Is IDO more compliant than ICO?
Recently, IDO, the “upgraded” mode of ICO (Initial Digital Assets Offering), has caught attention from medias. Being different from ICO, IDO has much lower threadhold. Users do not need to invest any fiats or virtual currency in their early participation. They just need to complete certain tasks to get free tokens. Many people think that IDO is safer and more compliant. Is that really the case? Chen Yunfeng, Senior Partner of Zhong Lun Wende Law Firm, thinks differently.
I. Compliance of internal circulation of IDO tokens
We noticed that some IDO tokens are transferrable at the IDO project platforms. This circulation includes the transfer of tokens between users and between users and platforms, and does not involve the exchange between fiats and tokens. The compliance of this model is directly related to how the token holder “cash in”. In the general business model, merchants tend to promote user’s adherence by rewarding user with royal credits, which is usually exchanged for gifts or services. Direct conversion to “cash” is restricted as per China’s regulations on the native game credits. In addition, according to the article “Strengthening Virtual Currency Supervision and Firmly Maintaining National Currency Issuing Rights,” published on April 10, 2018 by Wang Xin, Director of PBoC’s Bullion Bureau, the current regulatory attitude of the central bank is not only to prohibit the two-way exchange of RMB and tokens but also restrict the transfer and circulation of tokens between users within the platform. So if the IDO wants to be compliant, the use and circulation of tokens should be carefully designed.
2. Compliance of task and rewards
In order to attract users’ participation, some platforms have innovated many games. For example, different players participate in the task together and each player pays a certain token as a deposit. Those who have completed tasks could obtain the deposits of those who didn’t.
If the tokens are used only as internal credits and cannot be transferred between users, it’s not much different from most online games. However, if the tokens can be directly exchanged with fiat currency, there is a certain legal risk in this model. One of the key links is whether the “credits” or “game currency” can be directly converted into fiat currency.
According to the Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Certain Issues Concerning the Specific Application of Law in Handling Criminal Cases of Gambling, Article 1: for the purpose of making profits, if one of the following circumstances occurs, it is “gathered gambling” as described in Article 303 of the Criminal Law. (a) Organize gambling with more than 3 persons, and tap-a-share total profits to more than 5,000 yuan; (b) Organize gambling with more than 3 persons with the over 50,000 yuan of gambling funds; (c) Organize gambling with more than 3 persons with more than 20 gambling participants, (d) Organize more than 10 citizens of the People’s Republic of China to gamble abroad and collect kickbacks.
Therefore, if platform-based games accept betting from users and direct exchange between tokens and fiat currencies, it is suspected of involving gambling to a large extent. The use and circulation of tokens should be reasonably arranged to avoid such legal risk.
3. Token and exchange analysis
Through the above analysis, the conversion between tokens and fiat currency is the key to judging the IDO project’s compliance in China. The author believes that there is still a lot of uncertainty because whether the disguised “cash-in” model of exchange-based trading violates the existing regulatory rules.
To sum up, if IDO projects are intended to be compliant in China, the following aspects should be taken into account when setting up the function of tokens: (1) Restrictions on the transfer of tokens between users; ( 2) There is no direct or indirect conversion between token and fiat currency.