Blockchain startups issuing tokens without financing should pay attention to these three points

Author: Mankun Blockchain

In the world of blockchain, tokens play an important role in effectively incentivizing network participants and maintaining common goals and consensus. Some even argue that a blockchain without tokens is not a true blockchain.

In our country, businesses related to virtual currencies are subject to strict regulation and restrictions. Project teams often find it difficult to determine which token-related activities are permissible and which are not, as well as where the pitfalls lie.

Recently, a large deep social learning platform project in the universe consulted Mankun, asking whether it is feasible for users to use project-specific points for consumption, with the platform providing settlement between project points and virtual currencies while charging a certain settlement fee. What points should be noted in this process? This article will discuss it in detail.

01 Is Virtual Currency Business Completely Prohibited?

When it comes to virtual currency business, many people's first reaction is that it is illegal and cannot be done. This conclusion is largely drawn from the 94 Notice in 2017 and the 924 Notice in 2021, which have deeply influenced public perception.

In 2017, the central bank, the Cyberspace Administration, and the Ministry of Industry and Information Technology jointly issued the "Notice on Preventing Risks of Token Issuance and Financing," which clearly states that any organization or individual must not illegally engage in token issuance and financing activities; token financing trading platforms must not engage in the exchange business between legal currency and tokens or virtual currencies, must not buy or sell tokens or virtual currencies as a central counterparty, and must not provide pricing, information intermediary, and other services for tokens or virtual currencies.

In 2021, the central bank and ten other departments jointly issued the "Notice on Further Preventing and Dealing with Risks of Virtual Currency Trading and Speculation," which clarifies that virtual currencies do not have the same legal status as legal currencies, and activities related to virtual currencies are considered illegal financial activities. Foreign virtual currency exchanges providing services to residents in our country via the internet are also considered illegal financial activities.

From the above two notices, we can see that our country denies the monetary attributes of virtual currencies as legal tender and prohibits the use of virtual currencies for financing and the exchange and settlement business between legal currencies and virtual currencies. However, the above notices do not deny the property attributes of virtual currencies as commodities, nor do they prohibit all transactions related to virtual currencies.

For example, if the use of virtual currencies is merely similar to exchanging internet points and game currencies for related products or services in a centralized Web2 internet scenario, such transactions are not prohibited under the current regulatory environment in our country. However, during the operation, it is necessary to pay attention to:

1. The use of virtual currencies should be limited to the exchange of goods and services within the blockchain project system, and their circulation should be strictly restricted and controlled.
2. Avoid payment settlements between legal currencies and virtual currencies.
3. Avoid virtual currencies becoming tools for financing and speculative trading.

02 Beware of Being Trapped by Others

Although it was mentioned earlier that using virtual currencies to exchange products and services within a project is not prohibited, due to the decentralized and anonymous nature of virtual currencies, they can easily become tools for criminals to commit illegal activities, with money laundering being the most prominent.

The Mankun team previously studied how criminals launder money through the cryptocurrency space. In the article “Unveiling Money Laundering in the Crypto Space”, it was mentioned that "common methods of laundering money through virtual currencies can be divided into three steps: placement of illicit funds, layering process, and integration and withdrawal."

The second step, "layering process," refers to criminals using the anonymity of virtual currencies to conduct multi-layered and complex transactions on platforms, achieving the goal of dispersing and exchanging illicit funds across multiple accounts, further concealing the nature of the illegally obtained funds from upstream crimes.

Specifically, criminals may deposit "black U" into a platform and confuse and disperse illicit funds through false transactions with other users, washing "black U" through the platform's specific points conversion.

Therefore, to avoid the project becoming a tool for criminals to launder money or conduct illegal activities, project teams can take the following measures during project operation:

1. Optimize service content and design substantial products and services. For example, the project team in this consultation primarily focuses on social and learning services in the metaverse, allowing users to earn corresponding points and rewards through deep participation in project content, thus giving meaningful significance to the circulation of points among users and avoiding empty transactions.
2. Strengthen data monitoring and analysis, promptly mark or report suspicious transactions, and limit user platform activities during investigations.
3. Appropriately extend the settlement cycle and settlement time. For example, agree on weekly or daily settlement cycles and limit the amount that can be settled each time, making withdrawals more difficult.

03 Beware of Being Trapped by Your Own People

When blockchain project teams use virtual currencies for internal payment settlements, they must be cautious not only of becoming tools for criminals but also of being taken advantage of by their own team members.

Traditional companies usually use financial systems and banks for fund management and approval processes. If employees want to use company funds, they must go through multiple layers of approval from the finance department and obtain authorization. Even so, there are still many cases of embezzlement of company funds and misappropriation of company property.

The transfer of virtual assets is even more convenient; it only requires transferring from one wallet address to another to achieve peer-to-peer transactions. Once internal members of the project team cannot resist temptation, it is easy for employees to misappropriate virtual assets. For example:

1. A certain individual served as a backend development engineer at a technology company in Shenzhen. From July to August 2019, taking advantage of having the highest permissions on the company platform, they created accounts on the platform and repeatedly made false top-ups of the company's PXG virtual currency, trading approximately 62,000 USDT virtual currency on the platform, and later transferred all USDT virtual currency to their account on Huobi, selling it to others for a profit of about 426,000 yuan. 【(2021) Yue 03 Criminal Final 192】
2. Another individual, taking advantage of their position as an operations assistant at a network technology company in Qingdao, misappropriated 75,750 USDT of digital assets entrusted to manage by the company, valued at over 519,910 yuan. 【(2021) Lu 1302 Criminal Initial 1460】
3. A certain individual, during their internship at an information consulting company in Dongguan, was responsible for handling player complaints in the game backend management system and deciding whether to issue virtual currency "Yuan Mo" to players. During the internship, they initiated fictitious complaints using their own game account, self-reviewed, and decided to issue a total of 4,844,200 "Yuan Mo" (valued at 484,420 yuan), and disposed of the assets through their own game account. 【(2019) Yue 1972 Criminal Initial 2006】

To avoid being taken advantage of by their own people, project teams should establish strict internal control mechanisms and create multi-level approval processes. In the process of virtual asset transactions, a multi-signature mechanism can be adopted, requiring confirmation from multiple authorized parties to complete transactions, thus preventing the easy transfer of virtual assets.

04 Lawyer's Summary

The world of Web3 is fascinating, and starting a blockchain venture is not easy. On a macro level, it is necessary to grasp policy directions and adhere to legal boundaries. In the specific operational process, it is essential to prevent becoming a tool for others' crimes while also being cautious of being harmed by one's own people.

If any entrepreneurs encounter problems and doubts on their entrepreneurial journey, they might consider consulting with Mankun, as one of Mankun's goals is to help entrepreneurs achieve their business dreams through legal means and facilitate the legal development of Web3.0 in China!