In-depth analysis: The compliance secrets behind the gameplay of "Milk Tea Coin" and "Virtual Stocks"

Author: Xiao Za Legal Team, Babite

On June 30, a well-known milk tea brand announced the launch of its anniversary celebration event. Customers who place an order through the brand's mini-program and pay a total of 30 yuan can receive 30 "milk tea coins." The "milk tea coins" can be exchanged for product coupons in the mini-program mall and can also be exchanged for the brand's "virtual stocks." The "virtual stocks" are pegged to the real stock price fluctuations of the brand, allowing consumers to redeem more "milk tea coins" when the brand's actual stock price rises, thus obtaining greater discounts on products.

Our team believes that the "milk tea coins" and "virtual stocks" introduced by this milk tea brand are essentially a form of consumer points system. It must also be acknowledged that this mechanism involves numerous legal disputes and risk points, including the legal nature of consumption tokens, risks associated with prepaid card operations by payment institutions, online gambling risks, risks of prize sales, and risks of illegal public deposit absorption. The compliance operation of the entire mechanism is akin to "dancing on the edge of a knife," where a single misstep could lead to a perilous situation. The Xiao Za team reminds all "latecomers" to thoroughly understand the "compliance intricacies" behind the discount mechanism of this milk tea brand and not to blindly imitate it, lest they find themselves in legal trouble.

1. The essence of "milk tea coins" is a narrowly defined non-circulating token, not regulated by financial management laws

The definition of "tokens" is broader than that of virtual currency, which is a higher-level concept encompassing Bitcoin. The most common (i.e., narrowly defined) tokens are "consumer points" or "reward points." These tokens are generally rewards given by merchants to consumers for spending on their websites or apps, using their services, or completing specific tasks, allowing consumers to obtain corresponding product discounts. For example, on a well-known domestic e-commerce platform, consumers can receive "points rewards" after successfully purchasing products. These "points rewards" are typical tokens that consumers can use to offset cash payments during future purchases on the platform, thus obtaining discounts.

Tokens can be roughly divided into three categories based on their circulation and exchange relationship with fiat currency:

The first category is bidirectional circulating tokens, where users can exchange a certain amount of fiat currency for tokens, and these tokens can also be exchanged back for fiat currency through official channels. Bitcoin is a typical example of a bidirectional circulating token. This type of token has the strongest liquidity and can be seamlessly exchanged with fiat currency, posing higher legal risks. In China, bidirectional circulating tokens are regulated by a series of normative legal documents such as the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Speculation." Engaging in the exchange of such tokens with virtual currencies or related businesses is considered illegal financial activity.

The second category is unidirectional circulating tokens, where users can exchange a certain amount of fiat currency for tokens, but these tokens cannot be exchanged back for fiat currency through official channels. The "Penguin Coin" from a major company is a typical representative of this type of token. "Penguin Coin" can be obtained through fiat currency recharge (i.e., it can be exchanged for a certain amount of fiat currency) and can be used to purchase various game items and subscription services from the company, but it cannot be exchanged back for fiat currency or transferred, making it "unidirectionally circulating." This type of unidirectional circulating token significantly reduces the likelihood of causing systemic financial risks, so generally, unidirectional circulating tokens are not regulated by financial management laws and regulations. Before the repeal of the "Interim Measures for the Administration of Online Games," it was generally believed that this type of token complied with the provisions of Article 2, Item 4 of that measure and could be managed similarly to virtual currencies in online games, thus being subject to regulations from the Ministry of Culture and Tourism. Overall, the legal risks of unidirectional circulating tokens are significantly lower than those of bidirectional circulating tokens, but it is still necessary to note that the "issuer" of such tokens often needs to obtain licenses for value-added telecommunications services and network cultural operations.

The third category is non-circulating tokens, where users cannot directly exchange fiat currency for these tokens, nor can these tokens be exchanged back for fiat currency through official channels. This type of token is the most common "narrowly defined token," or "consumer points, reward points." The possibility of exchanging these tokens for fiat currency is minimal, and among the three types of tokens, it carries the least legal risk, making it almost impossible for such tokens to cause systemic financial risks. The "milk tea coins" described in this article are examples of non-circulating tokens. These tokens cannot be directly exchanged for fiat currency (or recharged) and are typically obtained through several channels in commercial practice, such as consumers receiving them based on spending (especially after spending a certain amount) or through activities like signing in or completing tasks. Additionally, these tokens cannot be exchanged for fiat currency or used to purchase third-party products, as merchants use these tokens to encourage consumers to make repeat purchases. Therefore, their legal essence is a typical form of promotional sales with prizes, which is a common marketing strategy.

Non-circulating tokens like "milk tea coins" are unlikely to cause systemic financial risks due to their extremely poor liquidity and minimal possibility of exchange with fiat currency. Thus, they are not regulated by China's financial management laws and will not be subject to the relevant regulations from the Ministry of Culture and Tourism like "Penguin Coin," minimizing the risk of crossing legal red lines. In judicial practice, "milk tea coins" are primarily regulated by the "Interim Provisions on Regulating Promotional Activities" regarding commercial promotional activities and the "Anti-Unfair Competition Law" concerning prize sales.

2. Using "milk tea coins" for "virtual stock trading" is not genuine stock trading and is not regulated by relevant securities laws

Our team has noted that the "issuer" of "milk tea coins" has added a "virtual stock" feature in its mini-program, introducing mechanisms such as "buy," "sell," and "leverage," and even allowing users to check real-time Hong Kong stock market information within the mini-program, creating a strong sense of immersion. This feature has sparked significant controversy among the public, with the main criticism being that the issuance of virtual stocks by Hong Kong-listed companies to mainland investors may violate financial management regulations. Our team believes that this "virtual stock" feature carries high legal risks, but these risks are not in the realm of financial management; rather, such a disguised "betting on price fluctuations" game easily touches upon the legal risks of online gambling.

First, the "virtual stocks" launched by the merchant are essentially a form of non-circulating tokens (consumer points) and do not constitute "virtual stocks" in the legal sense in China. In mainland China, the term "virtual stocks" is commonly found in normative legal documents related to company equity incentive plans. The "Guidelines for Lawyers Handling Venture Capital and Equity Incentive Business Operations" issued by the All-China Lawyers Association clearly defines "virtual stocks" as a "virtual" stock granted by a company to its internal employees, allowing the incentive recipients to enjoy certain dividend rights and capital appreciation benefits, but without ownership, voting rights, or the ability to transfer or sell, and they automatically become invalid upon leaving the company. The "virtual stocks" offered by this milk tea merchant are neither a form of equity incentive nor directed at the brand's internal employees, and consumers receiving "virtual stocks" do not have dividend rights or other cash rights, making them fundamentally different from "virtual stocks" in the legal context of mainland China.

Second, in the "virtual stock" feature introduced by the milk tea merchant, consumers can only purchase "stocks" using "milk tea coins." When the "stocks" appreciate, they can only be exchanged for "milk tea coins." As mentioned earlier, since milk tea coins are the most narrowly defined "consumer tokens," they cannot be freely exchanged for fiat currency. Therefore, this "virtual stock" trading based on "milk tea coins" cannot directly influence the rise and fall of real stocks through financial means (of course, it may indirectly affect stock prices due to the activity's positive or negative reception, leading to significant increases or decreases in sales). Thus, such trading cannot be regarded as genuine stock trading, and the issue of "Hong Kong-listed companies issuing virtual stocks to mainland investors" does not arise.

However, this does not mean that the "virtual stock" feature is free from legal risks. In fact, this type of feature is highly susceptible to "betting on price fluctuations" style online gambling, which can easily cross the legal red line of Article 303 of the Criminal Law of the People's Republic of China regarding "operating a casino." In other words, if a merchant allows users to participate in "betting on price fluctuations" games in the form of points obtained through recharges (e.g., pre-recharging 500 yuan to receive 500 points), it essentially constitutes operating an online casino. The reason the milk tea brand's "betting on price fluctuations" feature is compliant is that its "milk tea coins" are not obtained through cash recharge or prepayment but are earned on a one-to-one basis through consumption (spending 30 yuan to buy a drink and receiving 30 "milk tea coins"), and the merchant does not directly profit from this "betting on price fluctuations" behavior.

Finally, our team has noted that the prepaid value feature in the milk tea brand's mini-program is not linked to the exchange of "milk tea coins." In simple terms, "milk tea coins" are merely consumer tokens, not recharge points. According to the "Measures for the Administration of Prepaid Card Business by Payment Institutions" in China, the nature of recharge points is that they are prepaid cards, which are subject to regulations governing licensed operations in payment and settlement. Therefore, this operation by the milk tea brand significantly reduces its legal risks.

3. Compliance recommendations for consumer token mechanisms

The seemingly simple design of consumer token mechanisms like "milk tea coins" reflects complex legal relationships and issues. Our team once again advises all "latecomers" not to blindly "copy" similar business models, as every seemingly casual design (such as the inability to trigger token acquisition through stored value, or obtaining 30 tokens for a 30 yuan purchase) has intricate compliance reasons behind it. At the end of this article, we briefly outline key compliance points for similar mechanisms for your reference:

1. In the design of tokens, it is strongly recommended to adopt the third category of tokens, namely "non-circulating" tokens, severing any possibility of exchange with fiat currency.

2. In the design of promotional sales based on tokens, it is advisable to avoid "betting on price fluctuations" models. Instead, a token lottery method can be used, and the conditions, methods, and duration for using tokens in the lottery should be clearly stated; the quantity and quality of prizes must not be fabricated, and false lotteries or manipulated drawings are prohibited; the value of prizes must not exceed the limits set by the "Anti-Unfair Competition Law"; if the lottery game is complex, it is advisable to obtain a license for online game operation (version number) and registration; attention should be paid to protective regulations regarding minors participating in lottery activities.

3. It is essential to pay attention to the issue of recharge points, striving to avoid falling into the pitfalls of prepaid card issues to prevent risks related to illegal fundraising and illegal operations.