"From On-site to Off-site" Comparison of the Similarities and Differences between the 94 and 621 Measures to Combat Virtual Monetary Policy

Wu said the author   |   Uncle Tan

Editor of this issue   |   Colin Wu

On September 4, 2017, the People’s Bank of China and seven other departments jointly issued the “Notice on Preventing Risks in Token Issuance and Financing” (1). On June 21, 2021, the People’s Bank of China [interviewed some banks and payment institutions] on the issue of virtual currency speculation (2). Both incidents brought shocks to the cryptocurrency market, and the prices of various cryptocurrencies plummeted. So, what are the similarities and differences between the two regulatory tightenings?

1    The 2017 policy mainly targets IC0

The title of the announcement on September 4, 2017 is "Announcement on Preventing Risks of Token Issuance and Financing". The first sentence of the announcement clearly points out that "recently, a large number of activities in China have emerged through the issuance of tokens, including initial coin offerings (ICOs), speculation is prevalent, and they are suspected of engaging in illegal financial activities, which has seriously disrupted the economic and financial order." As we all know, 2017 was a year when various ICO projects emerged in an endless stream. Although there were a very small number of normal projects, the vast majority of projects were scams under the banner of virtual currency. The regulators noticed this risk and issued the announcement at the right time.

According to the relevant statements in the announcement, "token issuance financing refers to the financing entity raising so-called 'virtual currencies' such as Bitcoin and Ethereum from investors through the illegal sale and circulation of tokens. It is essentially an act of illegal public financing without approval, and is suspected of illegal sale of token tickets, illegal issuance of securities, illegal fundraising, financial fraud, pyramid schemes and other illegal and criminal activities." It treats "Bitcoin and Ethereum" as assets raised by the financing entity through "token issuance financing."

Before the emergence of cryptocurrencies such as Bitcoin and Ethereum, criminal activities such as illegal fundraising and financial fraud had to be carried out through legal currency. The use of cryptocurrency to conduct criminal activities undoubtedly increased the difficulty of supervision. Therefore, in the 94 announcement, there is a sentence that "financial institutions and non-bank payment institutions shall not directly or indirectly provide account opening, registration, trading, clearing, settlement and other products or services for token issuance financing and 'virtual currency'."

Before 1994, domestic cryptocurrency transactions were all conducted through user transfers to exchange company accounts. After 1994, the "over-the-counter" era of cryptocurrency transactions began. Looking back from the perspective of policy implementation, the focus of supervision at the time was on "preventing the participation of token financing issuance through Bitcoin and Ethereum" rather than "participating in transactions between legal currency and Bitcoin and Ethereum."

  2     The 2021 policy targets a wider range of "virtual currency transactions"

The title of the 2021 People's Bank of China announcement is "The People's Bank of China interviewed some banks and payment institutions on the issue of virtual currency trading speculation", and the first sentence is "In order to thoroughly implement the relevant decisions and arrangements of the Party Central Committee and the State Council, implement the spirit of the 51st plenary meeting of the State Council Financial Committee, crack down on Bitcoin and other virtual currency trading speculation, protect the property safety of the people, and maintain financial security and stability..." It can be seen that compared with 2017, the scope of this crackdown includes all "virtual currency" "trading speculation" issues. For "trading speculation", banks or payment institutions such as Alipay are very important, so this ban is much wider than in 2017.

This is not the first time that restrictions on transactions between fiat currencies and cryptocurrencies have been raised. As early as 2013, the People's Bank of China, the Ministry of Industry and Information Technology, the China Banking Regulatory Commission, the China Securities Regulatory Commission, the China Insurance Regulatory Commission and other five departments jointly issued the "Notice on Preventing Bitcoin Risks", which put forward the following requirements for financial institutions and payment institutions:

“It is prohibited to directly or indirectly provide customers with other services related to Bitcoin, including: providing customers with Bitcoin registration, trading, clearing, settlement and other services; accepting Bitcoin or using Bitcoin as a payment and settlement tool; providing Bitcoin and RMB and foreign currency exchange services; carrying out Bitcoin storage, custody, mortgage and other businesses; issuing Bitcoin-related financial products; using Bitcoin as an investment target for trusts, funds and other investments, etc.”

This policy is quite vague literally. For example, in the period from September 4, 2017, exchanges such as Huobi, OK and BTCChina opened accounts in financial institutions and used these accounts to deposit and withdraw users’ money. So, as a bank providing financial account services for several major exchanges, is it considered as “providing Bitcoin and RMB and foreign currency exchange services”? In theory, the main body of “providing Bitcoin and RMB exchange services” is the exchange rather than the financial institutions, but the financial institutions did provide Bitcoin-related services to these customers of the exchange.

The reason for this situation was probably because people did not understand Bitcoin well enough at the time, and the entire cryptocurrency market was small and had limited impact. The requirement on September 4, 2017 that "financial institutions and non-bank payment institutions shall not directly or indirectly provide account opening, registration, trading, clearing, settlement and other products or services for token issuance financing and 'virtual currency'" can be regarded as a detailed explanation of the 2013 "Notice on Preventing Bitcoin Risks", because as a financial institution, setting up an account for users to top up and withdraw legal currency for the exchange can at least be regarded as indirectly providing services for the exchange of virtual currency and RMB.

  3      New issues in the “off-site” era

Before 2017, there was no such term as "frozen card" in the cryptocurrency circle, because at that time, deposits and withdrawals were all made through the company accounts of the exchanges. In 2018, sporadic cases of frozen cards began to appear, and in the past two years, the phenomenon of "frozen card" has intensified.

The main reason for freezing the card is that the card has received funds related to telecommunications fraud. Due to the anonymity of Bitcoin, it has naturally become a favorite way for fraudsters to launder money. Generally speaking, fraudsters will quickly buy the money they have defrauded into coins to achieve a rapid transfer of funds. Many people who sell coins will be "caught in the crossfire" and have their cards frozen because they have received fraudulent money.

Just as illegal fundraising did not emerge after the emergence of cryptocurrency, telecom fraud is not a new phenomenon after the emergence of cryptocurrency. But there is no doubt that the emergence of cryptocurrency has greatly facilitated these two criminal activities, and thus attracted the attention of regulators. If the ban on September 4, 2017 was mainly aimed at illegal fundraising and financial fraud, the interview by the People's Bank of China on June 21, 2021 was mainly aimed at the risk of money laundering. The size of the money laundering market can be seen from the telecom fraud industry alone. According to reports in the People's Daily (4) and People's Daily Online (5):

"In 2020, a total of 322,000 telecom fraud cases were uncovered, 361,000 suspects were arrested, more than 272 billion yuan of funds involved in the cases were frozen, 8.7 million people were dissuaded from being deceived, and a total of more than 187 billion yuan in economic losses were recovered, effectively safeguarding the property safety and legitimate rights and interests of the people."

"From January to May 2021, a total of 114,000 telecom fraud cases were uncovered nationwide, more than 14,000 criminal gangs were eliminated, and 154,000 suspects were arrested. Since the beginning of this year, a total of 265.4 billion yuan of funds involved in the cases have been urgently stopped. The economic losses of 99.1 billion yuan have been recovered for the people."

The amount of "stopped payments" in the first five months of 2021 was 265.4 billion yuan, which is close to the amount of 272 billion yuan for the whole of last year. It can be seen that telecommunications fraud is still rampant, and a large part of these stopped payments will be "laundered" through cryptocurrencies, which are very "efficient" in money laundering. After comprehensively weighing the benefits of cryptocurrencies to the economy (such as the use of abandoned hydropower, etc.) and negative effects (environmental problems, money laundering problems), it is not difficult to understand why the People's Bank of China further strengthened the ban on virtual currency transactions.