Introduction
With Hong Kong's enactment of the Stablecoin Ordinance, the market has seen a surge in"stablecoin fever"Financial authorities in Beijing, Zhejiang, Shenzhen, Suzhou, Chongqing, Ningxia, and other regions have successively issued risk warning notices, emphasizing that "stablecoins" are being exploited by criminals as a pretext for illegal activities such as illegal fundraising and financial fraud. The potential risks warrant heightened vigilance.
Why are emerging concepts such as stablecoins frequently exploited by criminals as tools for illegal activities like illegal fundraising and fraud?
Why have stablecoins become instruments of illegal fundraising risk?
Stablecoins are inherently neutral technological tools, originally designed to address volatility in the crypto assets market. Their emergence as criminal tools in the new era is linked to current trends such as blockchain and the digital economy based on crypto assets; however, their essence is consistent with early"illegal fundraising"schemes—such as "shopping rebates," "referral commissions," "agricultural planting projects," and "elderly care schemes"—that lack genuine underlying sales content and utilize methods like buyback-with-return-of-capital or agreed repurchases as mechanisms for illegally absorbing funds.
Stablecoins also possess distinct characteristics,such as anonymity, cross-border mobility, convenient transfers, regulatory lag, strong financial attributes, and high market popularity.These features make stablecoins more efficient, more concealed, and capable of causing harm on a broader scale as criminal tools.
(I) Anonymity and Cross-Border Flows Increase Enforcement Difficulties
Although blockchain ledgers are public and transparent, the identities of the actual controllers behind addresses remain anonymous. Furthermore, funds can be dispersed across multiple anonymous wallets through techniques such as coin mixing and cross-chain bridges. Stablecoins facilitate instant peer-to-peer transfers globally, bypassing traditional geographical boundaries and foreign exchange controls.
This provides a "convenience" unavailable in the traditional banking system for criminals who need to rapidly transfer and conceal large sums of capital. Once a scheme is on the verge of collapse or attracts regulatory attention, the operators can instantly transfer all funds to overseas exchanges or anonymous wallets at near-zero cost, shut down websites, and dissolve community groups, leaving investors with nothing but unrecoverable hash codes.
(II) Disguising Fraud as "Era Trends" and "Global Strategic Tools"
The designed value proposition of stablecoins is "stability," making them more suitable for settlement and circulation. An increasing number of countries and regions are legalizing stablecoins through legislation, integrating them into financial service systems, and expanding the credit boundaries of fiat currencies. As an emerging digital financial tool, stablecoins have a profound impact on fiat currencies and the traditional banking system.Some criminals exploit these international trends and human greed by exaggerating prosperity and creating illusions, inducing investors to believe that this is a "shortcut to wealth" and chasing high returns.
(III) Ambiguous Characterization of Innovative Models and Lagging Legal Regulation
Innovative models such as stablecoins, staking, and decentralized finance (DeFi),RWAlack precise regulatory provisions under existing laws and regulations. This ambiguity in legal characterization provides perpetrators with greater room for maneuver. Both national and global regulatory frameworks exhibit gaps or lag, leading criminals to preferentially locate their teams, registration jurisdictions, and servers in jurisdictions with lax or absent regulation.
How to Guard Against the Risk of "Illegal Fundraising"?
Some entities use "financial innovation," "blockchain," and "Web3" as facades. Leveraging the public's insufficient understanding of stablecoins, they induce public participation in investment, trading, and speculation by issuing so-called "digital assets" or claiming to be "pegged to certain mainstream cryptocurrencies." Such activities disrupt economic and financial order and are highly likely to give rise to illegal fundraising and other criminal activities, seriously endangering the property safety of the general public. Potential investors should remain vigilant and avoid impulsive investments. They may assess whether a stablecoin project is "compliant" by examining aspects such as the economic model for minting and redeeming stablecoins, reserve custodians, audit firms, and regulatory oversight.
(1) Whether there is a promise to "repay principal and pay interest or provide returns"
Some projects claim that they use stablecoins deposited by users to provide"liquid staking," "arbitrage trading,"and the like, and distribute so-called "profits" to users in the form of platform tokens. This model disguises its substance of promising returns through packaging, and is highly likely to be determined by judicial authorities as having an "inducement nature." "Inducement nature"is one of the four core characteristics constituting illegal fundraising activities.
According to the provisions of the Criminal Law and the Interpretation of the Supreme People's Court on Several Issues Concerning the Specific Application of Law in the Trial of Criminal Cases of Illegal Fundraising, a promise to "repay principal and pay interest or provide returns" is a key element constituting the crime of illegally absorbing public deposits orthe crime of fundraising fraud.The "promise" here may beexpress(such as explicitly stating the annualized yield in white papers or promotional materials), or it may beimplied(e.g., through “dividend” or “commission rebate” models). DeFi (decentralized finance) is subject to significant market volatility, and no one can guarantee stable returns. Investors encountering such seemingly lucrative “windfalls” should carefully consider whether they may in fact be “traps.”
(II) Whether a financial license issued by regulatory authorities is held and whether a regulatory framework is in place
In mainland China, “stablecoin” projects cannot obtain financial licenses. Issuing stablecoins in the Hong Kong Special Administrative Region requires obtaining a license from the Hong Kong Monetary Authority and complying withthe “100% fiat currency reserve + independent custody + monthly audit”regulatory framework. In terms of project compliance, requirements include holding a license, maintaining genuine reserves, keeping funds segregated, and ensuring transparency of information.
Many illegal fundraising schemes typically require investors to transfer funds directly into accounts or wallets controlled by the promoters, resulting in commingled funds that form a pooled fund, thereby facilitating misappropriation and absconding. By contrast, compliant projects employ independent custody to safeguard assets, allowing investors to verify reserve status at any time.
(III) Whether personal virtual currency trading is provided or whether foreign exchange controls are circumvented
When identifying the risks of illegal fundraising involving “stablecoins,” in addition to features such as promises of high returns and the absence of licenses, the methods of “fundraising” and the “destination of funds” during operations are also critical risk points requiring scrutiny, as they directly impinge upon the red lines of China’s financial regulation. Participation in such activities exposes investors not only to the risk of loss of principal but also to the possibility of inadvertently entering legal minefields, potentially involving offenses such as illegal business operations, money laundering, and fundraising fraud.
(IV) Whether there are genuine application scenarios
An analysis of a“Stablecoins”Whether a project represents genuine technological innovation or a scam requires looking beyond its polished whitepaper and marketing rhetoric to examine whether it has established real, sustainable use cases and business models. Stablecoins are generally categorized into fiat-collateralized stablecoins, crypto-collateralized stablecoins, and algorithmic stablecoins. Common use cases for stablecoins include cryptocurrency trading, cross-border payments, decentralized finance (DeFi), and store of value.
Conclusion
Stablecoins are not only an extension of fiat currency credit intothe digital spacebut also a key gateway connecting the crypto world. Against the backdrop of the European Union, the United States, and Hong Kong, China successively introducing regulatory frameworks and vigorously developing stablecoins, stablecoins both embody the international trend toward enhancing financial efficiency and, due to their characteristics, have become “tools” readily abused for illegal fundraising activities.
When confronted with dazzling projects promising financial freedom, we might calmly ask:“What exactly is your core business? Apart from using new investors’ funds to pay returns to earlier investors, how do you actually generate profits?”Steer clear of investment projects with vague business models that promise high returns. Adhere to the principles of “no greed, no blind trust, and no participation” to securely safeguard your assets.
Note: This article provides general information and does not constitute legal advice in any jurisdiction. For specific projects, conduct targeted due diligence and customize compliance solutions after executing a non-disclosure agreement.
