Bitcoin exchanges in China have all closed down, and Bitcoin regulation still has a long way to go

October is coming to an end. According to the requirements of the regulatory authorities, domestic Bitcoin transactions need to stop all virtual currency transactions on this day. At present, the three major domestic Bitcoin exchanges OKCoin, Huobi.com, and Bitcoin China have all issued announcements to stop RMB and Bitcoin transactions.

This means that if the establishment of China’s first Bitcoin exchange, Bitcoin China, in June 2011 is taken as the starting point for Bitcoin’s official entry into China, then Bitcoin exchanges have finally come to an end after a brief six-year existence in China, and there are still eight months before the “seven-year itch”.

The "last straw" for the exit of Bitcoin exchanges in China should be a document issued by the central bank and seven other ministries in September this year.

On September 4, 2017, the People's Bank of China, the Central Cyberspace Affairs Commission, the Ministry of Industry and Information Technology, the State Administration for Industry and Commerce, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission jointly issued the "Announcement on Preventing Risks of Token Issuance and Financing" (hereinafter referred to as the Announcement). The "Announcement" stated that Bitcoin is a "virtual currency" and emphasized that any so-called token financing trading platform shall not engage in the exchange business between legal currency and tokens or "virtual currency", shall not buy or sell tokens or "virtual currency" or act as a central counterparty to buy or sell tokens or "virtual currency", and shall not provide pricing, information intermediary and other services for tokens or "virtual currency".

The background of the release of the "Announcement" is that ICO (Initial Coin Offering) is almost "out of control" in China.

According to the "2017 First Half Domestic ICO Development Report" released by the National Internet Financial Technology Expert Committee, from March to June 2017, China's ICO financing scale totaled more than 2.6 billion yuan (converted based on the prices of virtual currencies such as BTC and ETH at 0:00 on July 19, 2017). During the same period, according to incomplete statistics from Babbitt based on public reports, the total financing scale from VC institutions to blockchain start-ups was less than 100 million yuan, which shows how popular ICO is.

Many ICO projects have hastily traded their tokens in the secondary market in a very short period of time, even before the main network was launched and the wallet was developed. Moreover, the prices of these tokens have increased by several times or even more than 10 times, which has deviated from the purpose of simply raising funds for project development. There is a strong atmosphere of speculation, which has seriously disrupted the normal economic and financial order of our country.

According to Caixin.com, people from the central bank studied a large number of ICO white papers and concluded that "90% of ICO projects are suspected of illegal fundraising and subjective intentional fraud, and the amount of ICOs that actually raised funds for project investment is less than 1%."

Babbitt previously interviewed a domestic financial professional who had been exposed to Bitcoin earlier about his views on ICO. Although he believed that the original intention of some entrepreneurs was to use ICO to develop projects, he said, "Once you get into it, you can't help yourself. You can't get clean even if you want to. There is mud all around you. Even if you cut out your heart and say 'my heart is red', when you take it out, it will be stained with mud, and it will be difficult to prove your innocence ."

The risks of ICO quickly attracted the attention of relevant departments, and they promptly issued risk warnings and rectification documents. While ICO was short-lived, it also sent Bitcoin exchanges to the guillotine.

There is no unified definition of Bitcoin in the world. China defines it as a commodity. The Notice on Preventing Bitcoin Risks issued by the People's Bank of China and five other ministries on December 5, 2013 states that "Bitcoin is a specific virtual commodity in nature and does not have the same legal status as currency. It cannot and should not be used as currency in the market. However, as a commodity trading behavior on the Internet, ordinary people have the freedom to participate under the premise of assuming their own risks."

Because Bitcoin is a commodity, and ICO raises Bitcoin by issuing tokens, it is an exchange of commodities, does not directly involve legal currency, and tokens can also be circulated on exchanges. Therefore, ICO was once considered to have cleverly circumvented the Securities Law and the Regulations on Dealing with Illegal Fund Raising.

However, financial activities should follow the principle of "nothing can be done without legal permission" rather than "anything can be done unless prohibited by law". The US Securities and Exchange Commission's investigation report on The DAO released in July believes that The DAO tokens are securities and should be subject to the supervision of the US federal securities law. Recently, a law firm in San Francisco, USA, conducted a "Howey Test" on the blockchain project Bytom from China and believed that Bytom is not a security. Any innovation in financial technology needs to be carried out under the premise of legality and compliance. From the perspective of "substance over form", most ICO projects directly use Bitcoin to exchange tokens, but most of the Bitcoin is purchased directly from exchanges by users with legal currency. Most of the tokens have no practical application value or are suspected of violating the Securities Law.

The one-size-fits-all approach to ICOs shows the decisiveness of my country's regulators. China's Bitcoin exchanges provide an environment for buying Bitcoin with RMB, and thus constitute indirect participants, so it is reasonable for them to be shut down.

Since the birth of Bitcoin in 2009, a complete industry chain has been formed. Some people describe Bitcoin exchanges, mining machines, and communities as the three pillars of the Bitcoin industry chain. However, no one would have realized in advance that a storm that started with ICO would eventually ruin China's Bitcoin exchanges.

However, although Bitcoin exchanges in China have been shut down and the trading channels for purchasing Bitcoin with RMB have been blocked, we have noticed that some exchange entities have begun to open new Bitcoin exchanges in overseas markets.

There is still a long way to go in Bitcoin regulation.