What legal issues should be considered when providing technical services to cryptocurrency exchanges?
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What legal issues should be considered when providing technical services to cryptocurrency exchanges?
What are the key considerations for remote work, in-house teams, and outsourcing teams?
Navigating Web3 tides with focused insightsAuthors: Huang Peng, Rao Weitong, ManQin Law Firm
It is well known that cryptocurrency exchange operations are not permitted in mainland China. As a result, most exchanges founded by Chinese entrepreneurs have chosen to go overseas—relocating to places like Singapore, Japan, South Korea, and Southeast Asia—to avoid domestic regulatory scrutiny. However, given the abundance of skilled Chinese programmers with high technical expertise, a common industry phenomenon has emerged: overseas exchanges outsource or hire technical teams based within mainland China.
What legal issues should these technical personnel be aware of and how should they respond? First, let’s examine several typical service scenarios, as outlined by ManQin lawyers.
Technical Service Scenarios
Scenario One
Xiao A is a programmer based in mainland China employed by a technology company. While this company appears to be an ordinary software development firm on the surface, it is actually a shell entity established domestically for a foreign cryptocurrency exchange. All employees—including Xiao A—are engaged in developing and maintaining the exchange platform. Such companies typically sign formal employment contracts with their staff and provide social insurance and housing fund contributions (the "five insurances and one fund").
Scenario Two
Xiao B is also employed by an overseas cryptocurrency exchange. The key difference from Xiao A is that this exchange does not have a physical entity registered in China. Instead, it directly signs a service agreement with Xiao B, stipulating that Xiao B provides technical services on a freelance basis. In practice, however, Xiao B functions as a full-time employee working remotely to support the exchange's technical operations.
Scenario Three
Company C is an independent tech firm specializing in Web3 services. It has entered into a partnership with an overseas cryptocurrency exchange, under which Company C assumes full responsibility for the platform’s technical development and maintenance.
Given these scenarios, what legal considerations should Xiao A, Xiao B, and Company C each bear in mind?
Core Compliance Risk Assessment
Regardless of the scenario, one central legal concern lies in the risks associated with providing services to a cryptocurrency exchange—risks largely determined by the compliance level of the exchange’s operations. As a cooperating party, due diligence must be conducted to ensure that, if required, you can demonstrate to authorities that reasonable care was exercised and that there was no actual or constructive knowledge of any criminal activity carried out by the exchange. The following three criteria regarding exchange compliance should form part of any pre-engagement due diligence process:
Does the Exchange Serve Mainland Chinese Residents?
The Notice on Further Preventing and Responding to Risks of Cryptocurrency Trading and Speculation, issued on September 15, 2021, clearly states that foreign cryptocurrency exchanges offering services via the internet to residents within mainland China are engaging in illegal financial activities. Domestic personnel working for such exchanges, as well as any individuals or organizations who knowingly or ought to know they are providing marketing, payment settlement, or technical support to virtual asset-related businesses, may be held legally accountable.
If the exchange does not serve users in mainland China, then there are no Chinese citizen victims. This significantly reduces the potential harm caused by fraud, pyramid schemes, illegal fundraising, market manipulation, and other crimes targeting Chinese citizens’ personal and property safety.
Does the Exchange Offer RMB-to-Cryptocurrency Conversion Services?
Cryptocurrency exchanges can easily become conduits for money laundering and illegal foreign exchange trading, thereby disrupting financial order and threatening financial security. This is precisely why individuals involved in over-the-counter (OTC) trading ("U traders") currently face high criminal liability risks.
In December 2023, the Supreme People’s Procuratorate and the State Administration of Foreign Exchange jointly released a set of typical cases involving foreign exchange-related crimes. In the case of Zhao and others for illegal business operations, the court ruled that using cryptocurrencies as an intermediary to provide cross-border currency conversion and payment services for profit—by exploiting the unique attributes of digital assets to circumvent state foreign exchange controls—constitutes disguised foreign exchange trading. Specifically, the “foreign currency → cryptocurrency → RMB” conversion chain effectively achieves value transfer between foreign currencies and RMB, and thus falls under the scope of illegal business operations punishable under Chinese law.
Therefore, severing the direct link between cryptocurrencies and RMB conversion greatly reduces exposure to criminal liability.
Is the Exchange Legally Operated in Its Jurisdiction?
The first two criteria help determine whether the exchange complies with Chinese regulatory standards. The next critical factor is its legal status in its jurisdiction of operation. Under Chinese criminal jurisdiction rules, Chinese criminal law applies to overseas cryptocurrency exchanges only when all three of the following conditions are met simultaneously:
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The crime targets the People's Republic of China or its citizens;
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The minimum penalty under Chinese law is imprisonment of three years or more;
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The act is also considered punishable under the laws of the country where it occurred.
Take Japan as an example. On May 25, 2016, Japan’s House of Councillors passed amendments to the Payment Services Act, officially recognizing virtual currencies as legitimate means of payment and bringing them under legal oversight. The Japanese Financial Services Agency (FSA) regulates crypto exchanges through a registration system. An exchange registered with the FSA at least possesses formal legality under local law.
Other Legal Risk Assessments
Contract Performance Risks
For Company C, if accounts receivable exist and the counterparty fails to make payments as agreed, questions arise about available remedies. Given China’s cautious judicial stance toward cryptocurrency-related matters, filing a lawsuit in domestic courts may lead to significant disputes over contract validity. If a court recognizes the contract as valid, it would implicitly acknowledge the legality of the exchange’s operations—an outcome many courts may be reluctant to endorse. To mitigate default risk, a prudent approach is to collect all or most of the contract payment upfront. Additionally, dispute resolution clauses should designate international arbitration institutions as the governing forum. Furthermore, the contract can include recitals or representations requiring the cryptocurrency exchange to affirm its own compliance and lawful operation, thereby demonstrating that the service provider has fulfilled its duty of review.
Risks in Labor Disputes
For individuals like Xiao B who work remotely for overseas exchanges from within China, labor rights protection becomes a major concern. Chinese labor laws protect only employment relationships formed with domestic entities. Working directly for a foreign company or signing contracts with overseas entities makes it difficult to enjoy protections under Chinese labor law. For instance, in cases of layoffs, whether an employee receives severance pay depends entirely on the employer’s goodwill. Moreover, if salaries are paid in cryptocurrency, claims related to withheld wages, reduced bonuses, or unpaid commissions are unlikely to receive legal support within mainland China.
In addition, because Xiao A and Xiao B may be viewed as internal employees of the exchange, they bear greater responsibility than external service providers to ensure the exchange’s operational compliance. Due to their close involvement and deeper insight into day-to-day operations, they are more likely to be held liable if the exchange engages in non-compliant or unlawful activities.
Administrative Regulatory Risks
For Company C, despite conducting due diligence, it can only perform formal compliance checks. There remains a risk that during the course of cooperation, the exchange may engage in or later expose previously hidden illegal activities, prompting investigations by Chinese regulators. Beyond cooperating with such inquiries, the company’s normal business operations could also be disrupted. Therefore, proactive risk mitigation plans should be put in place in advance.
Recommendations from ManQin Lawyers
In light of the potential legal issues outlined above, ManQin Law Firm offers the following recommendations for companies and individuals planning to provide technical services to overseas cryptocurrency exchanges. Consider conducting comprehensive assessments across multiple dimensions:
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Analyze the exchange’s registration process, KYC procedures, deposit/withdrawal mechanisms, and platform terms to determine whether it serves Chinese residents or offers RMB-cryptocurrency conversion services.
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Review whether the exchange meets local regulatory requirements in its jurisdiction of operation.
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Require the exchange to provide documentation including corporate credentials, compliance certifications, and formal commitments as part of the contracting process.
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Design robust transaction structures to minimize breach risks; carefully draft dispute resolution clauses to enhance enforceability and access to remedies.
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Maintain clear records demonstrating that due diligence and prudent review obligations have been fulfilled, to serve as evidence in future engagements with authorities.
Individuals intending to provide technical services to overseas cryptocurrency exchanges should follow similar guidelines while paying close attention to differences in legal risks based on job roles and employment arrangements.
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