Digital currency regulation should reflect "China's governance"

Author: Hu Jiye, Distinguished Expert of CECBC Blockchain Committee and Professor of School of Business, China University of Political Science and Law

According to reports, the progress of my country's legal digital currency research and development has attracted widespread attention from the society recently. The relevant person in charge of the Digital Currency Research Institute of the People's Bank of China said that the research and development of the digital RMB is currently being steadily promoted, and internal closed pilot tests will be carried out in Shenzhen, Suzhou, Xiongan New Area, Chengdu and the future Winter Olympics scenes to continuously optimize and improve functions.

At present, the currencies of all countries in the world are basically credit currencies, and the trend of non-cash and digital currencies is becoming more and more obvious. Bitcoin, the earliest encrypted digital currency, is based on blockchain technology. Since its birth in 2009, its price has increased by a million times, and the fluctuation is huge.

In June 2019, Facebook, which has nearly 2.7 billion users, released the white paper for its encrypted digital currency "Libra" project. Its vision is to build a borderless currency and financial infrastructure that serves billions of people.

Whether it is Bitcoin or Libra, since they cross national borders, they will have an important impact on a country's financial stability. How virtual digital currencies issued by non-sovereign countries should be regulated has become an important issue for all countries to consider.

Due to the widespread circulation of digital assets around the world, some countries such as Japan, Germany, the United Kingdom, Australia, Sweden, India, Switzerland, South Korea, etc. have announced that they recognize the currency status of Bitcoin as a payment method.

In my country, in December 2013, the People's Bank of China and five other ministries issued the "Notice on Preventing Bitcoin Risks", which defined digital currency as a "specific virtual commodity" but at the same time prohibited financial institutions from engaging in digital currency business.

On September 4, 2017, the People's Bank of China, the Central Cyberspace Affairs Commission and seven other ministries and commissions issued the "Notice on Preventing Risks of Token Issuance and Financing", which determined that the issuance of digital tokens is essentially an act of illegal public financing without approval. Overnight, domestic digital currency development platforms and traders moved overseas. Under the condition of unabated domestic demand, many platforms continue to provide related services to domestic users through overseas registration, leaving financial activities related to digital currencies in a regulatory vacuum.

In fact, my country is the only major country that can compete with the United States in the field of digital economy. The Digital Economy Report 2019 released by the United Nations Conference on Trade and Development in September 2019 pointed out that the United States and China account for 75% of patents related to blockchain technology, 50% of global Internet of Things spending, and more than 75% of the global public cloud computing market, accounting for 90% of the market value of the world's 70 largest digital platforms, while Europe's share is 4%; the world's seven "super platforms" - Microsoft, Apple, Amazon, Google, Facebook, Tencent, Alibaba - account for two-thirds of the total market value; in terms of digital technology development, the rest of the world lags far behind the United States and China.

According to the People's Bank of China's "China Inclusive Finance Indicator Analysis Report (2018)", the proportion of adults using electronic payment was 82.39% by the end of 2018, far ahead of the world. China's digital economy and electronic payment practices are in stark contrast to digital currency regulation.

General Secretary Xi Jinping emphasized that we must "strive to make our country at the forefront of theory, occupy the commanding heights of innovation, and gain new industrial advantages in the emerging field of blockchain," "we must strengthen the guidance and regulation of blockchain technology," and "we must implement the rule of law on the Internet in blockchain management and promote the safe and orderly development of blockchain."

Therefore, in the governance of blockchain and digital currency, we should give full play to the significant advantages of our country's national system and national governance system in many aspects and embody "China's governance."

First, clarify the guiding ideology and strengthen the guidance and regulation of blockchain technology

Blockchain technology and digital currency go hand in hand, and the core of the technology lies in the distributed ledger and proof of work mechanism. The distributed ledger is like the record of grabbing red envelopes that every member of a WeChat group has. The timestamp and amount cannot be changed at all, which truly solves the problem of "making false accounts". The best model for proof of work is to reward tokens, that is, digital currency, which is also the source of the incentive mechanism for the development of blockchain. Some "coinless blockchains" may adopt other incentive mechanisms, but just as the incentive for entrepreneurs is profit, there should be a place for digital currency in the specifications of blockchain technology.

Second, improve digital currency supervision and implement the rule of law in blockchain management

Digital currency is a balance between financial security and innovation capabilities. The financial industry should have clear entry barriers. Since blockchain-based digital currency involves finance, the entry threshold must be clear.

The qualifications of blockchain and digital currency companies need to be reviewed and an access system needs to be set up. One of the core aspects of supervision is that blockchain companies must have qualified technical personnel. For example, different levels of companies in the construction industry require different levels and numbers of registered structural engineers to ensure that the buildings and bridges they build are safe. This can also be used as a reference in digital currency supervision.

In addition, the capital owned by the company must also meet the relevant provisions similar to the capital adequacy ratio requirements of commercial banks, and implement "penetrating qualitative" supervision according to the financial attributes. Investor access needs to refer to the requirements of the "Securities and Futures Investor Suitability Management Measures" issued by the China Securities Regulatory Commission. Only investors who meet certain conditions can participate in the investment.

Third, innovative supervision methods

We can learn from the "regulatory sandbox" that the UK began to pilot in 2015 to regulate digital financial assets. The sandbox is a framework established by regulators that enables relevant companies to conduct small-scale field tests of innovations in a supervised and controlled environment for a certain period of time, enjoying special exemptions, acquiescence and other limited exceptions.

Regulatory sandboxes can enable greater openness and dialogue between regulators and digital financial service providers, and can also enable regulators to amend and develop regulatory frameworks with agility.

It is necessary for the legislative and law enforcement departments to take the lead in formulating relevant blockchain guidelines based on the current legal rules. At the same time, they should also consider how to combine traditional legal rules with current technical rules, give full play to the respective advantages of legal rules and technical rules, and better combine enforcement and flexibility.

Fourth, the division of labor and collaboration among blockchain and digital currency regulators

my country's blockchain and digital currency regulatory agencies should include the People's Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, the Cyberspace Administration of China, the Ministry of Industry and Information Technology, the Ministry of Public Security, etc. The supervision of blockchain and digital currency should learn from the lessons of P2P, and these departments should collaborate to formulate unified regulatory rules through legislation and amendments at the beginning of development.

The Cyberspace Administration of China and the Ministry of Industry and Information Technology are responsible for the implementation of blockchain technology standards and technical rules, the People's Bank of China, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission are responsible for the implementation of access and regulatory rules based on blockchain digital currencies, and the Ministry of Public Security assists and cooperates with the above departments to punish illegal acts. In the supervision of the blockchain and digital currency fields, we will effectively promote the modernization of the national governance system and governance capabilities, and truly embody "China's governance."