Original Author: Lawyer Xu Qian

Introduction

With Hong Kong passing the "Stablecoin Regulation," the market has sparked a "stablecoin craze." Financial departments in various regions, including Beijing, Zhejiang, Shenzhen, Suzhou, Chongqing, and Ningxia, have consecutively issued risk warning announcements, emphasizing that "stablecoins" are being exploited by criminals as a guise for illegal fundraising, financial fraud, and other criminal activities, and their potential risks warrant high vigilance.

Why are emerging concepts like stablecoins frequently exploited by criminals, becoming tools for illegal fundraising and fraud?

Why Do Stablecoins Become Tools for Illegal Fundraising Risks?

Stablecoins are inherently a neutral technological tool, designed to address the volatility issues of the cryptocurrency market. The emergence of stablecoins as a tool for crime in the new era is related to the current trends of blockchain and the digital economy. However, their essence is consistent with early "illegal fundraising" tools, such as "shopping rebates," "referral commissions," "planting," and "pension," which do not involve the sale of real content and use methods like capital return sales and agreed buybacks as tools for illegally absorbing funds.

Stablecoins also possess unique characteristics, such as anonymity, cross-border flow, convenient transfers, regulatory lag, strong financial attributes, and high market enthusiasm, making them more efficient, covert, and broadly harmful tools for crime.

(1) Anonymity and Cross-Border Flow Increase Difficulty in Enforcement

Although the blockchain ledger is public and transparent, the actual controllers behind the addresses remain anonymous and can further disperse funds to multiple anonymous wallets through mixing and cross-chain bridges. Stablecoins can be easily transferred globally in real-time on a peer-to-peer basis, breaking traditional geographical boundaries and foreign exchange controls.

This provides criminals who need to quickly transfer and conceal large sums of money with "convenience" that the traditional banking system cannot offer. Once a scam is about to collapse or attract regulatory attention, project parties can almost instantaneously transfer all funds to overseas exchanges or anonymous wallets at minimal cost, shut down websites, and dissolve communities, leaving investors with nothing but a string of untraceable hash codes.

(2) Using "Trends of the Times" and "Global Strategic Tools" as a Facade for Scams

The designed value of stablecoins is "stability," making them more suitable for settlement and circulation. An increasing number of countries and regions are legalizing stablecoins through legislation, incorporating them into the financial service system and expanding the credit boundaries of fiat currency. As an emerging digital financial tool, stablecoins have a profound impact on fiat currencies and traditional banking systems. Some criminals exploit these international trends and human greed, exaggerating prosperity, creating illusions, and inducing investors to believe this is a "shortcut to wealth," chasing high returns.

(3) Innovative Models with Ambiguous Definitions and Lagging Legal Regulation

Innovative models such as stablecoins, staking, DeFi, and RWA currently lack precise regulatory provisions in existing laws and regulations. This ambiguity allows for more operational space for actors. Whether at the national or global level, regulation shows characteristics of being blank or lagging, making criminals more inclined to set up teams, registration locations, and servers in jurisdictions with loose or absent regulation.

How to Be Vigilant Against "Illegal Fundraising" Risks?

Some projects, cloaked in "financial innovation," "blockchain," "Web3," and other terms, exploit the public's lack of understanding of stablecoins and similar concepts by issuing so-called "digital assets" or "anchoring to certain mainstream currencies," inducing the public to participate in investment trading speculation, disrupting economic and financial order, and are highly likely to breed illegal fundraising and other criminal activities, severely endangering the property safety of the public. Potential investors should remain vigilant and avoid impulsive investments, assessing whether a stablecoin project is "compliant" by examining the issuer's minting and redemption economic model, reserve custodians, auditing institutions, and regulatory bodies.

(1) Do They Promise "Capital Return and Interest or Returns"?

Some projects claim to use users' deposited stablecoins for "liquid staking," "arbitrage trading," etc., and distribute so-called "profits" to users in the form of platform tokens. This model conceals the essence of their promised returns through packaging, which may likely be deemed "enticement" by judicial authorities. "Enticement" is one of the four core characteristics constituting illegal fundraising activities.

According to the Criminal Law and the "Interpretation of Several Issues Concerning the Application of Law in the Trial of Criminal Cases of Illegal Fundraising" by the Supreme People's Court, promising "capital return and interest or returns" is a key element constituting the crime of illegally absorbing public deposits or fundraising fraud. Here, "promise" can be explicit (e.g., clearly stating annualized returns in white papers or promotional materials) or implicit (e.g., through "dividends," "commissions," etc.). DeFi (Decentralized Finance) has significant market volatility, and no one can guarantee stable returns. Investors encountering similar "sweet deals" should consider whether they are "traps."

(2) Is There a Financial License Issued by Regulatory Authorities and Is There a Regulatory Mechanism?

In mainland China, "stablecoin" projects cannot provide financial licenses. In Hong Kong, issuing stablecoins requires applying for a license from the Hong Kong Monetary Authority and adhering to a regulatory mechanism of "100% fiat currency reserves + independent custody + monthly audits." Compliance with the project requires having licenses, real reserves, non-mixed funds, and transparent information.

Many illegal fundraising projects typically require investors to directly transfer funds into accounts or wallets they control, mixing funds to form a pool, facilitating misappropriation and escape. In contrast, compliant projects ensure asset safety through independent custody, allowing investors to check reserve status at any time.

(3) Do They Offer Personal Virtual Currency Trading or Break Foreign Exchange Controls?

When identifying the illegal fundraising risks of "stablecoins," in addition to high return promises and lack of licenses, the risk points that need to be audited include "how funds are raised" and "where the funds flow," which directly touch on the red lines of China's financial management. Participating in such activities exposes investors to risks far beyond the loss of principal; they may inadvertently step into legal minefields, involving illegal operations, money laundering, fundraising fraud, etc.

(4) Is There a Real Application Scenario?

To analyze whether a "stablecoin" project is a genuine technological innovation or a scam, one needs to penetrate its flashy white paper and promotional rhetoric, examining whether it has built real, sustainable application scenarios and business models. Stablecoins can generally be categorized into fiat-backed stablecoins, cryptocurrency-backed stablecoins, and algorithmic stablecoins. Common application scenarios for stablecoins include cryptocurrency trading, cross-border payments, DeFi, and value storage.

Conclusion

Stablecoins are not only an extension of fiat currency credit in the digital space but also a key entry point connecting the crypto world. Against the backdrop of the EU, the US, and Hong Kong successively introducing regulatory laws and vigorously developing stablecoins, they carry the international trend of enhancing financial efficiency while also being abused as tools for illegal fundraising due to their characteristics.

In the face of dazzling projects promising wealth freedom, we might calmly ask, "What is your core business? Besides using the money from later investors to pay the returns of earlier ones, how do you actually make money?" Stay away from investment projects with vague business models but high return promises. Uphold the principle of "not being greedy, not believing, and not touching," and safely guard your wallet.

Note: This article provides general information and does not constitute legal advice for any jurisdiction. Specific projects should undergo targeted due diligence and compliance plan customization after signing a confidentiality agreement.

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