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Node Operator Issues Open Letter of Concern as Hyperliquid's Centralized API Sparks Controversy
Original Article Title: A Letter To The Hyperliquid Core Team
Original Article Author: Kam Benbrik, Researcher @Chorus One
Article Translation: Ashley, BlockBeats
Editor's Note: Node operator Chorus One has detailed multiple issues with the Hyperliquid testnet in an open letter to the X platform, including frequent node shutdowns, operational difficulties due to closed-source code, and risks of centralization due to a single point of failure in the API. They have proposed various improvement suggestions aimed at increasing the chain's transparency and decentralization. In response to these concerns, Hyperliquid founder Jeff has replied, emphasizing that the validator selection criteria have been outlined in an announcement; the official Hyperliquid account has also posted a separate article on the X platform, addressing the issues raised in the letter and stating that node code will be open-sourced under secure conditions.
The following is the original content (lightly edited for readability):
The following letter is from Chorus One to the @HyperliquidX engineering team, hoping the team can take the time to review this feedback on Hyperliquid chain management.
TL;DR
· Due to closed-source code, lack of documentation, and reliance on a centralized API, validators face significant challenges, leading to frequent node jailing and unstable performance.
· The testnet incentive mechanism has resulted in black market trading of the HYPE token, favoring transactions with large holders rather than fair validator selection.
· Low returns for validators on the mainnet fail to cover the high self-staking requirements, limiting decentralization as 81% of stake is controlled by foundation nodes.
· To compete with major layer 1s, Hyperliquid must enhance transparency, decentralize stake delegation, implement a fair validator selection mechanism, and engage more with external validators.
I've been involved with Hyperliquid since December 2023 and find the application to be outstanding. It is user-friendly, with excellent user experience, and offers some unique features not found elsewhere, such as Vaults and the renowned HLP. Currently, HLP manages over $3.5 billion in funds and allows anyone to passively participate in Hyperliquid.
Upon seeing the platform's excellent performance and learning that Hyperliquid operates independently as a layer 1, I would like Chorus One to participate as an operator on the Hyperliquid chain. I am an employee from Chorus One, one of the largest node operators in the industry. Since 2018, Chorus One has been active in the Proof of Stake industry. We have collaborated with many outstanding teams, contributed to the development of various blockchain designs and consensus algorithms, and played key roles in some of the earliest Proof of Stake chains such as Tezos and Cosmos Hub. Currently, Chorus One manages over 50 blockchains, with a total staked asset value exceeding $3 billion, and has been collaborating with all major Proof of Stake blockchains since the early stages.
After being whitelisted on October 17, Chorus One joined the Hyperliquid testnet. I would like to share our overall experience on the testnet with the Hyperliquid engineering team, as even after almost 3 months of running on the testnet, we have not had the opportunity to interact with the team. During this time, we witnessed one of the most successful token launches of 2024—the HYPE token. At the same time, we experienced a testnet environment that was both fun and challenging. I would like to mention some key observations in the hope that they will be considered in the coming days, weeks, or months.
Testnet Experience
The experience on the testnet has been quite challenging so far. Node operators have almost no information on how to run a node, with very limited resources available for reference.
Frequent Node Shutdowns with Unclear Reasons
Initially, we were shut down multiple times without understanding the reasons. Due to the closed-source nature of the code, we could not properly assess why the shutdowns were happening. The only way was to communicate with other validators on Discord and speculate together on possible reasons. After talking to several validators, we learned that other validators were also repeatedly shut down, and they were not entirely clear about the reasons either.
Node Location Issue
Later, we found that the shutdown issue might be because our node was not deployed in Tokyo. Moving the node to Tokyo might be helpful. Unfortunately, the team never explicitly communicated this to us, and we only discovered it after facing issues multiple times.
After moving the node to Tokyo, the situation improved. This might be because many high-stake testnet nodes are also deployed in Tokyo, allowing our node to catch up slightly and reduce missed blocks. However, even after the migration, we still face shutdown issues, and the specific reasons remain unclear. This lack of understanding is primarily due to the closed-source nature of the code.
Dependency on Automatic Unjail Scripts
We acknowledge that maintaining a good uptime on the Hyperliquid testnet relies on the speed of scripts automatically unjailing nodes. The only way to improve uptime is by relying on fast automatic unjailing scripts. Validators cannot fully understand or address potential issues and can only unjail their nodes blindly in situations they do not comprehend.
Centralized Hyperliquid API as a Single Point of Failure
There have been occasions where our unjailing attempts have failed due to the Hyperliquid API being down. Since validators must send requests to the Hyperliquid server to unjail, they are left unable to unjail on their own when the API is down.
The team might already be aware of this, but this design needs to be reconsidered as it centralizes the API as a critical point of failure in the network. If the goal is to build a Byzantine Fault Tolerant system, then no node should have special privileges, such as relying on a centralized API.
Validator Selection on Mainnet
Hyperliquid recently went through a decentralization process for its validator set and chose approximately 16 validators. Previously, there were 4 validators managed by the core team that faced significant criticism. Hyperliquid recently took a significant step by expanding the validator set from 4 to 16.
Regarding the validator selection, the 4 validators were announced in the following Discord post:
These validators are Validao, Bharvest, Hypurrstake, and Prrposefulnode. These validators were selected based on maintaining over 90% uptime in the past 7 or 30 days.
This is a significant achievement on many fronts, mainly because validator performance is still influenced by external factors such as Hyperliquid API downtime, unjailing issues, and continuous crashes of the binary files, all of which have a non-negligible impact on performance.
In addition to the 4 validators selected based on the testnet performance, 5 validators from the Hyperliquid Foundation are also running on the mainnet. Furthermore, 7 additional validators have been chosen to participate in the mainnet, but the reasons for their selection have not been publicly disclosed.
Subsequently, a black market for HYPE Testnet tokens emerged.
The Hyperliquid Testnet initially had a set of 50 validators. Initially, specific entities were whitelisted to join the Testnet, but as of December 12, the validator set became fully open.
The conditions were simple: you needed 10,000 HYPE Testnet tokens to register as a validator. However, to become an active validator, you also needed to be in the top 50, or else validators would remain inactive.
This decision led to a surge in the price of HYPE Testnet tokens. The price initially rose to over 3,000 simulated USDC, and a few days later, it even exceeded 28,000 simulated USDC. At the time of writing, the price is approximately 700 simulated USDC per token.
Unfortunately, the faucet only distributes 100 simulated USDC every 4 hours. To be among the top 50 validators on the Testnet currently requires over 528,747 HYPE Testnet tokens. Assuming a price of 700 simulated USDC per token and relying solely on the faucet, the calculation is as follows:
Days = (528,747 × 700) ÷ (100 × 6) = 616,871.5 days
This means that relying solely on the faucet would take approximately 616,871.5 days, or 1,690 years, to accumulate enough HYPE Testnet tokens to become an active validator on Hyperliquid.
However, those who received a HYPE airdrop on the mainnet also received the same amount of tokens on the Testnet. This provided an opportunity for validators to collaborate with these community members by staking Testnet HYPE tokens, enabling validators to ensure entry into the active set.
Simultaneously, this situation also offered another perspective for those holding Testnet HYPE tokens. Given the competitive nature of joining the Testnet validator set, many validators were eager to acquire as many HYPE Testnet tokens as possible. Consequently, a black market emerged, where whales holding a significant amount of Testnet HYPE tokens began selling their Testnet tokens to validators in exchange for mainnet USDC.
I have never seen such a chaotic situation before. Although the Hyperliquid team clearly does not endorse these practices, they are fully capable of addressing this issue. One potential solution is to implement a proper testnet validator selection process.
In most other PoS networks, the core team usually shares a form that any validator can fill out to express their willingness to run the chain. The team would then review these applications based on various criteria, such as the validator's node operation experience, past contributions, community involvement, or other factors.
This group of pre-selected validators can then participate in the testnet, closely collaborate with the engineering team, provide feedback, and ensure everything runs smoothly. We have tried multiple times to provide feedback, but so far have not been successful.
Mainnet and Decentralization
As mentioned earlier, the current validator set of the Hyperliquid mainnet consists of 16 validators, which can be viewed at the following URL: https://app.hyperliquid.xyz/staking
· 5 validators are from the Hyperliquid Foundation.
· 4 validators were selected based on their performance on the testnet, maintaining over 90% uptime in the last 7 days.
· 7 validators were self-selected by the Hyperliquid team.
Out of the staked 404,495,250 HYPE tokens, approximately 329,578,724 HYPE tokens are staked on Foundation nodes, accounting for approximately 81.4% of the total stake. We know very little about HyperBFT, but assuming it operates as a Byzantine Fault Tolerant system, the core assumption of most BFT systems is that no more than 33% of the voting power behaves maliciously. If a single entity controls 1/3 of the stake, they can halt the chain. If they control 2/3 of the stake, they have full control of the network.
The Hyperliquid Foundation initially staked 60 million HYPE tokens on each Foundation node. However, many HYPE holders also chose to stake on Foundation nodes, which is not ideal for decentralization. The team should engage more with the community to encourage a more decentralized staking distribution.
There are three potential solutions:
· Educate the community on the importance of staking with external validators to enhance chain security and decentralization.
· Implement a 100% commission rate for foundation nodes to incentivize users to stake with external validators and promote decentralization.
· Reallocate foundation staking to external validators, which is a common practice in many chains.
Decentralizing staking to external validators will also help them achieve economic sustainability. Hyperliquid is a blockchain focused on high throughput, where infrastructure costs can be high, especially when nodes are deployed in Tokyo. Currently, validators at the bottom of the validator set earn between $3,000 and $5,000 annually, which is insufficient to cover costs. This is particularly challenging as they must self-stake the initial 10,000 HYPE tokens (worth around $250,000 at the current price) to validate on the mainnet.
Currently, users interact with Hyperliquid by bridging USDC from Arbitrum to the Hyperliquid chain. Upon reviewing the bridge contract, it appears that the bridge is still managed by 4 validators. These validators do not seem to be associated with the chain's consensus or the 16 validators on the mainnet.
Hyperliquid has a great product, but the team still needs to make several infrastructure improvements to truly compete with major layer 1s. Some improvements are straightforward, such as:
Seek input from experienced validators who operate on multiple networks. While the team's current approach of working independently has been very effective in building its sustainable product, validators are a key pillar of a layer 1. It is equally important to seek their input to ensure everything runs smoothly.
Open-source the code. This will help validators better understand the issues they face when running a node on the Hyperliquid L1 and also help users trust the product. Open-sourcing the code will also enable validators to have more insights into the architecture and consensus algorithm. Currently, information on HyperBFT is very limited, and open-sourcing can provide much-needed transparency and understanding. Chorus One has a network handbook on the importance of open source. Operators should be able to build all software they operate from source code: https://handbook.chorus.one/node-software/open-source.html
Create an appropriate validator selection process to prevent black market trading of the HYPE Testnet token. Selecting validators based on normal operation time is a fair approach, but achieving good normal operation time should also be fair. This should not depend on whether one has a relationship to acquire testnet tokens, purchased testnet tokens, or external factors (such as relying on Hyperliquid API for normal operation time).
Overall, Hyperliquid does not need to make too many changes to compete with major layer 1s. The main focus should be on interacting more with external parties and incorporating their feedback. I look forward to seeing the changes in the coming weeks and months, and our team will be ready to provide support and feedback at any time.
Hyperliquid Founder Jeff and Official Account Respond
In response to this letter, Hyperliquid Founder Jeff has responded on Platform X.
He emphasized that running a validator successfully is not difficult; the key lies in the validator's own setup and specialization. In addition, he pointed out that the validator selection criteria have been explained in the announcement and are based on the high normal operation time performance in the early stages of the testnet. This indicates that Jeff is more inclined to believe that the current issues stem more from the validators' own configuration rather than a flaw in system design.
Furthermore, the Hyperliquid official team has also released further clarifications, stating that the node code will be open-sourced in a secure manner.
· All validators qualify based on testnet performance and cannot obtain a seat through purchase; unfounded remarks denigrate the efforts of validators who have invested time and effort to understand the system; as the blockchain matures, the validator set will gradually expand.
· As previously announced, a foundation delegation program will be launched to support high-performing validators and further decentralize the network.
· Anyone can run an API server pointing to any node; sample client code sends requests to specific API servers, but this is not a fundamental requirement of the network.
· It is unacceptable for users to create a black market for the HYPE testnet; this has been stated multiple times; we will continue to work on improving the testnet onboarding process.
· The node code is currently closed source; open sourcing is very important, and the project will be open sourced once development reaches a stable state; Hyperliquid's development speed is several orders of magnitude faster than most projects, and its scope is also several orders of magnitude larger than most projects; the code will be open sourced under safe conditions.
· Currently, there is only one binary file. Even in a mature network like Solana, the vast majority of validators run a single client.
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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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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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