The Financial Committee of the State Council has issued a strong statement to crack down on Bitcoin transactions. Experts say that virtual currency "profiteers" will face multiple risks

Our reporter Xing Meng

Trainee reporter Zhang Bo

On May 21, the Financial Stability and Development Committee of the State Council (hereinafter referred to as the "Financial Committee") pointed out in a meeting that "we must crack down on Bitcoin mining and trading, and resolutely prevent individual risks from spreading to the social field." The Financial Committee's heavy voice once again clarified the financial regulatory authorities' strict regulatory attitude towards Bitcoin.

The price of Bitcoin briefly dropped by nearly $5,000 to more than $33,000. As of May 22, more than 170,000 people were liquidated in the cryptocurrency market in 24 hours, equivalent to more than 6.45 billion yuan in funds, and blockchain-related stocks in the U.S. stock market also suffered a heavy drop.

Cryptocurrencies such as Bitcoin have experienced sharp rises and falls, with huge risks, and many investors have suffered financial losses. Many industry experts pointed out that the launch of the digital RMB, the high energy consumption of Bitcoin mining, and money laundering issues are important reasons for this round of regulation. Investors should also fully understand the nature and risks of cryptocurrencies such as Bitcoin and not participate in any form of trading or speculation.

Preventing individual risks

Transmit to the social sector

Since the beginning of this year, the market of Bitcoin and other encrypted digital currencies has been extremely hot. The myths of wealth creation such as "100x coin" and "1,000x coin" have stimulated the sensitive nerves of the market, and a large number of domestic individual investors have followed suit. As a result, the risks are getting more and more serious. This year, the encrypted digital currency market is prevalent with speculation of worthless air coins, and sharp rises and falls have become the norm, attracting more and more investors to participate in high-leverage transactions, frequent liquidations, and huge risks.

Judging from previous policies, "preventing financial risks" is the main purpose of my country's strict supervision of encrypted digital currencies. Financial regulatory authorities have repeatedly emphasized that encrypted digital currencies such as Bitcoin do not have monetary attributes and related financial risks should be prevented.

On May 18, the China Internet Finance Association, the China Banking Association, and the China Payment and Clearing Association jointly issued the "Announcement on Preventing the Risk of Virtual Currency Trading Speculation", emphasizing that encrypted digital currency does not have currency attributes and should not and cannot be circulated and used as currency in the market. Financial institutions, payment institutions, etc. are not allowed to carry out business related to encrypted digital currency. In fact, as early as 2017, in order to implement the spirit of the National Financial Work Conference, protect the legitimate rights and interests of investors, and prevent and resolve financial risks, the central bank and seven other ministries and commissions jointly issued the "Announcement on Preventing the Risks of Token Issuance and Financing". In addition, at the 2021 Annual Meeting of the Boao Forum for Asia, Li Bo, Deputy Governor of the Central Bank, made it clear that "it is necessary to ensure that encrypted assets will not cause serious financial risks."

The Financial Committee meeting reiterated the need to guard against financial risks and stressed "resolutely preventing individual risks from spreading to the social sphere" to maintain the stability of the financial order.

"At present, the scale of virtual currencies such as Bitcoin entering the trading market is limited, which can easily create an illusion for investors that 'scarce goods are in short supply' and can be easily influenced and controlled by a small number of institutional investors or individuals. At the same time, many investors often hold the mentality of 'getting rich overnight', and the trading leverage is usually magnified to 5 times or even higher. In the case of large price fluctuations, investors face huge trading risks." Dong Ximiao, chief researcher of China UnionPay Financial and part-time researcher at the Institute of Finance of Fudan University, told the Securities Daily reporter.

In this context, there are frequent cases of virtual currency investors jumping off buildings to defend their rights due to liquidation. According to multiple media reports, on May 20, a user of Huobi.com, a virtual currency trading platform, jumped off a rooftop to defend his rights. On May 19, due to the collective plunge of cryptocurrencies such as Bitcoin, several virtual currency trading platforms staged "unplugging the network cable". The website and app of Coinbase, the largest cryptocurrency trading platform in the United States, were down, and another trading platform Binance also announced the suspension of some cryptocurrency withdrawals. Investors who are keen on high-leverage trading may suffer losses due to the inability to operate due to the downtime of the trading platform.

"The speculation of Bitcoin far exceeds that of other financial currency market products. The repeated liquidation of long and short positions caused by irrational speculation has caused serious damage to wealth and is not conducive to social stability." Zheng Lei, chief economist of Baoxing Financial, told the Securities Daily reporter.

“As an alternative investment target, the risks posed by cryptocurrencies are more complex and diverse than those posed by traditional financial instruments.”

An industry analyst told the Securities Daily reporter that in the cryptocurrency market, which lacks supervision and has information asymmetry, the price of the currency is easily influenced and manipulated by a small number of institutional investors, while individual investors are at a disadvantage in obtaining information. Under such circumstances, it is more likely to cause a large-scale depreciation of individual investors' assets, resulting in "individual risks."

He further pointed out that some investors, in particular, used lending financing channels to make highly leveraged investments, which meant that the risk of a sharp depreciation of cryptocurrencies was likely to create a higher risk of transmission to the traditional financial sector than before, thus affecting the stability of the financial order.

Zhang Xiaoyan, vice president of Tsinghua PBC School of Finance, believes that the regulatory policies for virtual currencies such as Bitcoin are intended to protect small and medium-sized investors. Virtual currency transactions lack effective supervision, and their prices are easily manipulated, resulting in volatile ups and downs. There are many retail investors in China, and the commonality among small and medium-sized investors is that they have little financial knowledge and do not have a deep understanding of virtual currencies. Regulatory policies are intended to protect the hard-earned money of retail investors.

Three major factors

Or it may lead to regulatory action

The rare statement from the Financial Committee surprised the industry. More stringent regulatory measures for encrypted digital currencies may be on the way in China.

Some people believe that the direct reason why the Financial Committee focuses on cracking down on Bitcoin is to clarify Bitcoin's non-monetary attributes, create a better environment for the launch of the digital RMB, and better maintain financial security.

Industry insiders said that the clear message conveyed by this Financial Committee meeting to ordinary people is not to participate in Bitcoin transactions and to prevent personal property losses in the process of Bitcoin transactions. Bitcoin and digital RMB have completely different properties. Digital RMB is a digital currency for easy use, while Bitcoin is treated as an illegal currency for trading and is dominated by profit. In this way, the legal currencies of various countries will be affected, and the financial regulatory authorities will crack down on Bitcoin to maintain the authority of the digital RMB.

Dong Ximiao believes that financial management departments should intensify the crackdown on illegal virtual currency transactions, maintain normal economic and financial order, and create a better environment for the official launch of my country's digital RMB. At the same time, investor education should be further strengthened and improved to enhance the pertinence and effectiveness of education and improve the ability of ordinary investors to identify and prevent risks of virtual currency. Investors should also fully understand the nature and risks of virtual currencies such as Bitcoin, withstand temptation, protect their "wallets", and not participate in any form of transactions or speculation.

In addition, industry experts generally believe that Bitcoin’s excessive energy consumption will hinder the achievement of carbon reduction targets, which has also become an important reason for the introduction of this round of supervision.

Zheng Lei said that the electricity consumption of Bitcoin mining conflicts with the goal of low-carbon emission reduction, and the sharp rise in energy and raw material prices since the beginning of this year has further aggravated the power shortage due to the electricity consumption of mining.

An industry insider who declined to be named told the Securities Daily reporter that Bitcoin's impact on carbon neutrality, capital outflow channels, and illegal financing using tokens (encrypted digital currencies) has led to a heavy blow from regulators.

In April this year, an academic paper published in the scientific journal Nature Communications gave the view that "Bitcoin mining activities may undermine China's carbon reduction efforts". The paper said that after research, it was found that without any policy intervention, the annual energy consumption of Bitcoin blockchain in China is expected to peak in 2024 at about 296.59 terawatt hours, and will generate 130.5 million tons of carbon emissions, which ranks among the top ten among 182 cities and 42 industrial sectors in the country.

"Bitcoin mining machines directly consume electricity, and as the computing power of the entire network increases, the total power consumption of Bitcoin will only get higher and higher." Li William, chief researcher of OKEx Research Institute, told the Securities Daily reporter that the latest data from the Cambridge University Bitcoin Electricity Consumption Index (CBECI) shows that the power consumption of Bitcoin mining has exceeded more than 100 countries and regions including Norway and the Netherlands, ranking around 28th in the world.

In addition, there is a risk of money laundering using virtual currencies such as Bitcoin in the market, especially in helping domestic funds to flow out, which has caused a certain impact on the existing foreign exchange system.

Due to the anonymity and wide international circulation of virtual currency, criminals have used virtual currency for cross-border exchange in recent years to convert criminal proceeds and profits into foreign legal currency or property, which has to some extent become a new means of money laundering.

The reporter noticed that in early May, the Hefei police cracked an underground money laundering case. It was learned that the suspects used the trading of Bitcoin and other encrypted digital currencies to help criminal gangs launder money, involving a turnover of more than 10 billion yuan. The scale and number of transactions far exceeded the traditional money laundering model.

"The large-scale inflow and outflow of funds through virtual currency transactions may cause the foreign exchange management system to fail. Many governments have issued warnings on virtual currency transactions, and strengthening supervision is becoming a trend," said Zheng Lei.

Yu Jianing, rotating chairman of the Blockchain Committee of the China Communications Industry Association and president of Huobi Education, told the Securities Daily reporter, "Compared with traditional money laundering crimes, the money laundering process of encrypted digital currency involves the conversion of stolen money into virtual currency and the exchange of encrypted digital currency into legal currency. The transaction process and transaction records between encrypted currencies are complicated and difficult to confirm, especially the on-chain asset transfer contains multiple transaction addresses and multiple transaction channels. These assets go through multiple layers of decentralized transfers, mixed currency service systems, and flow into service agencies and dark networks that do not require identity verification. It is very difficult to fully analyze the entire money laundering crime process."

Project parties, trading platforms, mining machine vendors

There will be multiple risks

After the Financial Committee made a strong statement at the meeting, the cryptocurrency market fell.

According to the data from the virtual currency market software Feixiaohao App, as soon as the news came out, the price of Bitcoin began to fall from around $38,000, and once fell to $33,598, a drop of more than 30% in the past month; Ethereum once fell to $2,113, and other currencies also fell to varying degrees. According to data from Bitcoin Home, as of May 22, more than 170,000 people in the entire network had their positions liquidated within 24 hours, equivalent to more than 6.45 billion yuan in funds being wiped out.

In addition, affected by this, blockchain concept stocks in the U.S. stock market also suffered a heavy blow on the same day, falling across the board.

According to Futu NiuNiu data, as of the close of trading on May 21, Eastern Time, BitMining fell more than 23% to $9.75; The9 fell more than 11%; Canaan Inc. and Ebang International fell 9.23% and 7.69%, respectively; and Coinbase, the "first crypto stock," fell 3.88% to $224.35, with its market value shrinking to $46.813 billion.

In the medium and long term, the Financial Committee's heavy-handed attack is aimed at maintaining financial order and security. Virtual currency project parties, trading platforms, mining machine manufacturers, etc. may face multiple legal issues.

"The impact of this Financial Committee meeting on the virtual currency industry will depend on the strength of the management's handling." Zheng Lei said that mining may be banned first. Currently, some domestic companies are still providing services for buying and selling virtual currencies in RMB. Although the servers are located overseas, they may still stop such services due to regulatory requirements.

"This will definitely have a profound impact on the ecology of the virtual currency industry." Ding Feipeng, director of the criminal department of Beijing Shangguang Law Firm, told the Securities Daily reporter that, first, the issuance and financing of tokens in the name of mining may be completely stopped, and clues of crimes such as illegal fundraising, illegal issuance of securities or illegal sale of token tickets may be transferred to judicial authorities; second, the contract transactions of virtual currency trading platforms may not be able to continue to operate, and even the possibility of further accountability cannot be ruled out; third, after domestic mining is completely banned, mining machine manufacturers will face the pressure of transformation or domestic sales to export, and some mining machine manufacturers of model coins may face the risk of bankruptcy or user rights protection. In addition, virtual currency project parties, trading platforms and mining farms may see a new round of "going overseas".

On May 18, the Inner Mongolia Development and Reform Commission issued the "Announcement on the Establishment of a Reporting Platform for Virtual Currency "Mining" Enterprises", which fully accepted petitions and reports on four types of virtual currency "mining" enterprises. As early as the end of February, Inner Mongolia required a comprehensive withdrawal of "mining" projects: on the one hand, it required "strictly prohibiting the establishment of new virtual currency mining projects"; on the other hand, it required "comprehensively clearing and shutting down virtual currency mining projects, and all withdrawal by the end of April 2021."

Guan Qingyou, president and chief economist of the Ruishi Financial Research Institute, pointed out in his article that from the perspective of ordinary investors, an investment target like Bitcoin, which is extremely volatile and has obvious head concentration, is not suitable for everyone. Investors still need to recognize their own positioning and choose to invest in targets that match their own circumstances.