Analysis | Will BTC be considered “foreign exchange”?

On June 9, 2021, El Salvador’s President Nayib Bukele announced that the country’s Bitcoin bill was passed with an “absolute majority” (62/84) of votes, which means that Bitcoin has become legal tender in the country, and El Salvador has become the first country in history to use Bitcoin as legal tender. Bitcoin has also risen from a private payment tool to the level of a country’s legal tender. According to Article 16 of the country’s Bitcoin bill, the bill will take effect 90 days after it is published in the government gazette, which means it will officially take effect around September 8, 2021.

There are also reports that following El Salvador, lawmakers from small Central and South American countries such as Mexico and Panama have also claimed that they plan to come up with bills to include Bitcoin as their national legal currency.

Could Bitcoin Become a Foreign Exchange?

As soon as the news of Bitcoin becoming the legal tender of El Salvador came out, some people immediately equated Bitcoin with foreign exchange, believing that Bitcoin speculation would be the same as foreign exchange speculation in the future. However, this statement is questionable.

Article 3 of the Regulations of the People's Republic of China on Foreign Exchange Administration defines what "foreign exchange" is. According to this article, foreign exchange refers to the following means of payment and assets denominated in foreign currencies that can be used for international settlement:

(1) foreign currency notes, including paper money and coins;

(2) foreign currency payment vouchers or payment instruments, including bills, bank deposit vouchers, bank cards, etc.;

(3) Foreign currency-denominated securities, including bonds, stocks, etc.;

(iv) Special Drawing Rights;

(V) Other foreign exchange assets.

It can be seen that the definition of "foreign exchange" in my country has three elements: first, it is expressed in foreign currency; second, it can be used for international settlement; third, it is a means of payment or asset.

Let's look at the first and third elements first. As for the first element, although El Salvador is only a country with a population of only 6.42 million, it is still a sovereign state and officially established diplomatic relations with my country in 2018. Since Bitcoin is recognized as legal tender by one or more sovereign states, it will be relatively smooth for it to obtain the status of "foreign currency". On the other hand, if a country or region that has no diplomatic relations with my country uses a certain virtual currency as legal tender, it is very likely that it will not be recognized by my country. Although unlike traditional legal tender, the credit of Bitcoin is not based on national sovereignty, but the credit of Bitcoin is actually much stronger than the credit of legal tender issued by some small countries themselves.

As for the third requirement, the "Foreign Exchange Administration Regulations of the People's Republic of China" was revised in 2008. Laws are always lagging behind. The legislators at that time obviously did not consider the emergence of digital currency in the future. Therefore, there is no digital currency in the four specific situations listed in this article. However, this article reserves space for new means of payment or asset forms that may appear in the future through the fifth item "other foreign exchange assets". Therefore, Bitcoin can be used as an "other foreign exchange asset" to meet this requirement.

The main obstacle for Bitcoin to become a foreign exchange lies in the understanding of the second requirement, that is, the requirement of "can be used for international settlement". The understanding of this requirement can be further broken down into the actual level and the ought-to level, that is to say: first, at the actual level, has Bitcoin actually become a means of payment for international settlement; second, at the ought-to level, should Bitcoin become a means of payment for international settlement.

On the actual level, the requirement of "can be used for international settlement" requires that foreign currencies that are widely circulated internationally can become foreign exchange. In addition to El Salvador, many countries or regions in the world have recognized that Bitcoin can be used as a payment and settlement tool, and require digital currency exchanges to do a good job in anti-money laundering and anti-terrorist financing, including Germany, Japan, Singapore, and the United States. However, although Bitcoin can be circulated worldwide based on its blockchain characteristics, its circulation is de-banked, that is, it is not circulated and exchanged in financial banks in various countries. In this way, whether Bitcoin can play a corresponding role as a buffer for international trade as foreign exchange needs further discussion.

At the normative level, there are still doubts about whether Bitcoin should become a means of international settlement. Just after El Salvador announced that Bitcoin became legal tender, a number of cold waters came. On June 11, Pieter Hasekamp, ​​director of the Netherlands Bureau of Economic Analysis, published an article titled "The Netherlands Must Ban Bitcoin", demanding that the Dutch government must immediately ban the mining, trading and holding of Bitcoin. In the article, he cited many common statements against Bitcoin, such as Bitcoin security issues, fraud and scam risks, as well as Bitcoin money laundering and the ease of being used as a tool for crime, pointing directly to Bitcoin should not be used as a means of payment. Benoit Coeure, representative of the Bank for International Settlements, also bluntly stated that Bitcoin has not yet passed the "test as a means of payment" and called for more regulatory measures.

In summary, in the field of foreign exchange, Bitcoin is currently more of a medium for exchanging foreign exchange rather than foreign exchange itself. It is too early to directly equate Bitcoin with foreign exchange, as a series of issues need to be addressed and resolved both in theory and practice.

What if Bitcoin is considered foreign exchange?

The above question of whether Bitcoin is foreign exchange is limited to theoretical discussion. my country currently still holds a relatively negative attitude towards the payment attribute of Bitcoin. But it is certain that if my country recognizes Bitcoin as foreign currency or even foreign exchange one day in the future, it will bring about chain legal consequences.

First, Bitcoin will be protected by the criminal law as a kind of property, and stealing Bitcoin will constitute theft. Although there are difficulties in determining the value of Bitcoin due to its high volatility, this is not insurmountable. The investigating authorities can make value determinations by referring to the fair price of Bitcoin on major exchanges and combining the principle of being favorable to the defendant.

Secondly, Bitcoin will be clearly defined as a type of "funds" and "currency". Illegal absorption of Bitcoin will constitute illegal fundraising crimes. Virtual currency trading business using Bitcoin as a medium will also be considered as fund settlement business, which needs to be registered and licensed in accordance with the law. Otherwise, it will be considered as "illegally engaging in fund payment and settlement business" and constitute illegal business operation.

Thirdly, according to Article 3 of the Measures for the Prohibition of Illegal Financial Institutions and Illegal Financial Business Activities (State Council Order No. 247), issued by the State Council in 1998 and revised in 2011, illegal financial institutions refer to institutions that are established without the approval of the People's Bank of China and are engaged in or mainly engaged in financial business activities such as accepting deposits, issuing loans, handling settlements, bill discounts, fund lending, trust investment, financial leasing, financing guarantees, and foreign exchange trading. If Bitcoin is regarded as foreign exchange, institutions that trade Bitcoin without approval will be regarded as illegal financial institutions and will be banned, and will also constitute the crime of establishing a financial institution without authorization.

Finally, if Bitcoin is identified as foreign exchange, Bitcoin trading activities and trading platforms will be subject to strict supervision by the "Foreign Exchange Management Regulations". For example, it is not allowed to transfer domestic Bitcoin abroad in violation of regulations, it is not allowed to remit Bitcoin into the country in violation of regulations, it is not allowed to carry Bitcoin in and out of the country in violation of regulations, it is not allowed to buy and sell Bitcoin privately or in disguised form, it is not allowed to operate Bitcoin settlement business without approval, etc. Violators will constitute administrative violations or even corresponding criminal offenses.

Final Thoughts

The news that El Salvador declared Bitcoin as legal tender has aroused the enthusiasm of many people in the cryptocurrency circle. Indeed, Bitcoin becoming legal tender has always been one of the dreams of digital currency geeks. But it should be noted that centralized legal supervision, like distributed ledgers, has always been with BTCers. Digital currency practitioners should plan ahead, have a forward-looking awareness of relevant compliance, and face the future development trend of Bitcoin rationally.