★Crypto Assets In A Transboundary Compliance Approach - Series 3:

Cryptocurrency is a hot topic in recent years and has met with mixed reception since its inception. On 28 December 2018^[1], Venezuela requested consultations with the United States under WTO, concerning measures imposed by the United States relating to matters like goods, gold, public debt, consumption of services, among which cryptocurrency^[2] is quite eye-catching(hereinafter referred to as “DS574 case”, named after its WTO case number).

This is the first and, so far, only case filed against cryptocurrency within the WTO framework on the grounds of violating international trade law. Historically, due to the decentralized, anonymous, peer-to-peer nature of cryptocurrencies, coupled with the lack of effective judicial bodies and enforceable penalties, an international consensus on cryptocurrencies has been elusive. However, as a dispute settlement institution with credibility in the field of international trade, the WTO has enforceable judgments and countermeasures, and subjecting cryptocurrencies to WTO's disciplines will provide new ideas for the resolution of cryptocurrency-related disputes, and guidelines for the formation of global rules for cryptocurrency. Besides, China is a member of the WTO and has been bound by member's commitments, as well as implementing comprehensive prohibition measures on cryptocurrencies. Therefore, in the future, China is likely to face complaints or lawsuits for "unjustifiable discrimination" similar to the DS574 case. The purpose of this paper is to use the DS574 case as a reference point, and analyze the underlying legal issues indicated from similar types of cases using WTO stipulations and Chinese regulations. This analysis aims to benefit China and other countries that have adopted similar measures.

1.1 Cryptocurrency is Not the Goods Covered by GATT

Despite previous expert proposals that “cryptocurrencies are barter goods that will be subject to disciplines of the GATT”^[3],this claim is questionable. This is because the GATT (General Agreement on Tariffs and Trade, hereinafter “GATT”) mainly regulates tangible products with physical attributes and it also contains specific provisions relating to “balance-of-payments”^[4]. Actually, in the document submitted by Venezuela, when mentioning “discriminatory coercive trade-restrictive measures with respect to transactions in Venezuelan digital currency^[5]”, Venezuela quoted the clauses from GATS (General Agreement on Trade in Services, hereinafter “GATS”), specifically the Most-favored Nation Principle in Article II:1 and National Treatment in Article XVII:1.

The issue of classification is a threshold question encountered when applying WTO rules to cryptocurrencies. The GATT regulates aspects of trade in goods without defining “goods”. Generally, goods are first characterized by their tangibility, as opposed to services, which are intangible. Then, goods are then classified into a particular tariff category with a specific tariff rate. Further, the GATT provides protections to goods such as countervailing measures, anti-dumping duties and safeguard duties.

However, given the decentralized and anonymous nature of cryptocurrencies, they cannot be classified as tangible goods. Additionally, as a novelty based on blockchain technology, they cannot be included in certain tariff classifications of goods practiced by major WTO members, nor can they be subjected to tariffs and trade remedies or protection measures in practice, except for quantitative restrictions. Therefore, from the author's view, cryptocurrencies are not "goods" covered by WTO regulations and are not subject to the GATT.

1.2 Cryptocurrency is captured by Financial Services and Its Sub-sector

Unlike GATT, GATS regulates trade in services and provides a clear definition of “services” and a more liberal regime. According to GATS Art. 1.3(b) “services” includes any service in any sector except services supplied in the exercise of governmental authority;(c)“a service supplied in the exercise of governmental authority” means any service which is supplied neither on a commercial basis, nor in competition with one or more service suppliers. This definition is generic enough to cover cryptocurrencies and Art. 1.3(c) may indicate that cryptocurrency services promoted by national governments are not regulated by GATS, which would be helpful for China-like states. Furthermore , under GATS Art. 20, all services must be included in "Schedules of Specific Commitments." If cryptocurrency is defined as a service, it will be classified into one of the 12 service sectors based on the "Services Sectoral Classification List" (also known as "W/120"), which contains 160 sub-sectors corresponding to the "UN Provisional Central Product Classification".

Based on GATS’ definition of financial services and the characteristics of cryptocurrency, we believe that cryptocurrency can be classified as “financial services” in W/120. In GATS, financial service “is any service of a financial nature offered by a financial service supplier of a Member. Financial services include all insurance and insurance-related services, and all banking and other financial services (excluding insurance)^[6]” . Meanwhile, back to the original design purpose of cryptocurrency and the reason for its prosperity, its core function is to serve as a new payment instrument that is different from the services provided by traditional financial institutions. Therefore, cryptocurrency is simply a financial service provided by the service provider of non-traditional financial institutions.

In the Panel Report of China-Electronic Payment Services case^[7], the Panel uses the term “essential” to refer to “all component services which are needed to complete a payment transaction or money transmission”. In other words, payment and money transmission services are services that can be fully supplied by the combination of several individual services and should not be split into different services. This article argues that the criteria can be applied to cryptocurrency blockchain services including service suppliers, exchanges, issuers, and other services. Thus, cryptocurrency belongs to “all payment and money transmission services” of “Schedules of Specific Commitments”. If we summarize all of the above, we can reach a conclusion that, due to its payment function, cryptocurrency should be classified as the subsector (viii) : “All Payment and Currency Transfer Services” from “Banking and other financial services (excl. insurance)” of GATS Annex on Financial Services.

2.1 Relevant Laws and Regulations of China and WTO

Following our analysis of the categorization of cryptocurrencies in last part, the corresponding sector in “China - Schedule of Specific Commitments” is “B. Banking and Other Financial Services (excluding insurance and securities) - (d) all payment and money transmission services, including credit, charge and debit cards, travellers cheques and bankers drafts(including import and export settlement)^[8]”(hereinafter “B(d) commitments”).

China's policy on cryptocurrencies, with the September 2019 document titled “Circular on Further Preventing and Disposing of Speculative Risks in Virtual Currency Trading^[9]” as the boundary, shifted to a total ban. In this section, we intend to focus our analysis on the legal issues that may arise from banning the payment function, the core function of cryptocurrencies, under WTO rules. It is worth mentioning that, as a relatively flexible regime, when GATS is applied, exemptions to the most-favoured nation treatment are permitted, and the national treatment principle only applies when a Member has made commitments in that specific sector^[10]. Even where Members take up commitments in services sectors, they are free to define their level of commitment (ranging from “fully liberalised” to “no commitment”)^[11], and their extent of obligation would be affected accordingly.

2.2 Most-Favored Nation, National Treatment and Market-Access Commitment

Most-favored-nation treatment in GATS Art. 2(1) requires WTO Members “shall accord immediately and unconditionally to services and service suppliers of any other Member treatment no less favourable than that it accords to like services and service suppliers of any other country.” Given China's blanket and non-discriminatory prohibition on cryptocurrencies, there is no breach of this obligation.

GATS Art. 17 define national treatment as “in the sectors inscribed in its Schedule, and subject to any conditions and qualifications set out therein, each Member shall accord to services and service suppliers of any other Member, in respect of all measures affecting the supply of services, treatment no less favourable than that it accords to its own like services and service suppliers.” In China, wherever the services and service suppliers, home and abroad, apply the same rules. The only possible exception is Central Bank Digital Currency (CBDC), whereas, just like stated above, GATS Art. 1.3(c) may indicate cryptocurrency services promoted by national governments are not regulated by GATS. Hence, there is no breach of this obligation either.

GATS Art. 16(1) prescribes “each Member shall accord services and service suppliers of any other Member treatment no less favourable than that provided for under the terms, limitations and conditions agreed and specified in its Schedule.” In the according B(d) commitments, China has committed to two exceptions in cross-border supply: “Provision and transfer of financial information, and financial data processing and related software by suppliers of other financial services”, and “Advisory, intermediation and other auxiliary financial services on all activities listed in subparagraphs (a) through (k), including credit reference and analysis, investment and portfolio research and advice, advice on acquisitions and on corporate restructuring and strategy”. Actually, cryptocurrency is a type of payment service that aligned with its cross-border attributes. The Chinese government prohibits the use of cryptocurrencies as legal payment tools, which may constitute a breach of promise.

2.3 Exceptions: General Exceptions and Prudential Carve-out

GATS Art.14 includes general exceptions, allowing the Members to deviate from the substantial treaty obligations for the sake of “public morals or public order”protection. In US - Gambling case, the Panel interpreted “public morals” as “standards of right and wrong conduct maintained by or on behalf of a community or nation” and “public order” refers to “the preservation of the fundamental interests of a society, as reflected in public policy and law……related to standards of law, security and morality”. From this point, the reasons China could cite for prohibiting cryptocurrencies are as follows: money laundering, fraud, untraceable purchases due to the anonymous nature, ensuring the status of RMB, financial stability and order maintenance, investors’ rights and interests protection, and lack of reasonable alternative measures.

The prudential carve-out is a provision in the GATS Annex on Financial Services, mainly about “the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system…… they shall not be used as a means of avoiding the Member's commitments or obligations under the Agreement.” Taking the Argentina – Financial Services dispute as a reference, China, as a possible respondent, may argue from measures, reasons, and non-avoidance of obligations. Based on the specific classification of cryptocurrency, the regulatory measures imposed by the Chinese government are measures affecting financial service providers, consistent with the prudential carve-out provision. For the justifiable grounds, China could refer to the financial-related reasons in the general exception part. Finally, the Annex is silent on the detailed non-avoidance of obligations, so we could elaborate on fiduciary duty to integrate the depth, breadth, and indiscrimination of the restrictions.     

Cryptocurrency is sui generis, especially when it met with WTO and China. In a way, the DS574 case opened a new gate in this field. Even if the dispute is still ongoing and without a final decision, as a start, it can be far-reaching. This article has primarily focussed on issues relating to the classification of cryptocurrency, the commitments, obligations and possible violations that may result when applying Chinese regulations to WTO rules.

Overall, cryptocurrency belongs to the financial service under GATS, and any measure that imposes a ban on crypto-trade would lead to a violation of the WTO obligation. Nevertheless, the exception provisions in the GATS could provide a favorable defense for China-like countries.