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Liquidity Provider "Black Box" Revealed: Did VCs Pull an Exit Scam on Liquidity Provision, Turning Projects into "Rug Pull" Victims?
Original Title: "Top 10 Questions and Answers to Clarify the Market Maker 'Black Box': Why Did VCs Get Involved in Market Making? Is it Really Easy for Projects to Get 'Backstabbed'?"
Original Author: flowie, Nianqing, ChainCatcher
Last week, Binance suddenly issued a strict order to seal off market makers, shifting the conflict from VCs and exchanges to market makers. However, for most people, market makers are like a black box, difficult to understand, and often misunderstood. This article sorts out some of the common questions and reference answers that everyone is concerned about regarding cryptocurrency market makers (mainly referring to market makers serving projects on CEX).
1. Which cryptocurrency market makers are there?
RootData currently lists around 60 cryptocurrency market makers. However, the actual market participants may be far more than this, as many market makers operate incognito behind the scenes.
Among the publicly disclosed 60 market makers, only a few are active in the public eye. For most ordinary users, which market makers participate in market making projects is also a black box.
It is difficult to clearly classify or rank market makers, but based on on-chain holdings, major market makers with large fund sizes include Jump Trading, Wintermute, QCP Capital, GSR Markets, B2C2 Group, Cumberland DRW, Amber Group, and Flow Traders, which are also well-known in the market.
2. Which type of market maker could be a market manipulation whale?
From an insider's perspective, market makers are usually divided into active market makers and passive market makers. Maxxx, Head of Ecosystem at @MetalphaPro Market Making, has detailed this in his tweet. Recommended reading: "Confessions of a Market Maker Frontline Practitioner: Dark Forest Survival Guide for Project Teams."
In short, active market makers are generally what people call "whales," colluding with project teams or backstabbing them to manipulate market prices and harvest retail investors. Many active market makers may only surface after being investigated and prosecuted by regulatory authorities.
Passive market makers, on the other hand, mainly place maker orders on the order book of centralized exchanges, providing market liquidity, remaining neutral, and not influencing coin prices. The strategies and technologies they provide are also more standardized.
Due to significant compliance risks, most active market makers prefer to remain anonymous.
Some active market makers may also operate under the guise of investment firms, incubators, and the like.
The market maker Web3port, which was recently exposed and banned by Binance, appeared as an incubator, participating in 26 investments over the past year, with at least 6 of them being for newly launched projects.
To some extent, the profitability of a market maker can reveal whether they are active or passive. According to crypto influencer @octopusycc, market-making institutions that are "profitable" are likely engaged in market manipulation rather than true market-making activities.
An ideal market maker business should provide quotes to both buyers and sellers, maintaining market liquidity and relative price stability. In this model, the profit margin is not substantial, often requiring incentives from the trading platform.
3. Which crypto market makers have been sued or investigated by regulatory authorities?
Following the crypto market crash in 2022, crypto market makers became a key focus of regulatory scrutiny. However, under the regulatory environment after Trump took office, some lawsuits have gradually been withdrawn or settled.
The first market maker to come under intense regulatory scrutiny was Jump Crypto. In 2023, a collective lawsuit in the United States revealed that during the 2022 Terra UST stablecoin crash, Jump Crypto's subsidiary, Tai Mo Shan Limited, colluded with Terra to manipulate the UST coin price, resulting in a profit of nearly $1.3 billion. As a result, they were sued by the SEC for market manipulation and acting as an unregistered securities dealer. However, in December 2024, Tai Mo Shan agreed to pay a $123 million settlement to the SEC, and recently expanded its team to resume crypto operations.
In addition to the SEC's charges, on June 20, 2024, CFTC reportedly initiated an investigation into Jump Crypto, as reported by Fortune, but CFTC has not yet filed formal charges.
Recommended Reading: "Tainted History Haunts Jump as It Awkwardly Resumes Full Crypto Operations"
Another major market maker, Cumberland DRW, was also accused by the SEC of acting as an unregistered securities dealer, and Cumberland allegedly obtained millions of dollars in illegal gains through transactions with investors. However, these charges were recently dropped.
Compared to the two major market makers mentioned above, in October 2024, an investigation launched by the SEC in collaboration with the FBI and DOJ accused eighteen individuals and entities of large-scale fraud and manipulation in the crypto market. This investigation brought some market makers to light, including Gotbit Consulting, ZM Quant Investment, and CLS Global. These market makers were primarily labeled as meme market makers.
In addition to facing regulatory charges, DWF Labs, a highly active crypto market maker in the past two years, has been exposed multiple times for market manipulation details by CoinDesk, The Block, and other media outlets.
For example, The Block stated that one key reason DWF was able to collaborate with 35% of tokens in the top 1000 by market capitalization in its short 16-month history was that DWF Labs promised "pump" to clients during negotiations. For instance, shortly after its establishment in September 2022, DWF's promotional materials extensively mentioned price action. In a section titled "Price Management," DWF claimed it could synchronize with potential clients' marketing teams to help the token's price react to relevant events, commonly known as "coordinated pump on positive news."
Recommended reading: "The Block Uncovers DWF Labs: The Operational Secrets Behind Investing in 470 Projects"
4. What are some common manipulation behaviors of market makers?
Market makers' misconduct usually manifests as market manipulation and mistreatment of project teams. Some common manipulation behaviors include:
1. Wash Trading. Creating artificial trading activity by simultaneously buying and selling assets to increase trading volume and liquidity.
2. Spoofing. Placing large buy or sell orders but having no intention to execute them. The purpose is to deceive other traders and impact asset prices.
3. Pump and Dump. These schemes involve coordination with other market participants to artificially drive up the asset's price through active buying. Then, the market maker sells at a higher price, causing a price crash.
Examples of market manipulation are not uncommon. For instance, Jump Crypto, fined $123 million for colluding with Terra to manipulate UST's price, and Alameda Research, which caused the collapse of the previous bull market.
Let's look at another example of a project team being malicious:
In October 2024, crypto game developer Fracture Labs sued Jump Trading, accusing Jump of using its DIO game token to conduct a "pump and dump" scheme.
In the lawsuit, Fracture Labs stated that in 2021, they had entered into an agreement with Jump to assist in the initial issuance of the DIO token on the cryptocurrency exchange platform Huobi (now HTX).
Fracture Labs lent 10 million DIO tokens to Jump, valued at $500,000, and additionally sent 6 million tokens to HTX, valued at $300,000. The token price subsequently surged to a high of $0.98, with Jump's borrowed value reaching $9.8 million. Jump then sold all holdings at the peak.
A "massive liquidation" caused DIO to plummet to $0.005, following which Jump repurchased 10 million tokens at a lower price (around $53,000) and returned them to Fracture Labs, terminating the agreement thereafter.
In this event, the collaboration model between Fracture Labs and Jump was a common Token loan structure. Despite being prevalent, cases where project teams are "rekt" are not uncommon.
5. What are the collaboration models between Market Makers and project teams?
As mentioned earlier, Market Makers are divided into active and passive categories.
Active Market Makers often do not have standard practices. Maxxx mentioned in a tweet that the terms of collaboration vary widely, involving scenarios such as token borrowing, API integration, leveraging, revenue sharing, and other different models. There are even rogue whale incidents where no communication is made with the project team, and the whale uses their own funds to snatch chips, manipulate the market once enough chips are acquired.
So how do Market Makers operate? Canoe founder Guangwu once shared common ways institutional Market Makers manipulate tokens in his article.
One is strong manipulation to control the stock, meaning that under the premise of passing the project's fundamentals, they choose a target to start manipulating (the project team may or may not know, which is irrelevant)
· The first stage is fundraising: the typical scenario is a sustained low-price fundraising.
· The second stage is the consensus phase of the Market Maker institution. The main indicator at this stage is the trading volume, first pumping a wave, then trading with other Market Makers in the oscillation (recovering costs, increasing capital utilization, establishing a risk control model)
· Phase Three, the Rug Pull Phase. Continuing to drive up the price, institutions will both sell off their holdings to recoup funds and promote the project, with some institutions even voluntarily assisting the project team in fundamental development.
The second is to anchor the value of the asset, rapidly enhancing the project's fundamentals through means such as lending and derivatives to boost both funds and trading volume. Former FTX head of trade @octopuuus mentioned a lending model where FTT is used as collateral to borrow BTC/ETH. In this model, the value anchor for FTT becomes BTC and ETH, creating a cycle of lending and leverage, potentially even using the borrowed BTC/ETH to buy more FTT.
Recommended reading: "Market Maker Manipulation: The Love-Hate Relationship Between Market Makers, Project Teams, and Exchanges"
More benign passive market maker services are relatively more standard. In terms of service models, they are divided into Token Loan and Subscription Fee models. The Token Loan model is currently the most widely used and adopted cooperative model. Recommended reading: "Confessions of a Frontline Market Maker: A Dark Forest Survival Guide for Project Teams"
Source: Maxxx Tweet
In the Token Loan model, the project team needs to lend a certain percentage of tokens to market makers to provide liquidity.
At the end of the service period, the project team needs to repay the tokens but will be settled based on the pre-agreed option value. (The option value refers to the economic value that the option contract holds at a specific point in time.) For example, if 100kU of tokens are borrowed, and the option value accounts for 3% of the borrowed assets, the project team can earn 3kU in collaboration revenue upon repayment. This is also the main source of income for market makers.
The advantage for the project team in choosing the Token Loan model is to quickly establish liquidity through the professional capabilities of market makers and mitigate the risks of self-trading.
The Subscription Fee model, on the other hand, is relatively easier to understand. In this model, the project team does not lend coins to market makers; instead, market makers provide liquidity through API access. The project team does not worry about malicious behavior from market makers, but they are responsible for gains and losses during the order placement process. The project team also needs to pay a monthly service fee.
6. How Deeply Internalized Are Market Makers? Why Do VCs Want to Build Their Own Market Making Teams?
In his tweet, Maxxx mentioned that not only are market makers becoming more internalized, but many VCs and project teams are also setting up temporary teams to start market making. Some teams may not even have basic trading capabilities, but they first acquire the coins anyway, as they end up at zero anyway, so there is no risk of being unable to redeem.
And the reason is also very clear. In a situation where the token price has become the primary product of most projects, the liquidity unlocked at listing is the most valuable part.
For instance, in the past, although VCs received token allocations early, they still had to wait for the project team to list the token and follow the unlocking rules step by step. On the other hand, market makers can unlock liquidity at listing, providing them with significant operational flexibility.
7. Why Do Crypto Market Makers Also Invest?
According to a perspective provided by industry insiders, good project teams are usually surrounded by market makers. Through investment, market makers can interact with project teams in the early stages, transforming from passive liquidity providers to proactive parties. Post-investment, they can legitimately follow up on the project's progress, seize key projects and milestones, and gain an advantage in market making.
For project teams, besides receiving actual funds, they also, to some extent, gain a sense of security by becoming part of the market maker's vested interest community. During the listing phase, market makers can indeed be very helpful. Trading platforms often have certain market maker requirements for listed projects.
However, this is not entirely beneficial. The investment that project teams receive from market makers may come with undisclosed strings attached. Even if market makers invest in a project, they may choose to dump the price after unlocking liquidity at listing to make a profit.
Furthermore, market makers' investments may not always be genuine. As per The Block's report on DWF, many industry insiders believe that DWF's multimillion-dollar investment in crypto startups is more appropriately termed over-the-counter (OTC) trades. These OTC trades allow startups to convert their tokens into stablecoins instead of DWF injecting cash upfront and then transferring the tokens to the exchange.
At one point, some market makers' investment activities became a pump signal for ordinary investors.
In addition to investments, crypto market makers also provide other forms of support to cooperate with project teams.
For example, liquidity support. If it is a DeFi project, market makers can commit to providing liquidity support to the project team.
They also act as intermediaries for VC firms, trading platforms, and other resources. For example, they can introduce more VC investors, help project teams manage relationships with exchanges. Especially in the Korean market, where the buy-side is strong, having a market maker can provide what is known as comprehensive liquidity planning.
8. Why Do Most Project Teams Choose Multiple Market Makers?
Realizing that they shouldn't put all their eggs in one basket, project teams opt for three or four market makers to diversify the listing liquidity held by market makers and reduce the risk of malicious behavior.
However, the "three monks have no water to drink" approach may also have risks. According to industry insiders, for example, some market makers may shirk their responsibilities and not actively participate. It is difficult for the project team to detect the market maker's market-making behavior, making it challenging to supervise and hold them accountable.
9. Does the Market Maker Have Such a Strong Ability to Engage in Wrongdoing?
A study by Forbes in 2022 of 157 cryptocurrency exchanges found that more than half of all reported Bitcoin trading volume consisted of fake or non-economic wash trades.
As early as 2019, a whitepaper submitted to the U.S. SEC by Bitwise Asset Management pointed out that, among the 83 cryptocurrency exchanges analyzed at that time, 95% of the Bitcoin trading volume was fake or non-economic. This discovery sparked widespread industry attention to market maker behavior.
The market maker may not be the mastermind, but they are indeed the primary tool for carrying out operations.
As a service provider, the market maker is more often a tool rather than the driving force. The starting point is the demand of the trading platform and the project team.
During a bull market, the entire system collaborates to generate enormous profits, allowing all stakeholders to maintain a minimal level of harmony. However, in a bear market, this entire chain accelerates the onset of a liquidity crisis, leading to a reenactment of the drama of tearing off masks and mutual accusations.
Market makers are not entirely the "scapegoats" for liquidity depletion. The current dilemma in the crypto market is not solely caused by market makers, even though they are the direct creators of "pseudo-prosperity." The entire chain of interests also involves the project team, VCs, KOLs, and pump-and-dump schemes.
10. Why is it Difficult to Constrain Market Makers' Wrongdoing?
The lack of regulation is indeed a core reason for market makers' misconduct, but the inability of market makers' counterparts such as project teams and exchanges to impose effective constraints is also a significant factor.
Due to the covert nature of market makers' behavior, the industry has not yet established a clear, unified standard and norm for them. Project teams themselves find it challenging to supervise and constrain market makers' operations. Once misconduct occurs, project teams mostly rely on post-event accountability, which is often ineffective.
According to industry insiders, apart from on-chain market making, currently only centralized exchanges can monitor market makers' behavior. Although market makers usually agree on a monitoring method with the project team, once they transfer the tokens to a third party, they must heavily rely on their reputation and moral standards.
Of course, project teams can also choose the monthly fee model offered by market makers. The monthly fee model typically involves short-term contracts (settled monthly), allowing project teams to flexibly adjust their partners or strategies based on market performance to avoid long-term commitments to unreliable market makers. Project teams can also negotiate and include KPIs (such as daily minimum trading volume and maximum spread limits) in the monthly fee contract to ensure the quality of the market maker's service. However, the issue with this model is that project teams transfer the risk that was originally spread to market makers back to themselves, needing to bear losses on their own.
In addition, while the project team may be able to agree on details such as liability after a breach in the contract, determining when a liquidity provider has "breached" is also challenging. The project team needs to present sufficient evidence to prove the liquidity provider's breach, but even with trading records, demonstrating a "causal relationship" (i.e., the liquidity provider's actions directly causing a price collapse) requires extensive data analysis, which is costly and time-consuming in legal proceedings. Liquidity providers can still argue that market fluctuations were due to external factors (such as macroeconomic events or investor panic).
The entire process involves different counterparties such as the trading platform, project team, and liquidity provider, making it difficult for liquidity providers to be fully informed about the project and the market.
Furthermore, due to the symbiotic nature of centralized exchanges and liquidity providers, trading platforms find it challenging to take drastic actions against those who benefit the most. Therefore, in the GPS and SHELL events, Binance ultimately chose to freeze the account of the liquidity provider involved in the GPS event-related price crash and publicly disclose detailed evidence of their wrongdoing, which has significant implications. Proactively disclosing evidence and taking action is to some extent a positive response to regulatory pressure and a reflection of industry self-regulation. This may stimulate other trading platforms to follow suit, creating a new trend in the industry to protect users.
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Foreword: Today, the People's Bank of China's website published the "Notice of the People's Bank of China, National Development and Reform Commission, Ministry of Industry and Information Technology, Ministry of Public Security, State Administration for Market Regulation, China Banking and Insurance Regulatory Commission, China Securities Regulatory Commission, State Administration of Foreign Exchange on Further Preventing and Dealing with Risks Related to Virtual Currency and Others (Yinfa [2026] No. 42)", the latest regulatory requirements from the eight departments including the central bank, which are basically consistent with the regulatory requirements of recent years. The main focus of the regulation is on speculative activities such as virtual currency trading, exchanges, ICOs, overseas platform services, and this time, regulatory oversight of RWA has been added, explicitly prohibiting RWA tokenization, stablecoins (especially those pegged to the RMB). The following is the full text:
To the people's governments of all provinces, autonomous regions, and municipalities directly under the Central Government, the Xinjiang Production and Construction Corps:
Recently, there have been speculative activities related to virtual currency and Real-World Assets (RWA) tokenization, disrupting the economic and financial order and jeopardizing the property security of the people. In order to further prevent and address the risks related to virtual currency and Real-World Assets tokenization, effectively safeguard national security and social stability, in accordance with the "Law of the People's Republic of China on the People's Bank of China," "Law of the People's Republic of China on Commercial Banks," "Securities Law of the People's Republic of China," "Law of the People's Republic of China on Securities Investment Funds," "Law of the People's Republic of China on Futures and Derivatives," "Cybersecurity Law of the People's Republic of China," "Regulations of the People's Republic of China on the Administration of Renminbi," "Regulations on Prevention and Disposal of Illegal Fundraising," "Regulations of the People's Republic of China on Foreign Exchange Administration," "Telecommunications Regulations of the People's Republic of China," and other provisions, after reaching consensus with the Cyberspace Administration of China, the Supreme People's Court, and the Supreme People's Procuratorate, and with the approval of the State Council, the relevant matters are notified as follows:
(I) Virtual currency does not possess the legal status equivalent to fiat currency. Virtual currencies such as Bitcoin, Ether, Tether, etc., have the main characteristics of being issued by non-monetary authorities, using encryption technology and distributed ledger or similar technology, existing in digital form, etc. They do not have legal tender status, should not and cannot be circulated and used as currency in the market.
The business activities related to virtual currency are classified as illegal financial activities. The exchange of fiat currency and virtual currency within the territory, exchange of virtual currencies, acting as a central counterparty in buying and selling virtual currencies, providing information intermediary and pricing services for virtual currency transactions, token issuance financing, and trading of virtual currency-related financial products, etc., fall under illegal financial activities, such as suspected illegal issuance of token vouchers, unauthorized public issuance of securities, illegal operation of securities and futures business, illegal fundraising, etc., are strictly prohibited across the board and resolutely banned in accordance with the law. Overseas entities and individuals are not allowed to provide virtual currency-related services to domestic entities in any form.
A stablecoin pegged to a fiat currency indirectly fulfills some functions of the fiat currency in circulation. Without the consent of relevant authorities in accordance with the law and regulations, any domestic or foreign entity or individual is not allowed to issue a RMB-pegged stablecoin overseas.
（II）Tokenization of Real-World Assets refers to the use of encryption technology and distributed ledger or similar technologies to transform ownership rights, income rights, etc., of assets into tokens (tokens) or other interests or bond certificates with token (token) characteristics, and carry out issuance and trading activities.
Engaging in the tokenization of real-world assets domestically, as well as providing related intermediary, information technology services, etc., which are suspected of illegal issuance of token vouchers, unauthorized public offering of securities, illegal operation of securities and futures business, illegal fundraising, and other illegal financial activities, shall be prohibited; except for relevant business activities carried out with the approval of the competent authorities in accordance with the law and regulations and relying on specific financial infrastructures. Overseas entities and individuals are not allowed to illegally provide services related to the tokenization of real-world assets to domestic entities in any form.
(III) Inter-agency Coordination. The People's Bank of China, together with the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Public Security, the State Administration for Market Regulation, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, the State Administration of Foreign Exchange, and other departments, will improve the work mechanism, strengthen coordination with the Cyberspace Administration of China, the Supreme People's Court, and the Supreme People's Procuratorate, coordinate efforts, and overall guide regions to carry out risk prevention and disposal of virtual currency-related illegal financial activities.
The China Securities Regulatory Commission, together with the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Public Security, the People's Bank of China, the State Administration for Market Regulation, the China Banking and Insurance Regulatory Commission, the State Administration of Foreign Exchange, and other departments, will improve the work mechanism, strengthen coordination with the Cyberspace Administration of China, the Supreme People's Court, and the Supreme People's Procuratorate, coordinate efforts, and overall guide regions to carry out risk prevention and disposal of illegal financial activities related to the tokenization of real-world assets.
(IV) Strengthening Local Implementation. The people's governments at the provincial level are overall responsible for the prevention and disposal of risks related to virtual currencies and the tokenization of real-world assets in their respective administrative regions. The specific leading department is the local financial regulatory department, with participation from branches and dispatched institutions of the State Council's financial regulatory department, telecommunications regulators, public security, market supervision, and other departments, in coordination with cyberspace departments, courts, and procuratorates, to improve the normalization of the work mechanism, effectively connect with the relevant work mechanisms of central departments, form a cooperative and coordinated working pattern between central and local governments, effectively prevent and properly handle risks related to virtual currencies and the tokenization of real-world assets, and maintain economic and financial order and social stability.
(5) Enhanced Risk Monitoring. The People's Bank of China, China Securities Regulatory Commission, National Development and Reform Commission, Ministry of Industry and Information Technology, Ministry of Public Security, State Administration of Foreign Exchange, Cyberspace Administration of China, and other departments continue to improve monitoring techniques and system support, enhance cross-departmental data analysis and sharing, establish sound information sharing and cross-validation mechanisms, promptly grasp the risk situation of activities related to virtual currency and real-world asset tokenization. Local governments at all levels give full play to the role of local monitoring and early warning mechanisms. Local financial regulatory authorities, together with branches and agencies of the State Council's financial regulatory authorities, as well as departments of cyberspace and public security, ensure effective connection between online monitoring, offline investigation, and fund tracking, efficiently and accurately identify activities related to virtual currency and real-world asset tokenization, promptly share risk information, improve early warning information dissemination, verification, and rapid response mechanisms.
(6) Strengthened Oversight of Financial Institutions, Intermediaries, and Technology Service Providers. Financial institutions (including non-bank payment institutions) are prohibited from providing account opening, fund transfer, and clearing services for virtual currency-related business activities, issuing and selling financial products related to virtual currency, including virtual currency and related financial products in the scope of collateral, conducting insurance business related to virtual currency, or including virtual currency in the scope of insurance liability. Financial institutions (including non-bank payment institutions) are prohibited from providing custody, clearing, and settlement services for unauthorized real-world asset tokenization-related business and related financial products. Relevant intermediary institutions and information technology service providers are prohibited from providing intermediary, technical, or other services for unauthorized real-world asset tokenization-related businesses and related financial products.
(7) Enhanced Management of Internet Information Content and Access. Internet enterprises are prohibited from providing online business venues, commercial displays, marketing, advertising, or paid traffic diversion services for virtual currency and real-world asset tokenization-related business activities. Upon discovering clues of illegal activities, they should promptly report to relevant departments and provide technical support and assistance for related investigations and inquiries. Based on the clues transferred by the financial regulatory authorities, the cyberspace administration, telecommunications authorities, and public security departments should promptly close and deal with websites, mobile applications (including mini-programs), and public accounts engaged in virtual currency and real-world asset tokenization-related business activities in accordance with the law.
(8) Strengthened Entity Registration and Advertisement Management. Market supervision departments strengthen entity registration and management, and enterprise and individual business registrations must not contain terms such as "virtual currency," "virtual asset," "cryptocurrency," "crypto asset," "stablecoin," "real-world asset tokenization," or "RWA" in their names or business scopes. Market supervision departments, together with financial regulatory authorities, legally enhance the supervision of advertisements related to virtual currency and real-world asset tokenization, promptly investigating and handling relevant illegal advertisements.
（IX） Continued Rectification of Virtual Currency Mining Activities. The National Development and Reform Commission, together with relevant departments, strictly controls virtual currency mining activities, continuously promotes the rectification of virtual currency mining activities. The people's governments of various provinces take overall responsibility for the rectification of "mining" within their respective administrative regions. In accordance with the requirements of the National Development and Reform Commission and other departments in the "Notice on the Rectification of Virtual Currency Mining Activities" (NDRC Energy-saving Building [2021] No. 1283) and the provisions of the "Guidance Catalog for Industrial Structure Adjustment (2024 Edition)," a comprehensive review, investigation, and closure of existing virtual currency mining projects are conducted, new mining projects are strictly prohibited, and mining machine production enterprises are strictly prohibited from providing mining machine sales and other services within the country.
（X） Severe Crackdown on Related Illegal Financial Activities. Upon discovering clues to illegal financial activities related to virtual currency and the tokenization of real-world assets, local financial regulatory authorities, branches of the State Council's financial regulatory authorities, and other relevant departments promptly investigate, determine, and properly handle the issues in accordance with the law, and seriously hold the relevant entities and individuals legally responsible. Those suspected of crimes are transferred to the judicial authorities for processing according to the law.
（XI） Severe Crackdown on Related Illegal and Criminal Activities. The Ministry of Public Security, the People's Bank of China, the State Administration for Market Regulation, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, as well as judicial and procuratorial organs, in accordance with their respective responsibilities, rigorously crack down on illegal and criminal activities related to virtual currency, the tokenization of real-world assets, such as fraud, money laundering, illegal business operations, pyramid schemes, illegal fundraising, and other illegal and criminal activities carried out under the guise of virtual currency, the tokenization of real-world assets, etc.
（XII） Strengthen Industry Self-discipline. Relevant industry associations should enhance membership management and policy advocacy, based on their own responsibilities, advocate and urge member units to resist illegal financial activities related to virtual currency and the tokenization of real-world assets. Member units that violate regulatory policies and industry self-discipline rules are to be disciplined in accordance with relevant self-regulatory management regulations. By leveraging various industry infrastructure, conduct risk monitoring related to virtual currency, the tokenization of real-world assets, and promptly transfer issue clues to relevant departments.
（XIII） Without the approval of relevant departments in accordance with the law and regulations, domestic entities and foreign entities controlled by them may not issue virtual currency overseas.
（XIV） Domestic entities engaging directly or indirectly in overseas external debt-based tokenization of real-world assets, or conducting asset securitization activities abroad based on domestic ownership rights, income rights, etc. (hereinafter referred to as domestic equity), should be strictly regulated in accordance with the principles of "same business, same risk, same rules." The National Development and Reform Commission, the China Securities Regulatory Commission, the State Administration of Foreign Exchange, and other relevant departments regulate it according to their respective responsibilities. For other forms of overseas real-world asset tokenization activities based on domestic equity by domestic entities, the China Securities Regulatory Commission, together with relevant departments, supervise according to their division of responsibilities. Without the consent and filing of relevant departments, no unit or individual may engage in the above-mentioned business.
(15) Overseas subsidiaries and branches of domestic financial institutions providing Real World Asset Tokenization-related services overseas shall do so legally and prudently. They shall have professional personnel and systems in place to effectively mitigate business risks, strictly implement customer onboarding, suitability management, anti-money laundering requirements, and incorporate them into the domestic financial institutions' compliance and risk management system. Intermediaries and information technology service providers offering Real World Asset Tokenization services abroad based on domestic equity or conducting Real World Asset Tokenization business in the form of overseas debt for domestic entities directly or indirectly venturing abroad must strictly comply with relevant laws and regulations. They should establish and improve relevant compliance and internal control systems in accordance with relevant normative requirements, strengthen business and risk control, and report the business developments to the relevant regulatory authorities for approval or filing.
(16) Strengthen organizational leadership and overall coordination. All departments and regions should attach great importance to the prevention of risks related to virtual currencies and Real World Asset Tokenization, strengthen organizational leadership, clarify work responsibilities, form a long-term effective working mechanism with centralized coordination, local implementation, and shared responsibilities, maintain high pressure, dynamically monitor risks, effectively prevent and mitigate risks in an orderly and efficient manner, legally protect the property security of the people, and make every effort to maintain economic and financial order and social stability.
(17) Widely carry out publicity and education. All departments, regions, and industry associations should make full use of various media and other communication channels to disseminate information through legal and policy interpretation, analysis of typical cases, and education on investment risks, etc. They should promote the illegality and harm of virtual currencies and Real World Asset Tokenization-related businesses and their manifestations, fully alert to potential risks and hidden dangers, and enhance public awareness and identification capabilities for risk prevention.
(18) Engaging in illegal financial activities related to virtual currencies and Real World Asset Tokenization in violation of this notice, as well as providing services for virtual currencies and Real World Asset Tokenization-related businesses, shall be punished in accordance with relevant regulations. If it constitutes a crime, criminal liability shall be pursued according to the law. For domestic entities and individuals who knowingly or should have known that overseas entities illegally provided virtual currency or Real World Asset Tokenization-related services to domestic entities and still assisted them, relevant responsibilities shall be pursued according to the law. If it constitutes a crime, criminal liability shall be pursued according to the law.
(19) If any unit or individual invests in virtual currencies, Real World Asset Tokens, and related financial products against public order and good customs, the relevant civil legal actions shall be invalid, and any resulting losses shall be borne by them. If there are suspicions of disrupting financial order and jeopardizing financial security, the relevant departments shall deal with them according to the law.
This notice shall enter into force upon the date of its issuance. The People's Bank of China and ten other departments' "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" (Yinfa [2021] No. 237) is hereby repealed.
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China's Central Bank and Eight Other Departments' Latest Regulatory Focus: Key Attention to RWA Tokenized Asset Risk
Foreword: Today, the People's Bank of China's website published the "Notice of the People's Bank of China, National Development and Reform Commission, Ministry of Industry and Information Technology, Ministry of Public Security, State Administration for Market Regulation, China Banking and Insurance Regulatory Commission, China Securities Regulatory Commission, State Administration of Foreign Exchange on Further Preventing and Dealing with Risks Related to Virtual Currency and Others (Yinfa [2026] No. 42)", the latest regulatory requirements from the eight departments including the central bank, which are basically consistent with the regulatory requirements of recent years. The main focus of the regulation is on speculative activities such as virtual currency trading, exchanges, ICOs, overseas platform services, and this time, regulatory oversight of RWA has been added, explicitly prohibiting RWA tokenization, stablecoins (especially those pegged to the RMB). The following is the full text:
To the people's governments of all provinces, autonomous regions, and municipalities directly under the Central Government, the Xinjiang Production and Construction Corps:
Recently, there have been speculative activities related to virtual currency and Real-World Assets (RWA) tokenization, disrupting the economic and financial order and jeopardizing the property security of the people. In order to further prevent and address the risks related to virtual currency and Real-World Assets tokenization, effectively safeguard national security and social stability, in accordance with the "Law of the People's Republic of China on the People's Bank of China," "Law of the People's Republic of China on Commercial Banks," "Securities Law of the People's Republic of China," "Law of the People's Republic of China on Securities Investment Funds," "Law of the People's Republic of China on Futures and Derivatives," "Cybersecurity Law of the People's Republic of China," "Regulations of the People's Republic of China on the Administration of Renminbi," "Regulations on Prevention and Disposal of Illegal Fundraising," "Regulations of the People's Republic of China on Foreign Exchange Administration," "Telecommunications Regulations of the People's Republic of China," and other provisions, after reaching consensus with the Cyberspace Administration of China, the Supreme People's Court, and the Supreme People's Procuratorate, and with the approval of the State Council, the relevant matters are notified as follows:
(I) Virtual currency does not possess the legal status equivalent to fiat currency. Virtual currencies such as Bitcoin, Ether, Tether, etc., have the main characteristics of being issued by non-monetary authorities, using encryption technology and distributed ledger or similar technology, existing in digital form, etc. They do not have legal tender status, should not and cannot be circulated and used as currency in the market.
The business activities related to virtual currency are classified as illegal financial activities. The exchange of fiat currency and virtual currency within the territory, exchange of virtual currencies, acting as a central counterparty in buying and selling virtual currencies, providing information intermediary and pricing services for virtual currency transactions, token issuance financing, and trading of virtual currency-related financial products, etc., fall under illegal financial activities, such as suspected illegal issuance of token vouchers, unauthorized public issuance of securities, illegal operation of securities and futures business, illegal fundraising, etc., are strictly prohibited across the board and resolutely banned in accordance with the law. Overseas entities and individuals are not allowed to provide virtual currency-related services to domestic entities in any form.
A stablecoin pegged to a fiat currency indirectly fulfills some functions of the fiat currency in circulation. Without the consent of relevant authorities in accordance with the law and regulations, any domestic or foreign entity or individual is not allowed to issue a RMB-pegged stablecoin overseas.
（II）Tokenization of Real-World Assets refers to the use of encryption technology and distributed ledger or similar technologies to transform ownership rights, income rights, etc., of assets into tokens (tokens) or other interests or bond certificates with token (token) characteristics, and carry out issuance and trading activities.
Engaging in the tokenization of real-world assets domestically, as well as providing related intermediary, information technology services, etc., which are suspected of illegal issuance of token vouchers, unauthorized public offering of securities, illegal operation of securities and futures business, illegal fundraising, and other illegal financial activities, shall be prohibited; except for relevant business activities carried out with the approval of the competent authorities in accordance with the law and regulations and relying on specific financial infrastructures. Overseas entities and individuals are not allowed to illegally provide services related to the tokenization of real-world assets to domestic entities in any form.
(III) Inter-agency Coordination. The People's Bank of China, together with the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Public Security, the State Administration for Market Regulation, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, the State Administration of Foreign Exchange, and other departments, will improve the work mechanism, strengthen coordination with the Cyberspace Administration of China, the Supreme People's Court, and the Supreme People's Procuratorate, coordinate efforts, and overall guide regions to carry out risk prevention and disposal of virtual currency-related illegal financial activities.
The China Securities Regulatory Commission, together with the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Public Security, the People's Bank of China, the State Administration for Market Regulation, the China Banking and Insurance Regulatory Commission, the State Administration of Foreign Exchange, and other departments, will improve the work mechanism, strengthen coordination with the Cyberspace Administration of China, the Supreme People's Court, and the Supreme People's Procuratorate, coordinate efforts, and overall guide regions to carry out risk prevention and disposal of illegal financial activities related to the tokenization of real-world assets.
(IV) Strengthening Local Implementation. The people's governments at the provincial level are overall responsible for the prevention and disposal of risks related to virtual currencies and the tokenization of real-world assets in their respective administrative regions. The specific leading department is the local financial regulatory department, with participation from branches and dispatched institutions of the State Council's financial regulatory department, telecommunications regulators, public security, market supervision, and other departments, in coordination with cyberspace departments, courts, and procuratorates, to improve the normalization of the work mechanism, effectively connect with the relevant work mechanisms of central departments, form a cooperative and coordinated working pattern between central and local governments, effectively prevent and properly handle risks related to virtual currencies and the tokenization of real-world assets, and maintain economic and financial order and social stability.
(5) Enhanced Risk Monitoring. The People's Bank of China, China Securities Regulatory Commission, National Development and Reform Commission, Ministry of Industry and Information Technology, Ministry of Public Security, State Administration of Foreign Exchange, Cyberspace Administration of China, and other departments continue to improve monitoring techniques and system support, enhance cross-departmental data analysis and sharing, establish sound information sharing and cross-validation mechanisms, promptly grasp the risk situation of activities related to virtual currency and real-world asset tokenization. Local governments at all levels give full play to the role of local monitoring and early warning mechanisms. Local financial regulatory authorities, together with branches and agencies of the State Council's financial regulatory authorities, as well as departments of cyberspace and public security, ensure effective connection between online monitoring, offline investigation, and fund tracking, efficiently and accurately identify activities related to virtual currency and real-world asset tokenization, promptly share risk information, improve early warning information dissemination, verification, and rapid response mechanisms.
(6) Strengthened Oversight of Financial Institutions, Intermediaries, and Technology Service Providers. Financial institutions (including non-bank payment institutions) are prohibited from providing account opening, fund transfer, and clearing services for virtual currency-related business activities, issuing and selling financial products related to virtual currency, including virtual currency and related financial products in the scope of collateral, conducting insurance business related to virtual currency, or including virtual currency in the scope of insurance liability. Financial institutions (including non-bank payment institutions) are prohibited from providing custody, clearing, and settlement services for unauthorized real-world asset tokenization-related business and related financial products. Relevant intermediary institutions and information technology service providers are prohibited from providing intermediary, technical, or other services for unauthorized real-world asset tokenization-related businesses and related financial products.
(7) Enhanced Management of Internet Information Content and Access. Internet enterprises are prohibited from providing online business venues, commercial displays, marketing, advertising, or paid traffic diversion services for virtual currency and real-world asset tokenization-related business activities. Upon discovering clues of illegal activities, they should promptly report to relevant departments and provide technical support and assistance for related investigations and inquiries. Based on the clues transferred by the financial regulatory authorities, the cyberspace administration, telecommunications authorities, and public security departments should promptly close and deal with websites, mobile applications (including mini-programs), and public accounts engaged in virtual currency and real-world asset tokenization-related business activities in accordance with the law.
(8) Strengthened Entity Registration and Advertisement Management. Market supervision departments strengthen entity registration and management, and enterprise and individual business registrations must not contain terms such as "virtual currency," "virtual asset," "cryptocurrency," "crypto asset," "stablecoin," "real-world asset tokenization," or "RWA" in their names or business scopes. Market supervision departments, together with financial regulatory authorities, legally enhance the supervision of advertisements related to virtual currency and real-world asset tokenization, promptly investigating and handling relevant illegal advertisements.
（IX） Continued Rectification of Virtual Currency Mining Activities. The National Development and Reform Commission, together with relevant departments, strictly controls virtual currency mining activities, continuously promotes the rectification of virtual currency mining activities. The people's governments of various provinces take overall responsibility for the rectification of "mining" within their respective administrative regions. In accordance with the requirements of the National Development and Reform Commission and other departments in the "Notice on the Rectification of Virtual Currency Mining Activities" (NDRC Energy-saving Building [2021] No. 1283) and the provisions of the "Guidance Catalog for Industrial Structure Adjustment (2024 Edition)," a comprehensive review, investigation, and closure of existing virtual currency mining projects are conducted, new mining projects are strictly prohibited, and mining machine production enterprises are strictly prohibited from providing mining machine sales and other services within the country.
（X） Severe Crackdown on Related Illegal Financial Activities. Upon discovering clues to illegal financial activities related to virtual currency and the tokenization of real-world assets, local financial regulatory authorities, branches of the State Council's financial regulatory authorities, and other relevant departments promptly investigate, determine, and properly handle the issues in accordance with the law, and seriously hold the relevant entities and individuals legally responsible. Those suspected of crimes are transferred to the judicial authorities for processing according to the law.
（XI） Severe Crackdown on Related Illegal and Criminal Activities. The Ministry of Public Security, the People's Bank of China, the State Administration for Market Regulation, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, as well as judicial and procuratorial organs, in accordance with their respective responsibilities, rigorously crack down on illegal and criminal activities related to virtual currency, the tokenization of real-world assets, such as fraud, money laundering, illegal business operations, pyramid schemes, illegal fundraising, and other illegal and criminal activities carried out under the guise of virtual currency, the tokenization of real-world assets, etc.
（XII） Strengthen Industry Self-discipline. Relevant industry associations should enhance membership management and policy advocacy, based on their own responsibilities, advocate and urge member units to resist illegal financial activities related to virtual currency and the tokenization of real-world assets. Member units that violate regulatory policies and industry self-discipline rules are to be disciplined in accordance with relevant self-regulatory management regulations. By leveraging various industry infrastructure, conduct risk monitoring related to virtual currency, the tokenization of real-world assets, and promptly transfer issue clues to relevant departments.
（XIII） Without the approval of relevant departments in accordance with the law and regulations, domestic entities and foreign entities controlled by them may not issue virtual currency overseas.
（XIV） Domestic entities engaging directly or indirectly in overseas external debt-based tokenization of real-world assets, or conducting asset securitization activities abroad based on domestic ownership rights, income rights, etc. (hereinafter referred to as domestic equity), should be strictly regulated in accordance with the principles of "same business, same risk, same rules." The National Development and Reform Commission, the China Securities Regulatory Commission, the State Administration of Foreign Exchange, and other relevant departments regulate it according to their respective responsibilities. For other forms of overseas real-world asset tokenization activities based on domestic equity by domestic entities, the China Securities Regulatory Commission, together with relevant departments, supervise according to their division of responsibilities. Without the consent and filing of relevant departments, no unit or individual may engage in the above-mentioned business.
(15) Overseas subsidiaries and branches of domestic financial institutions providing Real World Asset Tokenization-related services overseas shall do so legally and prudently. They shall have professional personnel and systems in place to effectively mitigate business risks, strictly implement customer onboarding, suitability management, anti-money laundering requirements, and incorporate them into the domestic financial institutions' compliance and risk management system. Intermediaries and information technology service providers offering Real World Asset Tokenization services abroad based on domestic equity or conducting Real World Asset Tokenization business in the form of overseas debt for domestic entities directly or indirectly venturing abroad must strictly comply with relevant laws and regulations. They should establish and improve relevant compliance and internal control systems in accordance with relevant normative requirements, strengthen business and risk control, and report the business developments to the relevant regulatory authorities for approval or filing.
(16) Strengthen organizational leadership and overall coordination. All departments and regions should attach great importance to the prevention of risks related to virtual currencies and Real World Asset Tokenization, strengthen organizational leadership, clarify work responsibilities, form a long-term effective working mechanism with centralized coordination, local implementation, and shared responsibilities, maintain high pressure, dynamically monitor risks, effectively prevent and mitigate risks in an orderly and efficient manner, legally protect the property security of the people, and make every effort to maintain economic and financial order and social stability.
(17) Widely carry out publicity and education. All departments, regions, and industry associations should make full use of various media and other communication channels to disseminate information through legal and policy interpretation, analysis of typical cases, and education on investment risks, etc. They should promote the illegality and harm of virtual currencies and Real World Asset Tokenization-related businesses and their manifestations, fully alert to potential risks and hidden dangers, and enhance public awareness and identification capabilities for risk prevention.
(18) Engaging in illegal financial activities related to virtual currencies and Real World Asset Tokenization in violation of this notice, as well as providing services for virtual currencies and Real World Asset Tokenization-related businesses, shall be punished in accordance with relevant regulations. If it constitutes a crime, criminal liability shall be pursued according to the law. For domestic entities and individuals who knowingly or should have known that overseas entities illegally provided virtual currency or Real World Asset Tokenization-related services to domestic entities and still assisted them, relevant responsibilities shall be pursued according to the law. If it constitutes a crime, criminal liability shall be pursued according to the law.
(19) If any unit or individual invests in virtual currencies, Real World Asset Tokens, and related financial products against public order and good customs, the relevant civil legal actions shall be invalid, and any resulting losses shall be borne by them. If there are suspicions of disrupting financial order and jeopardizing financial security, the relevant departments shall deal with them according to the law.
This notice shall enter into force upon the date of its issuance. The People's Bank of China and ten other departments' "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" (Yinfa [2021] No. 237) is hereby repealed.
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