Babbitt Column | Deng Jianpeng: On USDT Risk and Protection of Chinese Investors' Rights

Author: Deng Jianpeng (Central University of Finance and Law Professor / PhD supervisor)

This article was originally authored by Babbitt Information for the author and may not be reproduced without permission.

Since June 2019, the social media platform Facebook, which has the world's largest number of users, released the white paper of the cryptocurrency Libra project through its independent company Calibra, which immediately aroused the industry's shock and the attention of financial regulatory agencies in various countries. It is too early to analyze the risks and regulatory practices of the stablecoin Libra. However, stablecoins such as USDT (Teta) and GUSD (Gemini USD) have come out since 2014. Among them, according to the Decentralized Finance (DeFi) Industry Research Report for the first half of 2019, as of June 30, 2019, the total circulation of the stablecoin market was US $ 4.57 billion, of which USDT was US $ 3.68 billion, occupying the total 80.6% of the share (see http://www.qukuaiwang.com.cn/news/142904.html , accessed August 3, 2019).

In the stablecoin market, USDT has the greatest impact. Although the current market value of USDT is only about 4 billion U.S. dollars, due to its digital form, rapid transactions and extremely fast turnover rates, the daily turnover during the peak period can reach 24 billion U.S. dollars, which has a dominant impact on the mainstream virtual currency market price. Therefore, the related risks and lack of protection of investor rights and interests are particularly worthy of the attention of Chinese regulators. The practice of dealing with stablecoins can provide regulators with prior experience in dealing with possible shocks brought by Libra in the future.

I. Jurisdiction between Tether and the New York State Prosecutor

Stablecoin is a virtual currency that is issued based on blockchain technology and the market price remains relatively stable. When it was issued, it claimed that by linking with specific assets, it would facilitate investors as a trading medium to buy and sell other virtual currencies to solve Bitcoin. Such as the high volatility of virtual currency prices.

The stablecoin USDT was issued by Tether, and its initial claim was that it could be exchanged for one to one with the US dollar. However, on July 30, 2019, Tether Corporation and its affiliate, the virtual currency exchange Bitfinex, were sued by the New York State Attorney General's Office to the Southern District Court of New York City, which attracted everyone's attention. At present, the court's trial has no substantial results. According to the "China Special Research Report Data" released by DIAR, Chinese investors hold more than 60% of USDT, while American investors hold less than 4.5% (see https://www.8btc.com/ article / 454985 , accessed August 3, 2019). It can be seen that USDT has the greatest impact on the rights and interests of Chinese investors. Once USDT has risks, the most serious losses must be Chinese investors. Therefore, although the trial of the Southern District Court of New York City has no substantive results, some issues exposed by Tether in the confrontation with the New York State Attorney General's Office are worthy of China's deep consideration.

Throughout the New York State Attorney General's confrontation with Tether, the issue of jurisdiction is the most contentious issue on both sides. Prosecutors believe that Bitfinex's senior executives live in New York and conduct virtual currency transactions with New York as the center, which affects the rights of relevant citizens in the state. According to investigations, Bitfinex and Tether executives have overlap and therefore have jurisdiction. Tether claims that in accordance with its terms of service, it does not provide services to New York users and does not substantially trade USDT with New York users, so New York State prosecutors have no jurisdiction. Tether's place of registration is not in the United States. Therefore, whether the New York State prosecutor has evidence to prove that Tether provides services to New York residents is a prerequisite for determining whether it has jurisdiction.

Problems with USDT and its holders' rights

No one can stand without a letter. Looking closely at the behavior of Tether after its establishment, there are often inconsistencies between words and deeds, and there are many doubts. The main problems are as follows:

One is the risk of account opacity. Since the date of the USDT issue, Tether has announced one-to-one anchoring of the US dollar, but the public has always expressed doubts as to whether it has sufficient reserve for US dollar deposits. Tether has so far only published an audit report written by a law firm rather than a professional accounting firm, demonstrating that it has sufficient reserves. Investigating its essence, its account status is opaque, and it is difficult to determine that it has a strict third-party audit to prove that it has sufficient reserves. And in March 2019, Tether's official website changed its statement of one-to-one anchoring with the US dollar to be supported by reserves such as US dollars and equivalents. At the end of April 2019, Tether Chief Legal Officer Stuart Hoegner stated in a statement that only 74% of the total USDT issued by Tether could be backed by currency or equivalent. Tether's changing approach is inevitably suspicionful.

Second, the risk of misappropriation of client funds. In April 2019, the New York State Attorney General's Office believed that Tether misappropriated $ 850 million to Bitfinex to make up for the loss. Bitfinex claimed that this was an accident when working with a third-party company. According to the screenshot of the allegations file on the website of the New York Attorney General's website, the five chief executives of Tether and Bitfinex, including the chief financial officer and general counsel, held the same positions in the two companies. A management group operation. Given the highly overlapping relationship between the executives of the two companies, if there is no evidence to prove it, it is inevitable that there will be suspicion of misappropriation of funds.

Third, the risk of lack of effective supervision. Tether and Bitfinex exchanges are registered in the British Virgin Islands and Hong Kong, respectively, and are not regulated by the US financial system. However, the extraterritorial jurisdiction of U.S. law has the effect of "long-arm jurisdiction", that is, as long as an act occurring in a foreign country has an "effect" in its own country, it does not matter whether the actor has his own nationality or domicile, In the law of the actor's location, the national courts can exercise jurisdiction over the cause of action resulting from such an effect. On the one hand, U.S. strict extraterritorial jurisdiction may cause Tether to face huge fines, which in turn will cause damage to the rights of USDT holders. On the other hand, Tether lacks effective supervision and the rights of stablecoin holders cannot be effectively protected. Comply with relevant laws of the host country, such as anti-money laundering, anti-terrorist financing, and foreign exchange control. Jurisdiction is the biggest dispute between New York State prosecutors and Tether. For holders of Chinese USDT, an unregulated stablecoin issuer, like a cat guarding a fish tank, has never been able to win the trust of the public!

In response to the above risks of stablecoin, and referring to the 2015 “Guiding Opinions of the General Office of the State Council on Strengthening the Protection of the Rights and Interests of Financial Consumers” (hereinafter referred to as the “Guiding Opinions”), the rights and interests of Chinese USDT holders mainly face the following problems:

First, the issue of property security rights. According to the "Guiding Opinions", financial institutions should operate prudently, adopt strict internal control measures and scientific technical monitoring methods, strictly distinguish the institutions' own assets from customer assets, and must not misappropriate or occupy customer funds. Tether and Bitfinex are essentially a company with connected transactions. The two as stable currency issuers and trading platforms should have paid attention to their obligations to maintain the safety of consumer property, but according to the above, Tether is suspected of misappropriating customer funds, posing a major threat to the property security of Chinese USDT holders . At the same time, Tether arbitrarily changed the previous agreement of 1: 1 anchoring of the stablecoin and the U.S. dollar, there was a risk that the payment could not be made, and the holder's right to property security could be violated.

Second, the issue of the right to know. According to the "Guiding Opinions", financial institutions should promptly, truthfully, accurately, and comprehensively disclose information that may affect their decision-making to financial consumers in a language that is easy to understand, fully remind the risks, and shall not issue exaggerated product returns, cover product risks, etc. Fraudulent information must not be false or misleading. In the financial field, the company's reputation is closely related to the degree of disclosure of corporate information. Tether has always been suspected of black box operations. The financial status and transaction situation lack transparency. The weak position of Chinese USDT holders in obtaining information may lead to fraud risks.

Third, the issue of claims according to law. According to the Guiding Opinions, financial institutions should earnestly fulfill the responsibilities of the subject of financial consumer complaints. The right to no remedy is like a dead letter. If Tether damages the rights of Chinese USDT holders, on the one hand, they should lodge a complaint with the regulator; on the other hand, they can seek relief from the judicial authorities. However, there are significant obstacles to effective protection of Chinese citizens' rights and interests by foreign companies.

Channels and Basis of Chinese Jurisdiction

As mentioned above, the US holders of USDT account for only 4%, while the New York State prosecutor actively seeks the possibility of jurisdiction to protect the interests of the citizens of the state. The Chinese holders of USDT account for a large proportion. Once USDT "explodes", it will seriously damage the rights and interests of Chinese investors. Therefore, China's judicial authorities and regulatory agencies should actively seek jurisdictional basis to protect the legitimate rights and interests of domestic investors.

(1) Basis of case investigation and criminal jurisdiction

First, Chinese public security organs have the right to file a case. Article 6 of the Criminal Law of the People's Republic of China stipulates the principle of territorial jurisdiction. According to this principle, one of the crime and the result of the crime can be regarded as a crime in China, and China enjoys jurisdiction. If Tether is found to be suspected of criminal behavior, such as serious violations of China's anti-money laundering, anti-terrorist financing, foreign exchange control and other related laws, or the rights and interests of investors in China have been seriously infringed, after determining that the location of the crime is in China, the Chinese public security agency The principle of territoriality opens a case for investigation in a related case and transfers it to the relevant judicial organ for prosecution on time. Article 8 of the Criminal Law of the People's Republic of China stipulates the principle of protecting jurisdiction. According to this principle, if Tether's alleged crime meets a term of imprisonment of more than three years, he can be held accountable unless he is not punished under the law of the place where the crime was committed. Therefore, if the Tether party is found to have committed a criminal act, meets the conditions of imprisonment of more than three years, and is punishable according to the law of the place where the crime was committed, then China enjoys jurisdiction in accordance with the principle of protection jurisdiction.

More specifically, regarding the public security organs' filing of overseas related cybercrime cases, according to the "Opinions on Several Issues concerning the Application of Criminal Proceedings in the Process of Cybercrime Cases" (Gongtongzi [2014]), "the jurisdiction of cybercrime cases , Cyber ​​crime cases are filed for investigation by the public security organs in the place of crime. The crime places of cyber crime cases include the site of the website server used for the commission of the criminal act, the location of the network access, the site of the website creator, the administrator, the compromised computer information system, or its The location of the manager, the location of the computer information system used by the suspect, the victim, the location where the victim was victimized, and the location where the victim's property was lost, etc. In the case of cybercrime involving multiple links, the criminal provides assistance to the cybercrime Place or place of residence can be filed for investigation. If there is more than one place of crime, it will be under the jurisdiction of the initially accepted public security organ or the public security organ of the main place of crime. "Therefore, as long as the stablecoin issuer is suspected of criminal behavior, the Chinese public security organ can file a case for investigation. And transferred to the judiciary.

Second, the people's courts have jurisdiction. According to Article 25 of the Criminal Procedure Law, criminal cases are under the jurisdiction of the people's court where the crime was committed. Regarding the place of crime, the Supreme People's Court's Interpretation of the Application of the Criminal Procedure Law of the People's Republic of China (hereinafter referred to as the "Interpretation") defines it as including the place where the crime was committed and the place where the result of the crime was. If it is more appropriate for the people's court where the defendant resides, it may be under the jurisdiction of the people's court where the defendant lives. At the same time, according to Article 9 of the "Interpretation", "If a foreigner commits a crime against the state or citizen of the People's Republic of China outside the territory of the People's Republic of China and should be punished according to the Criminal Law of the People's Republic of China, the alien shall The people ’s court of the place of residence or the place of residence of the victim ’s Chinese citizen before his departure. ”Therefore, if a stablecoin issuer is suspected of a criminal act, it shall have jurisdiction in the corresponding court in the place where the crime was committed or the result of the crime. According to Article 287 bis of the Criminal Law of the People's Republic of China, "Knowing that others use information networks to commit crimes, provide Internet access, server hosting, network storage, communication transmission and other technical support for their crimes, or provide advertising promotion If the circumstances are serious, the company shall be sentenced to fixed-term imprisonment or detention of less than three years and imposed a single fine. If the unit commits the crime mentioned in the preceding paragraph, it shall be fined by the unit and shall be directly responsible to the person in charge and other direct responsibilities. Personnel, in accordance with the provisions of the first paragraph. "If the stablecoin issuer is found to have committed such cyber crimes, it can also impose sanctions in accordance with the aforementioned laws and regulations.

(II) Jurisdiction and basis of civil proceedings

China's foreign-related civil litigation adopts the principle of actual connection between the litigation and the seat of the court. That is, where there is a practical connection between the lawsuit and the seat of the Chinese court, the Chinese people's court shall have jurisdiction. According to Article 522 of the Interpretation of the Supreme People's Court on the Application of the "Civil Procedure Law of the People's Republic of China" (hereinafter referred to as the "Interpretation"), the registered place of Tether and Bitfinex is not in China. Disputes caused by holders are foreign-related cases and shall be regulated by the Chinese Civil Procedure Law and relevant judicial interpretations.

According to the provisions of Article 265 of the Civil Procedure Law, "Contract disputes or other property rights disputes, litigations against defendants who have no residence in the territory of the People's Republic of China, if the contract is signed in the territory of the People's Republic of China or Performance, or the subject matter of the litigation is in the territory of the People ’s Republic of China, or the defendant has property available for attachment in the territory of the People ’s Republic of China, or the defendant has a representative office in the territory of the People ’s Republic of China , The place where the subject matter of the lawsuit is located, the place where the property can be seized, the place of infringement or the place of residence of the representative agency is under the jurisdiction of the people's court. " Carrying out significant benefits and infringing on the rights and interests of stablecoin holders may constitute infringement. According to Article 25 of the Interpretation, the infringement of the information network may be under the jurisdiction of the people's court in the place where the infringement is committed or where the defendant has his domicile. The place of infringement includes the place where the infringement was committed and the place where the infringement result occurred. The place where the infringement of the information network is implemented includes the location of the computer and other information equipment where the alleged infringement is committed, and the place where the infringement results occur includes the place where the infringed person lives. Therefore, the investor may file a civil lawsuit with the local people's court.

In addition, according to the provisions of Article 20 of the "Interpretation", if the sale and purchase contract entered into through the information network, and the target is delivered through the information network, the place of performance of the contract shall be the place of residence of the buyer. The white paper released by Tether once claimed that in order to maintain the stability of the USDT value, a one-to-one reserve was prepared with USDT, and USDT holders can exchange USD of the same value through the official Tether website. As mentioned above, since 2019, there has not been sufficient reserves in principle. When Chinese users use USDT to exchange USD, if Tether cannot be exchanged for USD of the same value, Tether is a breach of contract. Therefore, customers who can purchase USDT in China can sue to the corresponding court according to the above provisions.

(3) Channels and basis for supervision

First, according to the 2016 “People's Bank of China's Implementation Measures for the Protection of Financial Consumers’ Rights and Interests ”(hereinafter referred to as the“ Measures ”), financial consumers are natural persons who purchase and use financial products and services provided by financial institutions. The protection of rights and interests is carried out by the People's Bank of China in accordance with law. Although the stablecoin issuer is not a “statutory financial institution” in China, the stablecoin it issues has the typical “foreign currency” and financial attributes. Therefore, the People's Bank of China is currently the most appropriate administrative regulatory agency.

Secondly, in 2017, the “Announcement on Preventing the Risk of Financing of Token Issuance” (hereinafter referred to as the “Announcement”) issued by the seven central ministries and other ministries and commissions, “Any so-called token financing trading platform shall not engage in fiat currencies and tokens, and“ virtual currencies ” The exchange business between them shall not be bought or sold or used as a central counterparty to buy or sell tokens or 'virtual currencies', and shall not provide pricing or information intermediation services for tokens or 'virtual currencies'. "China prohibits domestic and overseas virtual currency trading platforms from Chinese citizens provide services. Although the registered locations of Tether and Bitfinex are abroad, providing USDT services to Chinese citizens is still a violation of China's aforementioned regulatory policies. At the same time, the stablecoins it issues also have token properties and should be subject to the supervision of the People's Bank of China.

Thirdly, Article 28 of the Consumer Rights Protection Law (hereinafter referred to as the "Consumption Law") as amended in 2013 requires financial service providers to remind consumers of risks such as risk warning and safety precautions. Article 56 requires that "when an operator is punished for damage to consumers' rights and interests, in addition to the corresponding civil liability, if other relevant laws and regulations have provisions on penalties and methods of punishment, they shall be implemented in accordance with the provisions of laws and regulations; If the laws and regulations do not provide for it, the administrative department for industry and commerce or other relevant administrative departments shall order correction, and may separately or concurrently warn, confiscate the illegal income, and impose a fine of more than one to ten times the illegal income according to the circumstances. There is no illegal income A fine of less than 500,000 yuan shall be imposed; if the circumstances are serious, the company shall be ordered to suspend business for rectification and its business license shall be revoked. .

Thoughts on regulatory recommendations

First, in response to the risks posed by stablecoins, Chinese regulators and judicial authorities should require Tether and related parties Bitfinex to disclose information. The current significant risk of stablecoins lies in their opaque financial status and trading situation. According to Article 13 of the "Measures", China's financial regulators can require stable currency issuers to establish strict information disclosure systems, disclose operating conditions and financial conditions, and disclose information on major shareholders, controlling shareholders, and actual controllers. Shareholding status.

Second, the independent audit report of regular funds. Since the establishment of Tether, it lacked an independent third-party assessment agency to evaluate it, which seriously affected the rights and interests of stablecoin holders. China can require it to interface data with the central bank and conduct regular audits of its financial position.

Third, cooperate with international regulators. According to China Economic Net on June 30, 2019, the China Securities Regulatory Commission has established cross-border supervision and enforcement cooperation mechanisms with 64 countries and regions. Both Tether and Bitfinex are registered in foreign countries. For example, Tether has implemented acts that endanger Chinese USDT holders. Although China has jurisdiction, foreign-related evidence collection and investigations are a huge test for China's limited administrative and judicial resources. Therefore, actively cooperating with overseas regulatory agencies is a concerted effort to combat illegal acts and protect consumers' legitimate rights and interests. For actions that harm the rights and interests of Chinese USDT holders, we can explore measures such as freezing the account with Tether in conjunction with relevant overseas regulators.

Stablecoin is a new thing that has appeared in the past four or five years. The legal nature of stablecoins, the financial nature of issuing institutions, and the custody of reserves, etc., currently lack clear regulations in China. Although stablecoins are issued by overseas institutions, there is no legal or policy basis for their circulation in China. However, Stablecoin is based on blockchain technology and has strong penetration. In recent years, it has become the most important medium for Chinese investors to buy and sell virtual currencies. When Chinese regulatory agencies and judicial authorities protect the legitimate rights and interests of relevant citizens in their country, they still need a clearer basis. Factors such as the limitations of the Chinese government's overseas supervision and law enforcement capabilities can easily encourage some overseas institutions to ignore Chinese regulations and infringe the rights and interests of Chinese citizens. Since the US Internet giant Facebook announced its plan to launch libra in June 2019, the stablecoin has received the attention and heated debate of financial regulators around the world almost instantly. No matter how complicated the future regulatory road is, stablecoins are already on the way and are likely to become an important infrastructure affecting global digital finance. In summary, relevant institutions in China plan ahead, accelerate research on the stablecoin and track the development of the industry, and pay attention to exploring the feasible ways of overseas stablecoin supervision and governance mechanisms from the perspective of investor rights protection. Financial market stability.