With violent ups and downs and competition among giants, can regulation regulate Bitcoin and the business logic behind it?

Original title: With violent ups and downs and competition among giants, can regulation regulate Bitcoin and the business logic behind it?

Economic Observer Network Hu Qun/Text

In April, Bitcoin experienced a roller coaster ride. On April 13, the price climbed to a stage high, rising to more than $63,000, but then began to fall, falling below $48,000 on April 26. As of press time on April 29, the price of Bitcoin was $54,000.

"We believe that Bitcoin and stablecoins are crypto assets. Crypto assets are investment options, not currencies themselves. They are alternative investments, not currencies themselves." Li Bo, deputy governor of the People's Bank of China, said at the Boao Forum for Asia on April 18 that crypto assets should play a major role in the future as an investment tool or alternative investment. If it is used as an investment tool, many countries, including China, are also studying what kind of regulatory environment should be for such an investment method.

"This should be the first time that the senior officials of the People's Bank of China have made a positive response to Bitcoin as a crypto asset." Xiao Sa, director of the China Banking Law Research Association, said that this to a certain extent shows that the People's Bank of China has a professional understanding of the Bitcoin market and a relatively open mind. This is the latest judgment made by the People's Bank of China based on a deep understanding of the development trend of the global crypto market, which fully reflects the principle of "prudent tolerance".

The market predicts that if digital currencies, mainly Bitcoin, are brought under the supervision of Chinese regulatory agencies in the future, the market is expected to develop towards standardization.

Giants compete

Tesla said on Wednesday that as of March 31, the fair market value of the company's bitcoin holdings was US$2.48 billion (about 16 billion yuan); based on the current price of Bitcoin, if Tesla cashes in all of its bitcoins, it will record at least about US$1 billion (about 6.4 billion yuan) in investment income.

Since 2020, the global economy has been in turmoil. Institutions such as Goldman Sachs and Tesla have deployed digital currencies, and the price of Bitcoin has hit new highs. The Ethereum ecosystem has gradually expanded, and data indicators such as transaction volume and number of addresses have achieved rapid growth. Facebook has renamed Libra to Diem, claiming that it is expected to be reviewed by the Swiss Financial Market Supervisory Authority (FINMA). It has previously stated that it will be launched on the market in January 2021. On April 20, it was reported that the Facebook-led Diem plan will be postponed and is expected to be launched later this year. PayPal, which has more than 300 million active users, has opened a cryptocurrency payment channel for American consumers since the end of March for users to pay at millions of online merchants around the world. PayPal said the service will be available at all of its 29 million merchants in the coming months. Visa has partnered with blockchain service company Circle to issue and use credit cards based on USDCoin (USDC).

Currently, more and more international financial institutions are involved in the cryptocurrency business, including JPMorgan Chase, New York Mellon, Morgan Stanley, DBS Bank and other large institutions. With the support of financial institutions, cryptocurrency trading opportunities are increasing, and investors can treat various investment portfolios containing cryptocurrencies more calmly.

Unlike international financial institutions such as JPMorgan Chase, HSBC has a different view on cryptocurrencies. On March 29, HSBC said in an email to its customers that it had banned customers of its online stock trading platform from buying or transferring MicroStrategy shares, defining the latter as a "virtual currency product." HSBC also stated that it would not provide services for the purchase or exchange of virtual currency-related or virtual currency products.

However, it cannot be ignored that the sharp volatility of Bitcoin prices makes its speculative nature far greater than its functions such as payment.

Jeff Currie, chief commodity strategist at Goldman Sachs, said in a client report on Wednesday that Bitcoin's recent volatility has heightened concerns about its long-term value storage. Goldman Sachs believes that one of the biggest risks facing Bitcoin is the large amount of energy consumed in the digital mining process. In addition, the status of other cryptocurrencies such as Ethereum and alternative coins has surpassed Bitcoin, which increases the risk of holding Bitcoin.

On April 21, Guggenheim's global chief investment officer Scott Minerd said that there is a huge bubble in Bitcoin, and the price will fall by 50%, falling back to $20,000 to $30,000. This kind of decline has also happened in the history of Bitcoin. But he believes that this is part of the "normal evolution of a long-term bull market" and expects the price of Bitcoin to eventually reach $400,000 to $600,000.

Coin circle, blockchain circle and mining circle

Since the launch of Bitcoin in 2009, various cryptocurrencies have emerged, the first of which were launched by startups such as Ethereum. Well-known companies such as Facebook have also entered this field, and its Diem aims to create a new global digital ecosystem.

On September 4, 2017, the People's Bank of my country, the Cyberspace Administration of China, the Ministry of Industry and Information Technology, the State Administration for Industry and Commerce, the China Banking Regulatory Commission, the China Insurance Regulatory Commission, the China Securities Regulatory Commission and other seven ministries and commissions jointly issued the "Announcement on Preventing the Risks of Token Issuance and Financing". The announcement characterized the sale of Bitcoin and other tokens as "illegal sale of token tickets", "illegal sale of securities", "illegal fundraising" and "financial fraud" type criminal activities.

On April 21, Wang Wenguang, head of the BitDeer Group Data Center, said at the "Second BitDeer 421 Water Festival and Mining Ecological Conference" that there are four types of domestic cryptocurrency investment channels: buying coins, mining/computing power, buying stocks of related listed companies, and buying derivatives of coins. Buying coins is simple and direct, but the transaction is illegal; mining/computing power costs are low, but there are many pitfalls; buying stocks of related listed companies is compliant and transparent, but the coin + stock model has additional operating risks; buying derivatives of coins is directly compliant, but the technical threshold is high and the risk is high.

"The sale of mining machines is not directly prohibited by law." Xiao Sa said that in the first article of the "Notice on Preventing Bitcoin Risks" implemented by the People's Bank of China and five other ministries in 2013, "Correctly Understand the Attributes of Bitcoin", the notice clearly stipulates that "Bitcoin should be a specific virtual commodity, does not have the same legal status as currency, and cannot and should not be circulated and used as currency in the market." By extension, some virtual currencies similar to Bitcoin are indeed illegal as currencies, but as specific virtual commodities, they should be protected by law.

2021 is a year of major changes in the mining industry. With the entry of large-scale institutions, the prevalence of cloud mining, the industry scale exceeding 100 billion RMB, the introduction of carbon neutrality policies, the rise of DeFi and overseas mining, the mining market has suddenly taken off, and new trends in the mining industry have emerged.

Regarding the large-scale entry of institutions, Wu Jihan, chairman of BitDeer Group, believes that this is a sign that the industry has been recognized by mainstream funds, which is a good thing for the mining industry. He believes that "whether as a layout of a new industry direction or as a financial investment, more and more companies will enter this direction in the future, and this trend will definitely not be interrupted. Just like companies buying buildings or investing in shops, mining as a unique asset allocation and as a long-term income in an emerging field, such a phenomenon will become more and more common."

However, the current sharp drop in the price of coins has made miners afraid of the risks of mining. Mining has become professionalized and scaled, and centralization has become increasingly obvious, making it difficult for new miners to participate. Ye Jiejie, head of operations at BitDeer Group, believes that the oligopoly of the mining industry and the entry of institutions, the change of industrial location, and the impact of Ethereum's conversion to POS on the output value of POW mining will become three important variables that will cause changes in the mining industry in the next two to three years. Under this situation, although the mining industry is still a highly profitable industry, the growth rate will inevitably decline, which is not good for small miners.

However, mining is extremely energy-intensive. According to research data from the University of Cambridge, the annual electricity consumption of global Bitcoin mining is about 121.36 terawatt-hours, which is equivalent to meeting the energy needs of Cambridge University for 744 years. The Economic Observer previously reported that since electricity costs account for the majority of mining costs, areas with sufficient power resources and cheap electricity costs are often the first choice for mining sites. The "LBU Mining Machine Mall", a trading platform that mainly serves mining groups, shows that the places where mining machine supply and demand information is issued are mostly Yunnan, Guizhou, Sichuan, Xinjiang and Inner Mongolia. In recent years, due to the substantial development of the computing power of the entire network, the energy consumption of mining has risen sharply, and the government departments of the above-mentioned preferred places are also increasing their control efforts.

Regulatory standards must keep up

Melanie Swann, founder of the Blockchain Science Institute, divides blockchain technology into three stages or areas: Blockchain 1.0, Blockchain 2.0, and Blockchain 3.0.

Blockchain 1.0 is programmable currency represented by Bitcoin, which refers more to innovations in the field of digital currency, such as currency transfer, settlement and payment systems. Blockchain 2.0 is programmable finance based on blockchain. It involves more innovations in some contracts, especially commercial contracts and transactions, such as stocks, securities, futures, loans, clearing and settlement, and so-called smart contracts. Blockchain 3.0 is the application of blockchain in other industries. It corresponds more to the transformation of human organizational forms, including health, science, culture, and blockchain-based justice and voting.

Currently, the blockchain 3.0 era has arrived. Blockchain will be derived into various industries besides the financial industry, which also means that more application scenarios will be born, meeting more complex business logic and promoting greater industrial changes.

"The level of popular science of blockchain is low, which is not conducive to the development of the entire industry." Hu Chao, vice president of OKLink Group, pointed out that although the "demonization" stage of blockchain has passed, the legacy of "stigmatization" still exists, the "omnipotence theory" of blockchain is rampant, and the wrong perception of "blockchain + everything" is still spreading. In addition, there is a shortage of professional talents and the soil for industry growth is poor. More importantly, the regulatory framework and regulatory attitude are highly uncertain, and the "sword of Damocles" is always hanging high.

OKLink Research Institute previously conducted a questionnaire survey on the current status of blockchain popularization. Among the 1,580 valid feedback results, only 6.08% said they "understood blockchain", and 81.76% said they "had heard of it but didn't understand it". Compared with new technologies such as artificial intelligence and cloud computing, blockchain is considered the second most "difficult to understand" technology, accounting for 38.51%. Users who are "interested in learning blockchain" account for 91.89%, and the most interested content is blockchain concepts and applications, with the proportion of choosing these two items close to 70%. However, the channels for users to learn about blockchain are mainly web searches and video platforms.

"As for whether '+ blockchain' is needed, a more popular consideration is the cost-effectiveness that everyone often talks about. If a huge investment is spent to build a so-called blockchain system, but in the actual use process, it is found that its efficiency is far lower than that of the Internet system, it will cause a waste of resources." Hu Chao said that the real iteration of a new technology in the development stage mainly depends on two signs: one is the breakthrough of the underlying technology, and the other is the emergence of "disruptive" applications. For example, Alipay and WeChat Pay have created a new payment method, reconstructed people's payment habits, and formed a new business ecosystem around mobile payments. If there is no mobile Internet technology, such applications are dependent on this technology. In this sense, it can be said that Alipay and WeChat Pay are "disruptive" applications of mobile Internet technology.

"At present, the implementation of 'disruptive' blockchain applications is still in the exploratory stage, and killer applications may emerge in the next five years." Hu Chao believes that, for example, DeFi, NFT, etc. are representatives of disruptive applications in the current development stage. With technological breakthroughs, environmental changes and developments, more innovative applications based on the underlying logic of blockchain technology will enter everyone's field of vision, and more new business models will also bring more economic benefits.

What is the biggest application of blockchain at present?

"It is a black industry or gray industry." Zhang Chao, vice president of OKLink Group, said that black industry or gray industry will involve the interests of sovereign states. Some countries, including my country, restrict or provide limited protection for the development of blockchain, while countries including India prohibit the development of blockchain, and even individuals holding Bitcoin is illegal. Relatively speaking, my country is still very tolerant of the development of innovative norms.

Take NFT as an example. After the artwork is NFT, its price has different degrees of premium, and such premium will continue to exist in the short term. Xiao Sa believes that if the perpetrators who need to launder money convert the stolen money into virtual currency and use it to buy NFT artworks, it will bring great difficulties to the investigation. In various NFT auctions in the future, criminals will use the current high premium as a channel for money laundering.

At present, my country has issued a series of laws and regulations to explain the anti-money laundering issue, and financial institutions have also issued corresponding measures to control money laundering. In addition, the legal provisions and measures specify the obligated subjects of anti-money laundering and the responsibilities they must assume. Therefore, relevant personnel have an obligation to control money laundering, and refusal to perform relevant obligations may constitute a crime of omission of money laundering. However, my country has not yet issued corresponding laws and regulations on the prevention of general virtual currency money laundering risks, so general virtual currency traders do not have a legal obligation to combat money laundering. This lays a hidden danger for money laundering in the field of virtual currency. As for the trading platform for the circulation of NFT artworks, there are no targeted regulations. Although most of these platforms are currently set up overseas, Xiao Sa's team believes that it is necessary for regulators to prepare for a rainy day.

The rapid development of blockchain technology has caused varying degrees of lag in supervision and justice, and money laundering is bound to become one of the main negative externalities brought about by decentralized technology. Xiao Sa expressed the hope that regulatory authorities would neither take a one-size-fits-all approach nor ignore the actual business areas, but rather set up rules and regulations for virtual currency, NFT and other blockchain-extension businesses as soon as possible to regulate their development.

"Regulation is one of the factors driving the expansion of the cryptocurrency environment." PwC's research report pointed out that financial institutions and regulators are still continuing to improve transparency in this field. For example, Hong Kong is exploring a regulatory framework for cryptocurrency transactions; the U.S. Office of the Comptroller of the Currency has allowed federally chartered banks and federal savings institutions to conduct verification transactions for digital "stable coins." In addition, global financial centers and large economies are advancing the construction of digital asset rules, which not only paves the way for industry growth and innovation, but also facilitates traditional financial institutions that intend to enter this field.

"Financial institutions and regulators in the United States may be gradually clarifying their attitude towards encrypted digital currencies, allowing them to go further on the road of legalization and monetization." Chen Yongwei, a columnist for the Economic Observer and director of the research department of Comparison, said that Satoshi Nakamoto's original intention in conceiving Bitcoin was to make up for the shortcomings of the traditional centralized monetary system and to take a completely new path. There is no doubt that if this idea is achieved, it will be very beneficial to end the hegemony of the US dollar. However, if the old financial system reaches a settlement with them by controlling the infrastructure of digital currencies - exchanges, then there is a high probability that the path originally envisioned by Satoshi Nakamoto will become a fantasy. After the US dollar, Bitcoin and Ethereum merge in some form, the position of the Western financial system dominated by the United States may be more stable worldwide.