Source: Lawyer Liu Honglin
As an emerging business technology and model, blockchain technology has received more and more attention and applications in recent years. An important application area of blockchain technology is virtual currency, such as Bitcoin, Ethereum, etc. Virtual currency is a digital asset based on encryption algorithms and network consensus mechanisms. It does not rely on any centralized issuing agency or management agency, but is generated and circulated through transactions and verification between network nodes. The storage and transaction of virtual currencies require the help of specialized software or tools, namely virtual currency wallets.
A virtual currency wallet is an application used to manage virtual currency addresses and private keys. It allows users to send and receive virtual currency, as well as query balances and transaction records. Virtual currency wallets can be divided into cold wallets and hot wallets depending on whether the storage status is connected to the Internet.
Cold wallet refers to storing private keys on offline devices or media, such as paper wallets, hardware wallets, U disks, etc. It has high security, but is inconvenient to use.
Hot wallet refers to storing private keys on networked devices or platforms, such as mobile wallets, computer wallets, web wallets, exchange wallets, etc. It has high convenience, but is vulnerable to hackers Impact of attacks or platform risks.
With the popularity of the virtual currency market, more and more entrepreneurs have taken a fancy to the business opportunities of hot wallets and launched a variety of hot wallet products and services to provide users with better services. experience and functionality. However, in the process of starting a business, hot wallets also face many legal risks, which need to be paid attention to and avoided.
The following is a brief analysis from several aspects:
01 The law of virtual currency Attributes and regulatory policies
Digital assets have different legal attributes and regulatory policies in different countries and regions. Some countries consider digital assets to be a legal payment tool or commodity, while others prohibit or restrict the issuance and trading of digital assets.
In China, according to the "Announcement on Preventing Token Issuance and Financing Risks" issued by seven ministries and commissions including the People's Bank of China on September 4, 2017, token issuance and financing (ICO) is determined to be an illegal fund-raising activity. Any organization or individual is prohibited from engaging in token issuance financing activities, and all organizations and individuals that have completed token issuance financing are required to clear the funds raised as soon as possible. In addition, according to the "Notice on Preventing Bitcoin Risks" issued by the People's Bank of China and other five ministries and commissions on December 5, 2013, it was determined that virtual currencies such as Bitcoin do not have the same legal status as legal tender and cannot and should not be used as currencies in Circulation and use in the market, and requires financial institutions and payment institutions not to provide services for virtual currencies such as Bitcoin.
Therefore, hot wallet entrepreneurial projects in China need to abide by relevant laws and regulations. They are not allowed to engage in or assist in any form of token issuance and financing activities, and are not allowed to provide exchange or exchange services for Bitcoin and other virtual currencies. Transaction, settlement and other services. At the same time, we must also pay attention to changes in international digital asset regulatory policies to avoid violating the laws of other countries and regions.
02 Security protection and risk prevention of digital assets
As a wallet that stores digital assets online, hot wallets face risks such as hacker attacks, system failures, and data loss. Once these risks occur, it may lead to the loss or theft of users' digital assets, and even trigger legal disputes such as user complaints, lawsuits, and claims. Therefore, hot wallet entrepreneurial projects need to strengthen the security protection and risk prevention of digital assets. Specific measures include:
- Establish sound internal management systems and processes, and standardize the storage of digital assets. , transfer, backup and other operations to prevent internal errors or misconduct.
- Adopt advanced technical means and security measures, such as encryption, multi-signature, firewall, etc., to protect digital assets from hacker attacks or other external interference.
- Establish effective emergency plans and disposal mechanisms, such as promptly notifying users when security incidents occur, isolating risks, recovering data, etc., to reduce losses and impacts.
- Clarify the user agreement and terms of service, fully disclose the risks and responsibilities of hot wallet services, remind users to properly keep their passwords, private keys and other information, and limit or exempt own responsibility.
- Consider purchasing corresponding insurance products, such as digital asset insurance, network security insurance, etc., to increase your risk tolerance.
03 Tax treatment and compliance reporting of digital assets
Digital assets, as an emerging form of assets, also present some uncertainties and complexities in terms of tax treatment and compliance reporting. Different countries and regions have different tax policies for digital assets. Some countries treat digital assets as property or commodities and levy income tax or value-added tax. Some countries treat digital assets as currency or financial instruments and levy capital gains tax or stamp duty. In China, there are currently no clear laws and regulations on digital asset taxation policies, but according to existing tax law principles, individuals holding or trading digital assets may be required to pay personal income tax, and companies providing or accepting digital assets as payment instruments may be required to pay VAT or sales tax.
Therefore, when launching a hot wallet entrepreneurial project, need to pay attention to the following points:
- Reasonably determine your own business model and income source Tax obligations and tax entities must declare and pay tax payable in accordance with the law.
- According to the tax policies of the country or region where you are located and the country or region where the target market is located, rationally plan your own cross-border business and transfer pricing strategies to avoid double taxation or evasion of taxation.
- Pay attention to changes and developments in domestic and foreign digital asset tax policies, promptly adjust your business and financial arrangements, and comply with the latest legal requirements.
- In accordance with relevant laws, regulations and regulatory requirements, such as anti-money laundering laws, foreign exchange management regulations, etc., perform necessary compliance reporting obligations and truthfully report the digital asset transactions involving itself and its users.
04 OverseasRegulatory policies on wallets< /h2>1. Hong Kong:
On January 31, 2023, the Hong Kong Monetary Authority (“HKMA”) released a discussion paper on cryptoassets and stablecoins According to the consultation conclusion of the HKMA, in the preliminary concept of the Hong Kong Monetary Authority, wallets that "provide services for storing users' private keys and enable users to use and manage their regulated stablecoins" will be licensed. Supervision. In the aforementioned consultation summary, the Monetary Authority mentioned that for wallets, key points in its regulatory framework include restrictions on their main business. For example, wallet operators should not engage in lending activities. Although the aforementioned consultation summary is only the idea of the Hong Kong Monetary Authority, and it is still unknown whether it will be implemented, it shows the regulatory attitude of the authorities and points out some direction for the compliance of hot wallets, namely, the main business of hot wallet startupsFocus, don’t do too much financial business, andalways pay attention to whether the Hong Kong Monetary Authority requires hot wallets to apply for a license.
2. European Union:
The Fifth Money Laundering Directive came into effect on January 10, 2020 (The Fifth Money Laundering Directive) (5AMLD)) also brings custody wallets into the scope of supervision, requiring custody wallets to be registered in the corresponding countries as a means for the authorities to strengthen anti-money laundering and counter-terrorism (AML/CFT).
3. United States:
On June 2, 2023, Republicans from the Financial Services Committee and Agriculture Committee of the U.S. House of Representatives jointly released the "Digital Asset Market" The draft of the Digital Asset Market Structure Act proposes that companies developing digital asset wallet applications only provide ancillary services and should not be directly regulated by the SEC.
As can be seen from the above, for wallets, stricter supervision focuses on custodial wallets. Regardless of whether it is technically possible, legally, hot wallet entrepreneurs must be sensitive to compliance with the custody behavior of "storing userprivate keys".
05 Conclusion
Hot Wallet Entrepreneurship It is an innovative business involving virtual currency. Its legal risk points mainly include the legal attributes and regulatory policies of virtual currency, the security and liability issues of digital assets, and the tax treatment of digital assets. Hot wallet entrepreneurs need to strengthen the security protection measures of hot wallets based on the legal environment and regulatory dynamics of different markets, clarify the liability clauses in hot wallet service agreements, and comply with relevant compliance requirements and contractual obligations to avoid or mitigate potential legal risks. risk.
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