The two most frequently discussed topics in the EB-5 industry nowadays are (i) increase the visa numbers; and (ii) find a solution to transfer money out of China. It is a well-known fact that under China’s currency exchange controls, each Chinese national is permitted to an exchange of $50,000 per year. In the past years, Chinese investors have been mainly using the following methods to transfer Chinese currency outside China:
1. Assistance of friends and family – The investor recruits a circle of friends and family members (usually 11-12 individuals to satisfy the investment amount) that each exchange the permissible quota of $50,000 and transfer the collected funds to the investor’s overseas account, also known as ‘ant migration’. However, restrictions are placed by the Chinese regulators this year thus made the process more excruciating for the Chinese investors.
2. Parallel transfer – The parallel transfer involves a single intermediary who accepts the RMB funds in China and transfers U.S. Dollars of equivalent value from an account overseas. However, under the current adjudication environment, this method becomes a regular target of RFEs issued by USCIS.
3. Recognizable currency exchanges through qualified institutions – certain qualified financial institutions were allowed to act as currency exchangers, but the channel is ceased to exist followed by the government crackdown.
Complication in transferring funds out of the country is not a problem that singularly affects the Chinese investors; other countries, including Vietnam and India, similarly have controls on personal capital transactions. While Chinese regulators are increasing their scrutiny, it is still acceptable for Chinese companies and households to invest overseas. This led to the rise of multilayered investment vehicles such as cryptocurrency. The use of cryptocurrency allows entrepreneurs and skilled investors to seek alternate, yet legal means of transferring funds from out of the country to the United States.
What is Cryptocurrency?
Cryptocurrency is a digital asset that can be used as a form of electronic payment. Its source of value stems from its derivation in its unique and specialized digital structure and its sales volume. The currencies are without centralized control and maintained using a technology known as blockchain. Blockchain is a digital ledger in which transactions made in Bitcoin or other cryptocurrencies are recorded chronologically and publicly.
This distributed ledger is preserved by a group of mutually distrustful parties called miners, which avoids one of the perceived weakness of the current financial system which unilaterally relies on centralized control. The miners are members of the public that use their computers to validate and timestamp their transactions and then add them to the ledger and acquire them in their own digital wallets. The security of the system is based on the idea that each miner is trying to honestly maintain it, due to the financial incentives in doing so and computational impracticality in reversing the transactions.
Due to this feature, cryptocurrency is not subject to the same regulations and verification procedures by financial institutions, thus reducing the transaction costs associated with using their mediating services of a trusted third party. However, despite the financial incentive, there are serious security risks involved in investments in these alternative cryptocurrencies, among them is their proclivity to be used in black market transactions and the need to be anonymous. As a result, it is difficult for regulators to tract the transactions, but advantageous for users to engage in this peer to peer system of financing.
The Cryptocurrency Solution
Given that the previous avenues of the transfer have come under fire, and the bleak outlook of the currency exchange policy in China, Chinese investors are scrambling to find alternative currency exportation options. One alternative has been garnering increasing attention is a borderless crypto-currency, Bitcoin. Investors have used personal bank accounts (at the local RMB to Bitcoin exchange rate), and deposited their bitcoins into a Bitcoin digital wallet. From there, the Bitcoin can be sold on the open international market for US dollars. The proceeds from that sale are then free to be sent to a bank account of choice in the US, as long as the investor is able to create a US bank account. Since many banks have restrictions as to whom can create a U.S. bank account, an investor can create a foreign account that will accept USD and use it to transfer USD from their Bitcoin wallet. From here, the investor can transfer their money into an EB-5 project for investment purposes.
Bitcoin is digital money used for the secure and instant transfer of value anywhere in the world. It is not controlled or issued by any bank or government – instead it is purchased and sold on an open network which is managed by its users. The value of bitcoin is not tied to the value of any other currency. Similar to stocks or property, bitcoin values are determined by buying and selling in the open market. A bitcoin’s price changes in real time based on the number of people who want to buy or sell it at a given moment. Therefore, there is volatility involved in trading bitcoin like trading on stock market. Of the many advantages to using cryptocurrency, the speed in which currency can be transferred from a country with strict restrictions is at the top of the list.
So, is Bitcoin the perfect solution or a possible answer?
Indeed, this becomes a question of whether income derived from Bitcoin-related activities can be used to satisfy the EB-5 requirement. The head of the Immigrant Investor Visa Program officer, Lori Mackenzie said ‘Citizenship and Immigration Services (CIS) is considering issues involving virtual currency such as ‘bitcoin’ to transfer investment funds to the new commercial enterprise’. She went on to say ‘USCIS cannot provide a blanket assurances regarding any particular form of transfer, but we will continue to evaluate evidence provided by petitioners to determine whether the relevant statutory and regulatory requirements have been met, including evidence that the funds invested belong to the petitioner, and were acquired, directly and indirectly, by lawful means’.
Though consensus appears to be that the government shouldn’t take issue with it, the interested Chinese EB-5 investors need to understand some issues beforehand in exploring the Bitcoin option.
Since stricter cryptocurrecy control was imposed by the Chinese government, the three major digital exchanges, OKCoin, BTC China, and Huobi, successively announced in September 2017 that they would suspend Bitcoin trading indefinitely by the end of October 2017. This is not to say that Bitcoin transaction is illegal but high volume Bitcoin trading activities may be subject to government monitoring and come with increased credit risk.
To sell Bitcoin outside of China, a Chinese resident will need to register on a digital exchange overseas. Such exchanges usually have very strict registration requirements. Traders should be prepared to submit information such as date of birth, address, trading experience, profession, income as well as official identification documents to the website. The digital exchange may also impose a trading cap based on the information and documents provided. However, legal experts seem to think that a well-documented Bitcoin transaction would be sufficient to meet the source of funds requirements under the EB-5 regulations. Trading Bitcoin on an online exchange platform is essentially no different from trading AAPL or TSLA shares on the NASDAQ exchange. So long as the entire process is well-documented, the investor should be able to prove, by a preponderance of the evidence, that the currency exchange transaction involving Bitcoin is lawful.
Having said the above, Bitcoin option is not without challenges in the context of EB-5 adjudication. Firstly, proper documentation the purchase, holding and sale of bitcoin is a complicated process that requires the immigration attorney to retain certain level of understanding in Bitcoin trading. Secondly, documenting the purchase of Bitcoins in China after the trading ban takes effect may create a dilemma for Chinese investors. On the one hand, the investor/buyer has to show a direct link of source of RMB funds used to purchase Bitcoins in order to prove the unbroken path of funds. On the other hand, as a result of the current ban, parties to the transaction may be reluctant to document the transaction bluntly on the bank statements. Last but not the least, despite its viability in theory, the option is an unchartered territory in practice. Due to the unpredictability in I-526 adjudication, it remains unknown that if additional documents or information USCIS may request until the petition is adjudicated.
As chess players put it, ‘a good player is always lucky’. Though Bitcoin may not be the perfect solution given the challenges discussed above, it has a good potential to become a possible alternative for EB-5 investors who are Bitcoin traders.