Deng Jianpeng from Central Finance: How to optimize the legality and rationality of China's "one-size-fits-all" virtual currency regulation

Author : Deng Jianpeng (Professor of Law School of Central University of Finance and Economics, Director of Financial Technology Rule of Law Research Center, and Doctoral Supervisor)

Wu said blockchain authorized release

Deng Jianpeng, Ma Wenjie. Legal thinking and optimization approach for virtual currency regulation: On the "ban-type" supervision of financial technology. Journal of Shaanxi Normal University: Philosophy and Social Sciences Edition, 2022, 51(3): 86-97.

FinTech is technology-driven financial innovation, which aims to transform or innovate financial products, business models, and business processes by using modern scientific and technological achievements. Disruptive innovation and systemic risks coexist in the field of FinTech, bringing challenges to financial supervision. Among them, blockchain technology and virtual currency have attracted much attention in the field of FinTech. The institutional competition among countries around virtual currency and even FinTech has become increasingly prominent. On March 9, 2022, the United States issued the "Digital Assets Executive Order". On April 4, 2022, John Glen, the Economic Secretary of the British Treasury, delivered a speech at the Global Summit on Innovative Finance during FinTech Week, stating that the crypto asset market would be given full policy and legal support. The latest regulatory developments in the United Kingdom and the United States reflect that the world's major economies hope to play a leading role in the global governance of virtual currencies through effective regulatory practices. Against this background, how to give full play to policy and institutional advantages and enhance my country's international competitiveness in blockchain finance and even FinTech is extremely urgent and necessary.

Since 2013, my country has continuously strengthened its supervision of the virtual currency sector. In September 2021, 10 departments jointly issued a "comprehensive ban" on virtual currency-related businesses, and the intensity of supervision reached its peak. The "China Financial Stability Report (2021)" pointed out that "the rectification work in the field of virtual currency transactions has been basically completed and has entered normalized supervision." What are the characteristics of the regulatory policies in this field? Does it conform to the basic spirit and normative requirements of the rule of law? At a time when "ban-type" supervision is prevalent, how should virtual currency, blockchain finance and even financial technology change their regulatory concepts? How to optimize the regulatory path? The above issues are not only related to the choice of my country's virtual currency regulatory path, but also to the general thinking on the "ban-type" supervision of financial technology. Taking the rectification of virtual currency in my country as the starting point, this article intends to analyze the regulatory model and actual effects in this field, point out the possible rule of law problems in the current "ban-type" supervision, and put forward optimization suggestions.

1. Risks of virtual currencies and China’s regulatory practices

The essence of FinTech is to use technology to improve finance. To explore the governance path of FinTech, we need to understand the operating mechanism of FinTech, clarify the inherent logical relationship between virtual currency and blockchain technology, understand the innovation and risks of virtual currency, and explore China’s regulatory practices in the field of virtual currency and its regulatory logic and characteristics.

1. Concept and risks of virtual currency

At present, there is no unified international consensus on the concept of virtual currencies. Virtual currencies are often confused with concepts such as cryptocurrencies, digital currencies, virtual assets, digital assets and tokens. Although different international organizations and national regulators have different definitions of "virtual currencies", most of them emphasize their non-legal nature. They are digital forms of expression that can be accepted and used in specific communities through the generation and rights record of distributed ledger technology (such as blockchain). On September 15, 2021, the People's Bank of China and 10 other departments jointly issued the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" (Yinfa [2021] No. 237, hereinafter referred to as the "2021 Notice"), which pointed out that virtual currencies such as Bitcoin , Ethereum, and Tether have the main characteristics of being issued by non-monetary authorities, using encryption technology and distributed accounts or similar technologies, and existing in digital form, and are not legal tender.

Virtual currencies lack the credit support of sovereign states but are still popular around the world. This is due to certain technical support and economic logic. Bitcoin is the most important representative of virtual currencies. It can realize "peer-to-peer" (P2P) payments without the intervention of third parties such as governments or financial institutions. With the subsequent technological upgrades and industrial development, the business ecosystem of virtual currencies has expanded from the initial payment field to the investment and financing field. Initial coin offerings (ICOs) have become a new way to raise capital. Investors pay mainstream virtual currencies such as Bitcoin and Ethereum to project initiators to obtain tokens sold by project initiators. Virtual currencies have evolved from Bitcoin's "one flower" to a large and complex collection, which brings three risks and regulatory challenges: (1) Virtual currencies challenge the legal currency system. Bitcoin and other virtual currencies objectively circumvent the existing legal currency system and banking system and attempt to establish a new currency and payment system. They may pose a potential threat to the functions of central banks and challenge the legal currency system based on national sovereign credit. (2) Virtual currencies may be used as tools for illegal crimes. The anonymity and cross-border nature of virtual currencies make it difficult to regulate and track, and they are easily exploited by crimes such as corruption, money laundering, terrorist financing, and fundraising fraud. Unregulated and unconstrained initial coin offerings can easily become a means for scammers to engage in illegal financial activities. (3) Virtual currencies may trigger financial risks. The "decentralized" characteristics of blockchain are in stark contrast to the "centralized" structure of the financial regulatory system. It is difficult for regulators to control risks through traditional financial intermediaries as a "handle". At the same time, the virtual currency market is highly speculative and volatile, which may affect financial and social stability.

(II) Review of regulatory policies

my country has been paying close attention to the development of virtual currencies, and has issued risk warnings and regulatory rules one after another. In December 2013, the People's Bank of China and five other departments issued the "Notice on Preventing Bitcoin Risks" (Yinfa [2013] No. 289, hereinafter referred to as the "2013 Notice"), which clearly stated that Bitcoin is not a currency, but a specific virtual commodity. Bitcoin transactions are a commodity trading behavior on the Internet, and ordinary people have the freedom to participate on the premise of assuming their own risks. In September 2017, the "Announcement on Preventing the Risks of Token Issuance and Financing" (hereinafter referred to as the "2017 Announcement") clearly stated that no organization or individual may illegally engage in token issuance and financing activities, and all types of token issuance and financing activities should be stopped immediately. On May 21, 2021, the Financial Stability and Development Committee of the State Council held its 51st meeting and proposed to resolutely prevent and control financial risks and crack down on Bitcoin "mining" and trading. Subsequent regulatory policies quickly implemented the spirit of the above meeting. The "2021 Notice" issued on September 15, 2021 emphasized that virtual currency-related business activities are illegal financial activities, which are strictly prohibited and resolutely banned in accordance with the law. On September 24, 2021, the "Notice of the National Development and Reform Commission and Other Departments on Regulating Virtual Currency "Mining" Activities" listed virtual currency "mining" activities as an eliminated industry, and required strengthening of supervision of the entire upstream and downstream industrial chain of virtual currency "mining" activities.

These regulatory rules convey my country's vigilance towards the risks of virtual currencies. In order to deal with the prominent risks of virtual currencies at all stages, the regulatory authorities have gradually strengthened from simple risk warnings to prohibiting the issuance of tokens for financing, and finally to a complete ban on related businesses. The rectification work reflects the characteristics of "ban-type" supervision. It is undeniable that this regulatory logic has its success: administrative normative documents have established the basic framework for my country's virtual currency supervision and provided a basis for "administration according to law." Although a "comprehensive ban" can decisively terminate illegal activities and deal with risks immediately, the current popular "ban-type" supervision is prone to problems in the legality of regulatory documents, the rationality of regulatory methods, and the balance of regulatory concepts. It may violate the spirit of the rule of law and face the risk of regulatory failure, which should be taken seriously.

II. Legal Thinking on the “Prohibition-type” Regulatory Policy

Since the 18th CPC National Congress, the status of the rule of law in national governance has been highly valued. The 18th CPC National Congress emphasized that rule of law is the basic strategy for governing the country, and rule of law is the basic way to govern the country. The 19th CPC National Congress made it clear that by 2035, a country ruled by law, a government ruled by law, and a society ruled by law should be basically established. Therefore, the innovative development of financial technology should be included in the track of rule of law, led by the rule of law, and guaranteed by the rule of law. In view of the fact that the rectification work in the field of virtual currency transactions has been basically completed, it is necessary to conduct a comprehensive review and rational reflection on the regulatory policies in this field from the perspective of the rule of law.

1. Review of the legality of regulatory documents

my country's supervision of the virtual currency sector is mainly driven by documents such as the 2013 Notice, the 2017 Announcement, and the 2021 Notice, which are jointly issued by multiple departments. Regulatory documents are generally distinguished by their effectiveness levels due to their different formulating bodies, formulation procedures, and bases. From the perspective of the formulating body, the 2013 Notice, the 2017 Announcement, and the 2021 Notice are all jointly formulated and issued by the People's Bank of China and other ministries and commissions (departments). The legal effect of the documents jointly formulated by the departments can only be "regulations" or "normative documents below regulations" (hereinafter referred to as "normative documents"), which can be distinguished from the legislative procedures and legislative content. In terms of legal effect, we tend to identify the above-mentioned regulatory documents as "normative documents" because the legislative procedures of these documents are relatively simple, and there is no clear date of passage or implementation date; they are implemented upon publication, rather than 30 days after the date of publication, etc., which do not meet the high standards for the formulation of regulations in the Regulations on the Procedures for the Formulation of Regulations.

Under the rule of law, the formulation of normative documents must follow the principle of administrative legality, with the "principle of basis" and "principle of non-contradiction" as the basic requirements for formal legitimacy: the former requires that the formulation of lower-level laws must be based on higher-level laws; the latter requires that the provisions of lower-level laws must not conflict with the provisions or principles of higher-level laws, otherwise it will constitute a violation of the lower-level rules and lead to the consequence of their invalidity. According to Article 80 of my country's "Legislation Law", regulations without laws or administrative regulations shall not be self-empowered, shall not reduce the rights and freedoms of citizens, and shall not increase their obligations. As a normative document with lower legal effect, it has no authority to directly create provisions that reduce citizens' rights and increase their obligations, otherwise the normative document will have huge problems in its own legitimacy. However, in the definition of "illegal and irregular behavior", normative documents in the field of virtual currency have certain obstacles in connection with current laws and regulations, and there are flaws in formal legitimacy.

The 2017 Announcement characterizes the token issuance and financing activities as "an act of illegal public financing without approval", and believes that it is "suspected of illegal issuance of token tickets, illegal issuance of securities and illegal fundraising" and other criminal activities, and emphasizes that "no organization or individual shall engage in illegal token issuance and financing activities, and all types of token issuance and financing activities shall be stopped immediately". Some researchers pointed out that the "Law of the People's Bank of China" prohibits any entity from printing and issuing token tickets. my country's regulators believe that most crypto assets are suspected of illegal issuance of token tickets and prohibit them. This regulatory stance confuses the concepts of token tickets with financial products and services such as payment tools and securities. Although the relevant norms and concepts of token tickets can provide certain support for the characterization of virtual currency, they themselves have problems such as unclear concepts, low normative levels, and loose institutional logic. It is rash to determine that the token issuance and financing activities are "illegal" on this basis. In addition, it is not difficult to see from the argument of the "illegality" of token issuance and financing in the 2017 Announcement that token issuance and financing are easily suspected of "illegal fundraising", which is also a major reason for its prohibition. The issuance and trading of virtual currencies have a strong fundraising color, but not all types of virtual currencies involve the issue of illegal fundraising. Initial coin offerings (ICOs) are easily suspected of illegally absorbing public deposits or fundraising fraud. In practice, there are also "legal" types of initial coin offerings. For example, if a blockchain startup project raises funds from a few specific institutions or individuals, and the institution or individual only provides virtual currency to the project party as an investment, it is similar to the traditional private placement form and it is difficult to identify it as the crime of illegally absorbing public deposits. The distinction between private financing and illegal fundraising only remains at the policy level, and the legal boundary between the two is not clear, and individual cases need to be fully identified. The "2017 Announcement" directly identifies all token issuance and financing activities as illegal financial businesses, making some "legal" forms of token issuance and financing included in the list of prohibitions, which is equivalent to creating new obligations for the counterparty and is suspected of improperly reducing citizens' rights. The legality of the document deserves consideration.

Similarly, the 2021 Notice argues that "virtual currency-related business activities are illegal financial activities", and its argument logic is almost identical to that of the 2017 Notice. The 2021 Notice defines the conceptual scope of "virtual currency-related business activities" in an incomplete enumeration manner, and points out that virtual currency business activities "are suspected of illegal financial activities such as illegal issuance of token tickets, unauthorized public issuance of securities, illegal operation of futures business, illegal fundraising, etc.", and therefore should be "strictly prohibited and resolutely banned in accordance with the law." The 2021 Notice expands the scope of the administrative ban from "token issuance and financing activities" to "virtual currency-related business activities." In practice, virtual currency-related business activities are complex and diverse, and the non-legal and prohibition provisions of the "one-size-fits-all" normative documents on virtual currency-related businesses actually set behavioral bans for market entities, and some "legal" behaviors are therefore included in the list of prohibitions, causing legal disputes and concerns.

2. Questioning regulatory failure and policy rationality

In addition to the necessary review of the legality of normative documents, it is also necessary to reflect on the regulatory quality and effectiveness of the rectification work in combination with regulatory objectives and regulatory means. Protecting the rights and interests of investors is one of the important goals to be achieved in the virtual currency rectification work. The regulatory objectives of the "2013 Notice" include "protecting the property rights and interests of the public", and the "2017 Announcement" points out that it is necessary to "protect the legitimate rights and interests of investors". However, these regulatory policies have not completely solved the "cryptocurrency speculation craze" in China, and have even lost the "grip" and initiative to implement supervision or supervision to a certain extent, which has raised questions about the effectiveness of protecting the rights and interests of domestic investors and questions about regulatory failure.

In the first half of 2017, most ICO projects were transformed into means for scammers to engage in illegal financial activities. In the eyes of the regulatory authorities, the "coin speculation" activities carried out with the help of virtual trading platforms are purely speculative behaviors, which gather high financial risks and endanger financial stability. Therefore, the "2017 Announcement" adopted a series of measures such as prohibiting any issuance and financing activities and clearing out domestic virtual currency exchanges, trying to prevent investors from falling into the clutches of ICOs. In theory, there will no longer be any "legal" virtual currency exchanges in China, and investors cannot trade virtual currencies on domestic trading platforms; in fact, it is difficult for a single country to block the provision of financial services or products by foreign countries to China by electronic means, because virtual currencies have a natural tendency to operate across borders. Although my country has a policy orientation to ban virtual currencies, it is objectively unable to avoid the trading services provided by the international market to domestic investors. The "going overseas" of virtual currency exchanges triggered by the "2017 Announcement" has objectively increased the difficulty of my country's supervision. Most of the transaction data, legal entities and servers of overseas virtual currency exchanges are deployed overseas. Violators often try to shift responsibility through the shell of overseas companies, or delay litigation through jurisdictional objections to evade sanctions from Chinese judicial authorities. Because it is difficult for Chinese judicial authorities to obtain assistance from overseas exchanges, it has caused difficulties in obtaining evidence, unclear fund flows, and difficulty in executing virtual currencies. For example, after the virtual currency dispute involved in the case occurred, a large amount of evidence was stored on the overseas platform server. It was difficult for Chinese judicial authorities to retrieve data from the server during investigation and evidence collection, resulting in the lack of key evidence, which in turn hindered the smooth implementation of the determination of the amount involved and the recovery of stolen money, and ultimately aggravated the difficulty in protecting the rights and interests of domestic investors in my country. In response to the continuous emergence of the "cryptocurrency speculation craze" among domestic investors, the "2021 Announcement" emphasized that the provision of services to residents in my country through the Internet by overseas virtual currency exchanges is an illegal financial activity, but because overseas virtual currency exchanges and their actual controllers are far away from the regulatory scope of Chinese financial regulatory agencies, in this sense, the temporary deterrent effect of the new regulations may be stronger than the actual effectiveness in the future.

The increasingly stringent regulatory measures are not effective enough in combating illegal and criminal activities, and also have a certain negative impact on the trust interests and rights protection of market players. In view of the vague characterization of Bitcoin as a "virtual commodity" in the "2013 Notice" and the "no prohibition" of this business in early policies, many investors have participated in virtual currency-related business activities. After the release of the "2017 Announcement", the interpretation that virtual currency is prohibited from trading in China has become popular. The "negative evaluation" of virtual currency in normative documents and the policy trend of severe crackdown have caused the whole society to worry about the "illegality of the object" of virtual currency. After citing normative documents, some courts held that the debts generated by Bitcoin are all illegal debts, and related transactions are not protected by law; Bitcoin is an illegal object, and its behavior is not protected by law in my country, and the consequences are borne by the risk; the convertibility of virtual currency and legal currency is denied on the grounds of violating the public interest, resulting in the dilemma of virtual currency investors not being protected by law or insufficient legal protection in practice. While restricting the rights of private entities, the "comprehensive ban" also brings policy obstacles to the exercise of functions by public power agencies. The seizure, execution, and realization of virtual currencies have always been inherent problems in judicial practice. In order to promote the litigation process and dispute resolution and achieve effective relief for investors' rights and interests, public authorities cannot avoid the disposal of virtual currencies. For example, the judgment document of the major online pyramid scheme case of "Wallet+" (Plus Token), which is known as the "first capital plate in the currency circle", shows that the defendant Chen Bo applied to the Public Security Bureau of Yancheng City, Jiangsu Province to entrust Beijing Zhifan Technology Co., Ltd. to sell and realize the digital currency seized by the public security organs in accordance with the law, and all the funds were used as his return of stolen money. Based on this, the People's Court of Yancheng Economic and Technological Development Zone, Jiangsu Province determined that Chen Bo returned part of the funds and imposed a lighter punishment on him at his discretion. This "entrusted handling" disposal method was feasible in reality that year, but it faced legal questions after the issuance of the "2021 Notice", because the "2021 Notice" means that "China has completely banned virtual currency transactions." The new regulations not only constrain individuals, but also state organs. Does this mean that public authorities such as public security and justice can no longer conduct virtual currency transactions on their own or entrust other entities? Does the judgment of replacing the return of virtual currency with legal tender involve the prohibited behavior of "exchange of legal tender and virtual currency"? The above issues will bring policy obstacles to the state organs in the future disposal of virtual currency, judgment and execution of related cases.

3. Reflections on the Imbalance in the Value of Financial Regulation

Fintech has both innovative value and potential risks. The Fintech Development Plan (2019-2021) proposes to "balance the relationship between security and development, and coordinate the relationship between inclusiveness and prudence", but in practice, the regulatory policies and rectification actions of Fintech emphasize security and stability. In recent years, my country's supervision of virtual currencies has become increasingly strict, and there has been a large imbalance between security and development in the field of virtual currencies, especially the lack of protection of investor rights and interests, and the suppression of financial innovation, which may hinder the industrial development of blockchain.

my country has adopted different regulatory stances on virtual currency and blockchain technology: on the one hand, my country attaches great importance to the development of blockchain technology and industry. Blockchain is listed as one of the seven key digital economy industries in the "14th Five-Year Plan", hoping to create a good policy environment for the development of blockchain technology and industry; on the other hand, my country's regulatory policies in the field of virtual currency have been strengthened layer by layer. The regulatory objectives of the "2013 Notice" include "ensuring the legal currency status of the RMB, preventing money laundering risks, and maintaining financial stability", the "2017 Announcement" emphasizes "preventing and resolving financial risks", and the "2021 Notice" emphasizes "to further prevent and deal with the risks of virtual currency transaction speculation and effectively safeguard national security and social stability."

Under the general tone of risk prevention, my country's public law field has adopted a "one-size-fits-all" negative regulatory framework for virtual currency business, making virtual currency tend to be a de facto "contraband" in public law, and not positively recognized by regulatory agencies. The combined force of these two aspects of law and policy is essentially promoting the development of "coinless blockchain". However, there is a logical contradiction between the policy orientation of "coinless blockchain" and the booming development of the blockchain industry. According to the different internal structures of blockchain technology, it can be divided into three types: public chain, private chain and alliance chain. Among them, the public chain must rely on consensus mechanism and token (or token) economic incentives to enable participants who lack a trust foundation to associate and collaborate due to economic interests. In the blockchain ecosystem, tokens can be used as a medium for passes, incentives, proof of rights and interests, value storage, and payment and settlement; without a token, it is difficult to mobilize the public who have no interest relationship and lack trust in each other to participate in the blockchain industry ecosystem. Therefore, the vision of "coinless blockchain" promoted by my country's policies is only possible in alliance chains and private chains, and cannot promote the effective development of public chains for the public. Public chains are the mainstream of blockchain's top technology research and development, but public chains whose main functions are token issuance and trading face legitimacy difficulties in my country.

"Ban-type" policies can temporarily deal with risks, but in the long run they may kill financial innovation. Taking the hot initial coin offering (ICO) in 2017 as an example, the rise of ICO in my country stems from the endogenous demand for inclusive finance and financing of small and medium-sized innovative enterprises. my country's financial market, which is dominated by small and medium-sized individual investors, lacks suitable low-threshold investment channels that match their risk tolerance, making it difficult for the general public to enjoy the many benefits brought by financial investment. ICO has the characteristics of inclusive finance and the function of promoting inclusive growth, reflecting the endogenous demand that is inevitably generated in the process of upgrading traditional finance. If the contradiction between high financing costs and the capital needs of weak financing entities is not completely resolved at present, even if ICO is "strangled", various new financing formats that evade supervision and "illegally" emerge will continue to emerge. At the same time, the indiscriminate and comprehensive ban has inhibited the compliance transformation of emerging formats, and even forced some financial technology practitioners to turn from "actively seeking supervision" to "underground" or "going overseas" development, thereby increasing the difficulty of supervision.

III. Optimizing the Approach to Fintech Supervision

At present, there are great controversies about the effectiveness, system and "prohibitive" path of my country's virtual currency regulatory paradigm. In response to the outstanding problems derived from the "prohibition-type" regulation, it is necessary to make adaptive adjustments to the regulation. In the governance of virtual currency and even financial technology, the multi-value goals of financial regulation should be clarified first, so as to run through the macro policy orientation and specific institutional arrangements. Secondly, on the one hand, new regulations should be used to fill the regulatory gaps, but the formulation of rules should follow the principle of administrative legality; on the other hand, emerging businesses should be classified and included in existing rules through a "penetrating" method. Finally, the frequent issuance of new regulations in emerging fields and the adjustment of rules have become the norm, and it is necessary to strengthen the legal protection of the trust interests of market entities.

1. Balancing the multiple values ​​of financial regulation

The institutional arrangements and risk regulation strategies of financial technology contain the value choices of regulators for financial security and financial innovation. "Ban-type" regulation stems from the regulator's deep concern for financial risks and the ultimate pursuit of financial security. The value pursuit of "financial security" is the basis for policy formulation and even the "only guide" of regulatory goals, but financial security is not equivalent to blindly prohibiting. It is also necessary to consider the innovative value of new technologies and the upgrading and development of the industry itself. Because from the historical experience of financial innovation and financial risk prevention, "innovation → risk → regulation → re-innovation" is a dynamic process, and financial innovation is still the main way to avoid or reduce financial risks and ensure financial security. In this sense, innovation and development itself is also related to security issues, and the two complement each other. In view of the legitimacy dilemma faced by virtual currencies and related activities in my country, researchers are worried that the strict prohibition based on a strong paternalistic complex may abandon financial innovation in pursuit of the single value of financial stability, which may cause my country to miss the opportunity for the development of blockchain finance.

In the context of the globalization of financial technology, major economies either actively participate or are forced to be involved in the competition of financial technology. Therefore, the ban of a single country usually cannot completely eradicate the "exogenous" risks of financial technology, and the institutional competition between countries around laws and policies and systems has become more intense. A country's good regulatory policies and effective practices can not only fully stimulate domestic financial technology innovation and make the country's financial technology and applications at the forefront of the world, but also, emerging fields often lack international established norms, thus becoming a good opportunity for a country to "export" industry standards and values ​​and strive for the right to speak in international rule-making. For example, the White House official website of the United States issued the "Digital Assets Executive Order", emphasizing that it will continue to play a leading role in digital asset innovation and governance, reflecting the importance the US government attaches to this emerging field. The US government first puts the policy goal of protecting American consumers, investors and enterprises first, and then emphasizes the main policy goals and action plans such as maintaining US and global financial stability, reducing illegal financial and national security risks, leading innovation, strengthening the US leadership in the global financial system, technology and economic competitiveness, and promoting inclusive finance. Good institutions are a country's core competitive advantage, and institutional competition is the fundamental competition between countries, so my country should pay close attention to the new regulatory policies of the world's major economies. Some researchers pointed out that digital currency has changed the subject and credit method of currency issuance, inspiring us to reflect on the legal system of currency, and forcing new changes to the old financial regulatory measures and monetary policy measures based on traditional physical currency. my country should use this as a basis for thinking about the historical limitations and realistic shifts of the existing system, strengthen the overall grasp of the relationship between "virtual currency" and "blockchain technology", and cannot simply regard "virtual currency" as the source of financial risks. In terms of policy goals and institutional design, the relationship between financial security and financial innovation should be balanced, and the protection of investors' rights and interests should be strengthened. From the current policy orientation, my country will maintain a strong risk prevention and control orientation for virtual currency in the short term, but it is still necessary to continue to observe and judge, and retain the room for supporting or restricting policies in the future, so as not to miss the important opportunity for the development of blockchain technology and related industries.

2. Improvement of the legitimacy of regulatory documents

"Ban-type" supervision often involves restrictions or prohibitions on market operations, and this "ban" often uses administrative normative documents as a "carrier". The reason behind this is that the rapid differentiation and combination of the financial technology industry is in conflict with the stability and lag of the law. In order to ease the conflict between the two, low-level normative documents often precede formal legislation and play an irreplaceable positive role in filling the gaps in legal norms. However, the formulation process of administrative normative documents is relatively arbitrary, lacking the necessary constraints of legislative procedures and democratic consultation involving market players. Therefore, it is easy to have serious problems such as inappropriate content, arbitrary reduction of citizens' or corporate rights, and increase of citizens' or corporate obligations.

The regulation of virtual currencies in my country mainly relies on low-level normative documents in the field of public law. Although these normative documents are the main basis for administrative law enforcement and have directly affected judicial decisions in recent years, the legality and rationality of the documents themselves should not be underestimated. The normative documents in the field of virtual currencies in my country only list the names of higher-level laws in general, and then determine that the relevant businesses are suspected of illegal activities, making the determination of "illegality" perfunctory and lacking clear argumentation and reasoning. At the same time, although higher-level legal norms such as illegal issuance of token tickets and illegal fundraising can provide certain support for the characterization of virtual currencies, they are easily alienated into "bottom-line clauses" for determining that virtual currencies are illegal. Even if the above rules meet the formal legality requirements of the "principle of basis", they cannot escape the in-depth questioning of substantive legality, and may even deepen the misunderstanding of the nature of virtual currencies in the industry and academia.

The restrictions and prohibitions on financial technology businesses should be fully included in the scope of the principle of administrative legality to ensure the legality and effectiveness of the documents themselves. Normative documents are essentially the specific implementation or refinement of national financial management laws and regulations. They should provide specific arguments for matters created and granted by superior laws. The reason is that although the norms and related concepts of superior laws can provide a basis for the supervision of virtual currency and related businesses, this "general authorization" is at risk of being abused in practice, especially when new businesses may be characterized as "illegal" and "with a banning purpose". Normative documents often stipulate or even set bans at the factual level, which greatly restricts citizens' property rights and freedom of behavior. Therefore, it is more necessary to go through a legal and accurate administrative investigation procedure and provide more sufficient arguments and reasoning.

The Notice on Strengthening the Formulation and Supervision and Management of Administrative Normative Documents (Guobanfa [2018] No. 37) points out that important administrative normative documents must strictly implement procedures such as evaluation and demonstration, public solicitation of opinions, legality review, collective deliberation and decision-making, and public release. Normative documents in the field of virtual currency involve situations where private rights and freedoms are restricted and private obligations are added, which are closely related to the rights and obligations of market entities. However, there are flaws in the issuance procedures such as careful evaluation and demonstration and extensive solicitation of opinions. This "ban-type" regulatory policy more reflects the government's top-down regulatory thinking. Based on the technical characteristics of financial technology, top-down supervision will not produce the most powerful stable market. Effective supervision of the blockchain market requires consultation between lawyers, enterprises, programmers and legislators to create a regulatory strategy for a legal and compliant blockchain market. In institutional decision-making, only by following the principles of "rule of law and due process" and "democracy and pluralistic governance", achieving multi-party participation and in-depth interaction between the government and the public, and building a consultative democratic policy community between decision makers, actors and policy objects, can a governance mechanism and model that conforms to the laws of blockchain development be formed and the legal basis of normative documents be enhanced.

(III) Exploration of “penetrating” classification supervision

Under the "ban-type" supervision, the policy-based suspension of "banning it all" cannot escape the question of legitimacy and rationality, which then leads to the question of how to establish regulatory rules and achieve effective supervision. my country's supervision has not effectively distinguished the types of tokens, but has adopted the general definition of "virtual currency". In other words, "virtual currency" under the vision of my country's financial supervision is a complex and large collection, including "air coins" that have no technical support and have become fraud tools, as well as native tokens such as Bitcoin and Ethereum, and stablecoins and other types with specific value support. Different tokens have different operating mechanisms and risk performances, and regulators need to treat them differently.

The Financial Technology (FinTech) Development Plan (2019-2021) emphasizes: "In view of the essential characteristics and risk characteristics of special technologies, professional and targeted regulatory requirements are proposed, differentiated financial regulatory measures are formulated, and the precision and matching of supervision are improved." The Financial Technology Development Plan (2022-2025) requires: "Implement penetrating supervision on financial technology innovation." The core function of penetrating supervision lies in "fact discovery". Regulators identify the substantive transactions hidden behind the form, and then use appropriate legal norms and regulatory means to achieve in-depth and effective adjustments to financial transaction relationships. From an international perspective, developed countries such as Europe, the United States, Japan, and Singapore have not banned virtual currencies and related services "across the board", but have identified the essential attributes of the business and included related issuance and trading activities in existing regulatory rules. For example, the United Kingdom has issued regulatory guidelines to basically divide virtual currencies into payment tokens, security tokens, and utility tokens, and regulate them separately. However, from the perspective of my country's regulatory practice on virtual currencies, penetrating supervision still faces obstacles in its specific implementation. The strategy commonly adopted by my country's financial regulatory authorities is "whoever approves is responsible", and the main regulatory body is the issuing agency. The identification of the essence and legal attributes of virtual currency is a complex process. Different countries have different understandings of the legal and regulatory agencies. It is difficult to clearly define the regulatory authorities responsible for approval under the financial system of separate supervision. Therefore, my country has tried to bypass the qualitative problem of virtual currency itself and business activities through the "joint ban" of multiple departments. However, this regulatory model is still relatively rough and cannot solve the problem in essence, and does not meet the requirements of differentiated regulatory.

A relevant person in charge of the People's Bank of China pointed out that the People's Bank of China is studying the regulatory rules for Bitcoin and stablecoins. Cryptocurrency assets themselves are not currency, but as an investment tool or alternative investment. If any stablecoin wants to become a widely used payment tool, it must be strictly regulated like financial institutions such as banks or quasi-banks. The above speech conveys two key messages: First, my country's public law level denies the monetary attributes of virtual currencies, which are not negating the property value of virtual currencies themselves. The current view of "object illegality" and "not protected by law" is a misunderstanding; Second, the "comprehensive ban" is just a temporary wait-and-see attitude. my country's regulators have paid attention to the development of stablecoins, thinking about the response plan to recognize the legitimacy of stablecoins within a certain range and provide normalized supervision.

In the future, my country can explore refined supervision of virtual currencies and even the entire public chain business, use penetrating supervision to identify the essential attributes of emerging businesses, and strive to build a policy framework for classified supervision under the current system. Taking the functional supervision of stablecoins as an example, stablecoins can be further divided into two categories: mortgage-type stablecoins and algorithmic stablecoins. Fiat currency collateralized stablecoins anchored to the US dollar can be regarded as US dollar tokens representing US dollar asset debt, and regulate in accordance with relevant foreign exchange management regulations or implement strict restrictions. For virtual currency collateralized stablecoins and algorithmic stablecoins, their structural design and operation are more innovative financial products, and they can be included in the category of financial tools, give full play to the means of foreign exchange management and anti-money laundering supervision, and crack down on illegal and criminal acts that disrupt foreign exchange management order and financial order.

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(IV) Policy adjustment and trust interest protection

In order to deal with the phased risks of financial technology, adjustment of rules in the public law field has become the norm, especially under the stimulation of sudden risk events, regulatory policies are likely to shift from the initial "inclusiveness and prudence" to "suppression and prohibition". Sudden "ban" policies will have an impact on industry stability expectations, and legislative, administrative and judicial organs have the responsibility to protect the trust interests of market entities, and should reduce the adverse effects that policy fluctuations may have on market entities.

: : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : The 2021 Notice requires that virtual currency-related business activities be strictly prohibited and resolutely banned in accordance with the law. What is the legal significance of "ban" here? Does it include "authorization to take immediate enforcement measures to ensure the realization of the ban"? What compulsory enforcement measures can administrative agencies take based on this? What procedures should be followed to ban law enforcement? The answers to these questions directly affect the boundaries of the exercise of civil rights and constitute the corresponding basis for administrative law enforcement behavior. Disputes and differences in practice cannot provide clear guidance and stable expectations for market entities, and may also cause inconsistent law enforcement standards and abuse of administrative power in administrative management activities. At present, it is urgent to clarify these key issues to reduce the adverse effects brought about by the "fuzzy zone".

We believe that regulators need to focus on the situation of "point-to-point" transactions carried out by third parties, with commercial virtual currency business activities rather than "point-to-point" transactions without using any external services. There are two reasons: First, from the superior law listed in the 2021 Notice, Article 81 of the Commercial Banking Law (Amendment in 2015), Article 180, Article 202, and Article 212 of the Securities Law (Amendment in 2019) and Article 78 of the Futures Trading Management Regulations stipulate the situation of "banning", mainly including the establishment of commercial banks, securities companies, securities trading venues, futures exchanges, etc. without permission, or conducting the above-mentioned trading activities without authorization. It can be seen that the authorization of "banning" in the superior law should target financial intermediaries and their businesses that provide professional services. The essence is that the financial industry is a franchise industry, and if it is not qualified to engage in specific businesses, it should be banned. : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : "Peer-to-point" transactions have high technical requirements for users, and are limited to a few people and are difficult to be effectively monitored. The supervision of the above behaviors does not comply with the cost-benefit principle of supervision.

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IV. Conclusion

In recent years, a new round of scientific and technological revolution and industrial transformation have been accelerating, but the innovative development of financial technology business is accompanied by the possibility of market failure, which may trigger systemic risks. Balancing the relationship between blockchain financial innovation, risk prevention and control and investor rights protection, and promoting the sound and perfection of the modern financial regulatory system is the necessary meaning of establishing a scientific and effective macroeconomic governance system during the 14th Five-Year Plan period, and it is also the long-term direction for policy makers to consider.

The rectification of virtual currency in my country is a "micro" of the legal supervision of financial technology. "Prohibited" supervision not only exists in the field of virtual currency, but is also a regulatory logic that is prone to financial technology supervision: for businesses that are in the name of financial technology innovation but may impact the order of the financial market and harm the legitimate rights and interests of financial consumers, the regulatory authorities tend to adopt a strict restriction or resolute ban, and prohibit related financial technology businesses in a negative evaluation manner. For example, peer-to-peer online lending, Internet equity crowdfunding and other business formats were "popular", but they were hit hard in "ban" supervision, and eventually "stopped" and even went to a "gray-black area". This article's legal thinking on the rectification of virtual currency not only concerns China's choice of virtual currency supervision plans, but also the universal thinking on the "ban" supervision path of financial technology.

The emergence of "ban-type" supervision mainly stems from two major aspects: First, regulators rely too much on financial security and tend to curb risks through strict restrictions or even comprehensive bans; Second, in the face of "destructive innovation" in financial technology, existing legal norms, regulatory systems, and regulatory means have a certain degree of regulatory failure. Faced with some extreme risk events or accountability pressure, regulators are forced to adopt a "one-size-fits-all" ban model for new business models. Although "ban-type" supervision can temporarily respond to crises, it is easy to improperly reduce or restrict citizens' rights, which is not conducive to the compliance transformation of innovative business models, thereby causing hidden worries about imbalance between security and development. These hidden negative effects need to be paid enough attention.

my country's "ban" supervision in virtual currencies and even other financial technology fields is a temporary policy choice and wait-and-see policy, and has bought time for the construction and adjustment of subsequent regulatory policies. The competition situation of new financial technology formats and international systems is changing rapidly. It is necessary for my country to continue to explore governance mechanisms that are more in line with the characteristics of financial technology risks, and promptly adaptive adjustments to "ban" supervision. The introduction of financial regulatory policies requires balancing the goals of diversified value, improving the substantive legality basis of normative documents, classifying and regulating in a "penetrating" way, strengthening trust interest protection in policy adjustments, leading the voice of emerging industries through institutional advantages, and continuously enhancing my country's international competitiveness in blockchain finance and even financial technology fields.