The speech of the central bank leader sent an important signal that the "Regulations on Preventing and Dealing with Illegal Fund Raising" will be implemented soon

On the evening of April 18, the Boao Forum for Asia 2021 Annual Conference held a sub-forum on "Digital Payment and Digital Currency". Central bank officials from many Asian countries participated in the discussion on the current hot issues of digital currency regulation, the impact of digital currency on the financial system, and the cross-border use of digital RMB.

Li Bo, deputy governor of the People's Bank of China, said that Bitcoin is a crypto asset and an investment option. It is not a currency itself, but an alternative investment. Therefore, the main role that crypto assets should play in the future is as an investment tool or alternative investment. "It is necessary to ensure that speculation on such assets does not cause serious financial risks. We are studying the regulatory rules for Bitcoin and stablecoins. In the future, if any stablecoin hopes to become a widely used payment tool, it must be strictly regulated, just like banks or quasi-bank financial institutions."

Zhou Xiaochuan, Vice Chairman of the Boao Forum for Asia, Vice Chairman of the 12th National Committee of the Chinese People's Political Consultative Conference, and former Governor of the People's Bank of China, said that it is necessary to distinguish between digital currencies and digital assets. It is not time to draw conclusions about digital assets such as Bitcoin, but "we must remind and be careful. In China, financial innovations must clearly state their benefits to the real economy."

Crypto assets are investment tools, not currencies

Li Bo, deputy governor of the central bank, said at the Boao Forum that Bitcoin is a crypto asset and an investment option. It is not a currency itself, but an alternative investment. Therefore, the main role that crypto assets should play in the future is as an investment tool or alternative investment.

In my country, individuals are allowed to participate in virtual currency because it is a virtual commodity. However, no financial institution or payment institution is allowed to conduct Bitcoin-related business, including using Bitcoin as an investment target, issuing Bitcoin-related financial products, underwriting Bitcoin-related insurance business, etc.

Li Zemin, a lawyer at Guangdong Guangqiang Law Firm and director of the Guangqiang Economic Crime Defense and Research Center, believes that the most direct difference between crypto assets and virtual commodities is that crypto assets can be tokenized, that is, virtual currencies can be invested as commodities, property, currency, securities, etc. If virtual currencies can be selected as different investment products, they will face different criminal risks and may have different charges.

"Since it is an investment tool, many countries, including China, are studying what kind of regulatory environment should be applied to this type of investment and ensuring that such assets do not cause serious financial risks. Before we figure out what kind of regulatory rules should be applied to crypto assets such as Bitcoin, we will continue to maintain our current regulatory measures and practices," said Li Bo.

As Bitcoin is gradually accepted by mainstream society, people are still discussing whether Bitcoin is a currency or an asset. From a global perspective, the legal attributes of Bitcoin under the current regulatory systems of various countries are very different. The theoretical basis for defining Bitcoin in various countries mainly includes various viewpoints such as debt theory, property right theory, intellectual property theory and new right theory.

For example, each state in the United States has an independent legal system, and whether Bitcoin is recognized as a currency varies from state to state. From the perspective of regulatory agencies, the main regulatory agencies in the United States include the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Internal Revenue Service (IRS), etc. They have different positioning of Bitcoin and different regulatory measures.

Li Zemin believes that if virtual currency is consistent with the current trend abroad and develops into a financial derivative, the state is likely to issue licenses to institutions operating virtual currency and include them in the scope of administrative licensing supervision. Therefore, institutions engaged in virtual currency business will have a set of procedures for applying for licenses, but if they operate without a license, they are likely to face the criminal risk of illegal operation, and enterprises and companies must be vigilant about this.

For ordinary people, with the supervision of the state, they may conduct transactions on specific virtual currency exchanges, and virtual currency transactions will be fully transferred to on-site transactions. Theoretically, the currently active OTC transactions will not be allowed, which can alleviate the current situation where virtual currency OTC transactions are either frozen or criminalized.

"Digital assets, as virtual assets, are now receiving more and more attention from large institutions and national governments. I believe that anything that can be valued should be regarded as an asset, whether tangible or intangible. Since it is an asset, there should be relevant laws and regulations to protect its ownership and usage rights, and regulate its property rights and usage." Zhou Xinjian, senior researcher at MeiChain Technology, told "Chain News".

Stablecoins will face stricter regulation

Li Bo said that if crypto assets such as stablecoins are to become widely used payment solutions, they will need stronger regulatory rules, that is, stricter than the current regulatory rules for Bitcoin. "For stablecoins issued by private enterprises, if they become a payment tool in the future, they must be subject to strict supervision like banks or quasi-bank financial institutions."

As an important innovation in the financial industry, the advent of stablecoins is changing the country's monetary regulatory policies, commercial economic activities, and all aspects of people's daily consumption behaviors. The so-called stablecoin, as the name suggests, refers to a currency whose price remains relatively stable when measured using a mainstream legal currency. If a digital currency asset wants to maintain a stable value, it must first determine the anchor it is linked to. At present, there are three main types of stablecoins: legal currency reserve-backed stablecoins, excess asset-collateralized stablecoins, and algorithmic central bank stablecoins.

Although stablecoins are currently only adopted on a small scale, they have the potential to be used on a global scale in the future, especially if sponsored by large technology, telecommunications or financial companies. Like any other large-scale value transfer system, this trend of large-scale application has also become attractive to criminals and terrorists, especially in terms of money laundering and financing of terrorist activities. It is reported that there are nearly 100 stablecoin projects underway around the world.

Stablecoins can be used as payment and settlement tools in the future, and companies can be allowed to use stablecoins as payment tools. This means that stablecoins can be circulated in a small range and play the role of currency. Private companies can use them as payment and settlement tools, and institutions can also engage in payment and settlement business.

Li Zemin believes that institutions should pay attention to the fact that as a payment and settlement tool, there will be stricter supervision than the current Bitcoin supervision, and such supervision may require the permission of relevant departments. Therefore, in the future, when companies use stablecoins as payment and settlement tools, they must have a set of standardized payment and settlement processes, otherwise they may face administrative penalties, or even more seriously, criminal risks.

Former central bank governor Zhou Xiaochuan said at the forum that finance is to serve the real economy, and both digital currency and digital assets should be closely integrated with the real economy and serve the real economy. Zhou Xiaochuan said that it is necessary to distinguish between digital currency and digital assets, and that it is not time to draw conclusions about digital assets such as Bitcoin, but "be careful."

Li Zemin believes that this statement not only confirms the trend of virtual currency becoming a financial derivative in the future, but also sends a signal that the financial economy must be based on the real economy and must return to the real economy, and virtual currency cannot be used for pure speculation. "Institutions that carry out virtual currency business must have real projects to support it."

The crypto industry is welcoming major administrative regulations

Some industry insiders speculated that the speech by the central bank leader at the Boao Forum for Asia was intended to pave the way for the implementation of the "Regulations on the Prevention and Disposal of Illegal Fund Raising" (hereinafter referred to as the "Regulations") on May 1.

On January 26, 2021, Premier Li Keqiang signed State Council Order No. 737, announcing that the Regulations will take effect on May 1, 2021. Many analysts believe that the introduction of the Regulations will have a significant impact on the blockchain and digital currency industries.

In fact, due to its advanced technical characteristics and unique business attributes, the compliance issues of blockchain and digital currency industries have always been a pain point in the industry. Among them, the definition of digital currency attributes is also a major issue in the current global digital currency laws and regulations.

Article 19 of the Regulations clearly stipulates that "for the following acts within the administrative region, if they are suspected of illegal fund-raising, the leading department for handling illegal fund-raising shall promptly organize relevant industry competent departments, regulatory departments, and branches and dispatched agencies of the State Council's financial management department to conduct investigations and identification: issuing or transferring equity or debt, raising funds, selling insurance products, or absorbing funds in the name of engaging in various asset management, virtual currency, financial leasing business, etc." This is the first time that "virtual currency" has appeared in the "Regulations" at the administrative law level in China.

Some people believe that the promulgation of the Regulations means that the blockchain and digital currency businesses that were previously in a gray area will be clearly included in the regulatory scope of the regulatory authorities. After the implementation of the Regulations, more and more non-standard blockchain and digital currency companies will be investigated for illegal fundraising and may be subject to corresponding penalties.

In recent years, with the popularity of blockchain and digital currency, crimes committed in the name of the two have become the "hardest hit area" of mass economic crimes. According to public reports, since 2019, digital currency-related cases that have been publicly tried and sentenced include crimes such as organizing and leading pyramid schemes, illegally absorbing public deposits, fraud, extortion, illegal business operations, and illegal control of computer information systems.

Digital currencies are often developed in a "pyramid scheme" model, relying on the rise of digital currencies to deceive users and expand the market by developing downlines, involving a large number of people. Cross-regional, cross-provincial, and cross-national operations are also common.

On July 3, 2020, the Economic and Technological Development Zone Court of Yancheng City, Jiangsu Province, held a public hearing on the "Plus Token" online pyramid scheme case. In June 2019, PlusToken was exposed to have difficulty in withdrawing funds from the platform. In the first half of 2020, PlusToken was identified as a pyramid scheme by China's public security, procuratorial and judicial organs. The Plus Token platform involved more than 2.9 million members and was known as the "largest capital pool in the cryptocurrency circle." On November 26, the Intermediate People's Court of Yancheng City, Jiangsu Province, issued a final ruling on the second instance of the PlusToken case, and many people were sentenced to prison.

“If digital assets are kites, then supervision is the string that holds the kite. A kite without a string cannot fly high, and the length of the string must be adjusted according to market conditions and the kite’s flying performance. When new things emerge, governments are still in the process of exploration and need to constantly try and error within a certain framework to find the model that suits them best.” Zhou Xinjian, senior researcher at MeChain Technology, told ChainNews.