities of Futu in mainland China and Hong Kong had violated the Securities Law, the Securities Investment Fund Law, and the Futures and Derivatives Law of the People's Republic of China by conducting securities business, public fund sales, and futures operations without the required permissions or approvals. The CSRC plans to order the relevant companies to correct or stop such activities, confiscate illegal proceeds, and impose fines, with a proposed total fine of approximately 1.85 billion RMB. Additionally, the CSRC intends to impose a personal fine of 1.25 million RMB on Mr. Li Hua, the founder and CEO of the company. Futu Holdings stated that the proposed fines are still subject to further procedures and the CSRC's final decision.
Licenses are not amulets
If this news is only viewed within the broker industry, it can certainly be understood as a rectification of cross-border securities business. But if viewed within the larger framework of cross-border financial regulation, its significance is more than just “Futu and Tiger being fined.” The true signal it sends is: foreign financial institutions, even if they have obtained licenses abroad, are still subject to Chinese regulatory authorities judging their actions according to Chinese law whenever they provide financial services to residents of mainland China.
This logic is what cryptocurrency exchanges should really be vigilant about.
Many people might first ask: Futu is a licensed broker in Hong Kong, Tiger also has licenses abroad, they operate legally overseas, so why can Chinese regulatory authorities still intervene? This question is very simple but also very crucial. The answer is not complicated; regulators do not look at where you are registered or where you have obtained a license, but rather at who you are actually providing financial services to, and whether those services are entering the regulatory order of mainland China.
A Hong Kong license solves the problem of “can you conduct securities business within Hong Kong’s regulatory scope,” but it does not automatically resolve the question of “can you conduct securities business targeting mainland residents.” Being compliant in Hong Kong does not mean you are compliant in mainland China; being compliant in Dubai does not mean you are compliant in mainland China either. A financial license is not an amulet, nor is it a global passport. Essentially, it is a permission from a jurisdiction for you to undertake specific financial business within that jurisdiction.
This is also why this incident easily brings to mind cryptocurrency exchanges. Many cryptocurrency exchanges now say that they have licenses in Dubai, are registered in Europe, or are applying for or have obtained certain permits related to virtual assets in Hong Kong. But the question is, if these exchanges continue to provide services to mainland residents for registration, trading, contracts, financial management, loans, copy trading, promotion commissions, etc., will the Chinese regulatory authorities consider that you have entered into the regulatory field of mainland China?
From a regulatory logic perspective, the answer is likely yes.
Where are the differences
However, it is particularly important to note a legal difference here. Brokers like Futu, Tiger, and Changqiao were punished because mainland China already has a mature securities legal system. The Securities Law clearly stipulates that securities companies engaged in securities brokerage, securities financing, and margin trading must be approved by the State Council's securities regulatory agency and obtain a securities business license; moreover, no unit or individual other than securities companies may engage in securities underwriting, securities sponsorship, securities brokerage, and securities financing. Violating relevant regulations and conducting illegal securities operations may result in orders for correction, confiscation of illegal income, and fines ranging from one to ten times the illegal proceeds; if there are no illegal proceeds or if the illegal proceeds are less than one million RMB, fines of more than one million RMB and less than ten million RMB can also be imposed.
This is a typical case of “there are laws, licenses, illegal operation standards, and penalty bases.” Therefore, the CSRC can say, although you have a Hong Kong license, you do not have a Chinese mainland securities business license. If you provide securities brokerage services to domestic investors, that violates the Chinese securities legal system. Where do the illegal proceeds come from? From your unauthorized securities business conducted within the regulatory scope of China. Since illegal proceeds can be identified and the law grants the regulatory authorities the power to confiscate illegal income, then the confiscation can be established under legal theory.
But the situation for cryptocurrency exchanges is more complicated.
Currently, there is no “cryptocurrency exchange licensing system” in mainland China. In other words, it is not that if you meet certain conditions, you can apply for a virtual currency exchange license in mainland China and then legally provide services to users on the mainland. On the contrary, China's basic attitude towards virtual currency trading activities is to define relevant business activities related to virtual currencies as illegal financial activities through regulatory policies and departmental notifications.
In 2013, the People's Bank of China and other departments issued the notice on preventing risks from Bitcoin, clearly stating that Bitcoin is not issued by monetary authorities, lacks currency attributes such as legal repayment and coerciveness, and does not constitute true currency. Financial institutions and payment institutions are prohibited from conducting business related to Bitcoin. In 2017, seven departments published the announcement on preventing risks from token issuance financing, halting ICOs and requiring all token financing trading platforms to refrain from engaging in the exchange of fiat and tokens, virtual currencies, and prohibiting the buying and selling or acting as central counterparties in buying tokens or virtual currencies, as well as providing pricing, information intermediary services, etc. In 2021, ten departments issued the notice on further preventing and addressing risks from virtual currency trading speculation, further clarifying that virtual currency does not have the same legal status as fiat currency, and business activities related to virtual currencies belong to illegal financial activities. The People's Bank of China subsequently made it clear in response to public inquiries that virtual currency transactions are prohibited domestically and carry legal risks.
Thus, there are similarities and differences between cryptocurrency exchanges and Hong Kong brokers.
The similarities lie in the fact that they are both foreign entities, or at least provide financial services with significant attributes to residents in mainland China through foreign entities. One provides securities and futures services such as Hong Kong and US stocks, funds, and margin trading; another provides trading services such as spot and contract trading of virtual currencies, financial management, loans, pledges, copy trading, token promotion, OTC, etc. They both target users within mainland China and charge transaction fees, interest, spreads, platform service fees, or other earnings. From a regulatory intuition, these businesses are not ordinary internet services, but are services that carry significant financial, capital, and investment attributes.
The differences are that broker business in China has a complete legal system, while cryptocurrency exchanges are not engaging in “unlicensed operations of businesses that could originally apply for licenses,” but are continuing their operations in a space that is completely denied by regulatory policy. The former is “you do not have a Chinese securities license, so you cannot conduct securities business”; the latter is more akin to “this business is not permitted in mainland China, so you cannot target mainland users.”
This also explains why we cannot simply state that since the CSRC can confiscate Futu's illegal proceeds, then the Chinese regulatory authorities can certainly confiscate all illegal proceeds from Binance, OKX, Bybit, and other foreign exchanges tomorrow. The law does not allow such a crude analogy. Because the securities business has clear authorization clauses in the Securities Law, along with rules for confiscating illegal proceeds; in contrast, the field of virtual currency exchanges is often based on regulatory notifications, departmental regulations, risk disposal policies, as well as the specific legal frameworks of criminal law, forex, anti-money laundering, illegal fundraising, gambling, fraud, and assisting cybercrime that may apply to specific cases.
But precisely because of this, cryptocurrency exchanges should not feel secure; instead, they should feel more anxious.
Why? Because at least there is a “compliance pathway” for securities business. If you want to conduct securities business in mainland China, you go apply for the corresponding license, accept the supervision of the CSRC, and enter the statutory financial system. Of course, it is not easy for foreign brokers to directly obtain licenses on the mainland, but at least the securities legal framework itself is clear. Cryptocurrency exchanges targeting users in mainland China, however, do not even have a compliance pathway. You cannot say that since I have a license in Hong Kong, I can open contract trading to mainland residents; nor can you say that I am compliant in Dubai, so I can conduct Chinese promotional activities, KOL commissions, offline events, community operations, and OTC services in mainland China. Because mainland China does not recognize the legal operational space for such services.
From this perspective, the true reminder that the Futu incident gives to cryptocurrency exchanges is not that “regulators will certainly confiscate all your illegal proceeds tomorrow,” but three other statements: first, foreign licenses cannot countermand Chinese mainland regulation; second, if your service targets mainland residents, it may trigger evaluation by Chinese regulators; third, once regulatory authorities decide to penetrate and look into the substance of the business, foreign structures, foreign entities, and foreign licenses do not inherently isolate risks.
Risks fall on individuals
In reality, many cryptocurrency exchanges are indeed still targeting mainland users through various means. On the surface, they may have closed registrations for mainland mobile numbers or no longer publicly claim to support Chinese users. But in actual business, the Chinese interface persists, Chinese customer service remains, Chinese communities are still active, Chinese KOL promotions continue, the commission system is still in place, offline events persist, and many exchanges' growth, business, marketing, and technical teams still maintain numerous connections with mainland China.
If it is merely that mainland users are accessing foreign platforms by bypassing the Great Firewall, and the platform is not actively marketing, does not have Chinese operations, and does not have service arrangements targeting Chinese users, the legal evaluation can become relatively complex. But if the platform claims “not to serve mainland users” publicly while actively acquiring customers through agents, KOLs, communities, commissions, seminars, offline events, Chinese material packages, WeChat groups, and Telegram groups, then regulatory authorities may completely consider this not a passive access but an active targeting of the mainland market.
At this point, the issue is not just whether the platform will have its domain name blocked, app taken down, or payment channels severed. The more practical risk is that relevant personnel, if in mainland China or entering mainland China in the future, could face very specific legal consequences.
Here we also need to distinguish between administrative risks and criminal risks. Not all cryptocurrency trading services targeting mainland users will automatically constitute a criminal offense. Criminal liability must return to specific actions, specific amounts, specific levels of involvement, and specific harmful consequences for assessment. For example, if only ordinary employees are providing some marginal technical support, the legal risks will certainly not be on the same level as those of actual controllers, executives, core operations leaders, fund channel heads, OTC leaders, contract business heads, or platform operation heads.
However, if a cryptocurrency exchange is providing trading services to mainland residents in a long-term, large-scale, and organized manner, especially involving contract leverage, capital channels, OTC deposits and withdrawals, agency commissions, token listing projects, then the relevant actual controllers, executives, or core business leaders residing in the mainland may indeed face criminal risks.
Many will wonder why? Because under the framework of Chinese criminal law, conducting illegal operations in securities, futures, insurance businesses, or illegally engaging in payment and settlement operations without the approval of the relevant state departments, disrupting the market order, and with serious circumstances, could trigger the crime of illegal operation. But whether virtual currency exchanges can uniformly be treated as illegal operations is not a simple conclusion in practice. It depends on whether specific operations are recognized by judicial authorities as illegal financial business, whether there are attributes of payment and settlement, securities and futures, or capital exchange, and whether it meets the criteria of serious circumstances.
This article is not written to scare people; I want to express that there is no legal operational space for cryptocurrency exchanges in mainland China. If related business is conducted targeting mainland residents, it first has clear regulatory policy risks; if the business further overlaps with issues such as capital pools, leveraged contracts, illegal fundraising, pyramid schemes, money laundering channels, and fund flows that involve gambling or fraud, the risks can escalate from general regulatory risks to criminal risks. Especially for actual controllers, executives, and core business personnel, if they are involved in decision-making, organization, profit-making, and command of operations in the mainland for an extended time, their risk certainly cannot be equated with that of ordinary users or employees.
Regulators will keep tabs
This is also the most valuable insight from the Futu incident for the cryptocurrency industry: regulation might not intervene immediately, but that does not mean it will not keep tabs.
Internet brokers like Futu and Tiger have not only recently come under regulatory scrutiny. As early as 2021, the CSRC had already expressed its regulatory stance through the media; in November 2021, the CSRC interviewed executives from Futu and Tiger, clearly requiring them to legally standardize cross-border securities business targeting domestic investors; and in 2022, regulation continued to promote the rectification approach of “effectively curbing increases and orderly resolving stockpiles.” In other words, this is not an unexpected penalty but a process where regulatory attitudes have been repeatedly signaled, rectification requirements have been continuously advanced, and ultimately led to administrative penalties.
The same applies to cryptocurrency exchanges. China's regulatory attitude towards virtual currencies has been made very clear from 2013, 2017, to 2021. Many exchanges and practitioners are not unaware; they are merely choosing to ignore it. Everyone knows that the Chinese mainland market is large, with many users, active trading, strong demand for contracts, and high KOL conversion efficiency, so they publicly state they do not serve, while being absolutely honest in practice. The problem is, regulatory documents do not cease to exist just because you pretend not to see them.
For overseas cryptocurrency exchanges, what they should truly do is not to study how to write disclaimers more nicely, but to practically assess whether they are indeed targeting the mainland market. For instance, do they allow users with mainland identities to register and conduct KYC? Do they have a Chinese team specifically responsible for the mainland market? Do they acquire mainland users through KOLs, agents, and commission systems? Do they organize offline events in the mainland? Are there domestic employees participating in promotion, customer service, operations, and trading support? Are they facilitating OTC deposits and withdrawals for mainland users? Are they employing technical means to evade regulatory identification? Thoughtfully answering these questions, many platforms would have a clear understanding.
For mainland users, this incident also serves as a reminder. Many people feel that when using foreign brokers or exchanges, they are large platforms, have many licenses, extensive advertising, and KOL endorsements, thus there should be no problems. But the most troubling aspect of financial services is that a platform’s compliance does not mean your usage path is compliant; just because a platform is safe abroad does not guarantee you are safe in mainland China. Especially involving capital flows, foreign exchange use, virtual currency trading, bank card freezes, fraudulent fund inflows, and OTC trading counterparty risks, ordinary users are often the weakest link in the risk chain. Platforms can change domain names, entities, and countries, but users' bank cards, identity information, and transaction records are all domestic.
Therefore, the title of this article saying “cryptocurrency exchanges are panicking” does not mean that regulation will simply invoke the logic of the Securities Law tomorrow to confiscate all illegal proceeds from all exchanges. Rather, it wants to remind everyone that the Futu incident has once again illustrated a very realistic regulatory logic: holding a foreign license does not equate to being able to ignore regulations in mainland China; a business operating abroad does not equate to having no risks within the mainland; and if users are in China, regulators may trace back through users, funds, promotions, teams, technical services, and actual profit chains.
In the past few years, a popular saying in the crypto industry has been, “We are a global platform, not targeting Chinese users.” If this were true, it could certainly be part of compliance boundaries. But if it's just a disclaimer hanging on the official website while actual business continues to revolve around Chinese users, then its firewall effect is very limited. Regulatory authorities look at the facts, not slogans; they look at the flow of business, funds, users, and promotions, not what is stated on your website.
From a lawyer's perspective, in the future, all cross-border financial services targeting mainland customers, whether they are in securities, funds, futures, or cryptocurrencies, stablecoins, real-world assets, on-chain finance, and crypto payments will become increasingly difficult to explain with a simple “I am legal abroad.” The essence of financial regulation is managing funds, risks, and investors. As long as your target audience includes mainland residents and your business effectively impacts China’s financial order, foreign exchange management, anti-money laundering, personal information protection, and social stability, you cannot stand entirely outside of Chinese regulation.
The cryptocurrency industry undoubtedly has its technological value and commercial potential, with directions such as stablecoins, on-chain payments, global asset flows, and real-world assets possibly representing parts of future financial infrastructure. However, the more forward-looking the industry is, the less it should be established in regulatory gray areas and on luck. A truly mature industry is one where everyone understands where the boundaries are, knows which funds cannot be earned, which users cannot be approached, and which businesses cannot be conducted in the wrong places.
This statement is understood by traditional brokers, and cryptocurrency exchanges should understand it as well.
免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。
