Central Bank Media: Bitcoin belongs to Bitcoin and blockchain belongs to blockchain

(Original title: Bitcoin belongs to Bitcoin and blockchain belongs to blockchain. Shutting down Bitcoin trading platforms will not affect the development of blockchain technology)

Following the suspension of initial coin offering (ICO) financing by the central bank and seven other ministries on September 4, BTC China issued an announcement on September 14 that the BTC China digital asset trading platform would stop registering new users from now on, and would stop all trading business on September 30. On September 15, Huobi.com and OKCoin successively issued announcements that they would suspend registration and RMB recharge business from now on, and would notify all users of the suspension of virtual currency trading before September 30, and would gradually stop all digital asset exchange RMB trading business before October 31. On September 16, Huobi.com and OKCoin both revised their announcements and said that they would stop all virtual currency trading business in the next step.

After the three major domestic Bitcoin trading platforms announced the suspension of all virtual currency trading operations, the price of Bitcoin plummeted, falling below the 20,000 yuan per coin.

Many experts told reporters that virtual currencies such as Bitcoin are not currencies in essence, but are more purely speculative. Their trading platforms are even more hidden with huge market risks. They are increasingly becoming "accomplices" of various illegal and criminal activities, which are extremely harmful to the development of the real economy. Therefore, the management's closure of the trading platform is an important measure to protect the interests of my country's financial consumers, prevent financial risks, and maintain my country's financial security and stability. At the same time, this move does not mean that the research and development of the blockchain technology behind it will be affected. Blockchain technology is still encouraged, and virtual currencies and blockchains should be distinguished and treated differently.

Virtual currency is not money in nature

It is understood that virtual currency uses computer technology and communication technology as a means to store digital form in the network or related electronic devices, and transmit through the network system to achieve circulation and payment functions. Virtual currency has no physical form, is not issued by the monetary authorities, and has a limited scope of use.

The concept of Bitcoin was first proposed by Satoshi Nakamoto in 2009. It is a peer-to-peer digital currency. Peer-to-peer transmission means a decentralized payment system. Bitcoin has the characteristics of virtual currency such as no physical form, digital storage and payment. It also has characteristics that traditional currencies do not have, that is, there is no centralized issuer, the number is limited, it is completely anonymous, and transactions cannot be traced.

In 2013, my country's Bitcoin China website became the world's largest Bitcoin trading platform. In that year, Bitcoin rose from hundreds of yuan to 2,000 yuan, and once reached a historical high of 8,000 yuan. In the following years, the price of Bitcoin fell back. After entering 2017, Bitcoin not only stood at the historical high of 8,000 yuan again, but also broke the record again in July 2017, reaching a maximum of 30,000 yuan per coin.

The rapid development of Bitcoin has triggered people's thinking about whether virtual currency is a real currency. So, are virtual currencies such as Bitcoin a currency? On December 5, 2013, the People's Bank of China and five other ministries and commissions jointly issued the "Notice on Preventing Bitcoin Risks", which clearly stated that Bitcoin is not issued by monetary authorities, does not have monetary attributes such as legal compensation and compulsion, and is not a real currency. In terms of nature, Bitcoin is a specific virtual commodity that does not have the same legal status as currency and cannot and should not be circulated and used as currency in the market. After that, relevant departments repeatedly warned of risks and continuously took relevant regulatory measures.

In fact, as early as the beginning of 2014, Sheng Songcheng, former director of the Survey and Statistics Department of the People's Bank of China, first pointed out in his articles "Virtual Currency is Not Currency in Essence - Taking Bitcoin as an Example" and "The Concept of Denationalization of Currency and the Utopia of Bitcoin" that Bitcoin is not a real currency. Sheng Songcheng believes that Bitcoin lacks national credit support and is difficult to perform the function of a commodity exchange medium as a standard currency. Bitcoin does not have the value basis as a currency, is not legal tender and compulsory, has a limited and unstable circulation range, and is highly substitutable, making it difficult to serve as a general equivalent.

"Moreover, the scale of Bitcoin has an upper limit, which makes it difficult to adapt to the needs of modern economic development." Sheng Songcheng explained that, on the one hand, there is a contradiction between the limited number of Bitcoins and the ever-expanding social production and commodity circulation. If Bitcoin becomes a country's standard currency, although it theoretically eliminates the possible problems of money supply in the current credit currency system and avoids inflation, the relatively scarce total amount will inevitably be unable to adapt to the ever-expanding social production and commodity circulation needs, thus leading to deflation and bringing greater harm to economic development; on the other hand, the limited number of Bitcoins greatly reduces the function of Bitcoin as a means of circulation and payment, making it more likely to become an object of speculation rather than a medium of exchange.

In addition, Sheng Songcheng also said that Bitcoin lacks a central regulatory mechanism and is incompatible with the modern credit currency system. First, Bitcoin has no centralized issuer and is prone to over-hype, resulting in excessive price fluctuations. Second, Bitcoin is not controlled by the monetary authorities and is difficult to play the role of an economic regulator. Monetary policy is an important policy for modern countries to regulate the economy. The condition for this policy to work effectively is that the central bank has a monopoly on the right to issue currency, and the currency issued by the central bank is the standard currency.

"People only see the similarities between virtual currency and base currency in some individual appearances, and mistakenly believe that the former is the transcendence of the latter, and even assert that the former will replace the latter. In fact, convenience, speed and low cost are not the privileges of virtual currency. Electronic carriers of actual currency such as credit cards and online banking can meet these requirements, and these electronic base currencies are supported by the banking system, which is more convenient and secure," Sheng Songcheng believes.

Bitcoin is in digital form, which is undoubtedly convenient for storage, carrying and calculation, but it seems that the currency value has never been stable. According to Jin Hainian, chief research officer of Noah (China) Holdings Co., Ltd., the reason is that Bitcoin has a fatal flaw, that is, the total number has an upper limit of 21 million.

Jin Hainian further explained that the first "defective gene" is that the number of bitcoins and the number of goods cannot be balanced, which will inevitably lead to deflation and economic collapse. When there is only a fixed number of bitcoins, when the number of goods increases every day, the price of bitcoins will decrease every day, so no country dares to use bitcoins as currency. The second "defective gene" is that bitcoin was born for decentralization, but it has brought more unreasonable "centralization". Bitcoin can only be obtained through mining. At present, more than 2/3 of it has been mined, and most of it is in the hands of a few people, which is much more concentrated than the current wealth distribution. It is estimated that the Gini coefficient of Bitcoin is as high as 0.88, and the so-called "decentralization" has produced a more unreasonable wealth distribution.

Virtual currency trading platforms hide many risks

In recent years, the price of Bitcoin has risen rapidly, attracting a large number of investors to enter the market. Participants have quickly spread from a small number of professionals to the general public, and there has been a saying that "speculating in stocks and real estate is not as good as speculating in cryptocurrencies." Reporters found that a large number of "virtual currencies" followed suit and rose in turn. In 2017 alone, the price of Litecoin rose by 476%, the price of Ripple rose by 54 times, and the price of Ethereum rose by 13 times.

Industry insiders said that unlike sovereign currencies, the "credit" basis of "virtual currency" is a mathematical algorithm, and its price depends on factors such as the reliability of the algorithm and market confidence. There are still many technical defects and loopholes, and a large number of small and medium-sized investors are involved, which poses huge risks.

On September 13, the Internet Finance Association of China issued a "Notice on Preventing Risks of Bitcoin and Other So-called "Virtual Currencies"", pointing out that so-called "virtual currencies" such as Bitcoin lack a clear value basis, the market is full of speculation, and prices fluctuate violently. Investors blindly follow the trend and speculate, which can easily cause financial losses. Investors need to strengthen their awareness of risk prevention.

The reporter learned that it takes an hour for Bitcoin peer-to-peer transactions, or over-the-counter transactions, to be confirmed, and the holders are scattered. Its over-the-counter market transactions are not active, and more than 90% of Bitcoin accounts in the world have less than 10 transactions per year. 98% of Bitcoin transactions in China are conducted through Bitcoin trading platforms. Experts believe that Bitcoin trading platforms have both information intermediary and transaction intermediary functions. Most Bitcoin trading platforms have assumed the functions of central counterparties, providing information and transaction convenience for speculation activities, which is an important cause of Bitcoin market risks.

Moreover, virtual currencies such as Bitcoin are becoming "accomplices" of illegal and criminal activities. The reporter's investigation found that, in fact, many channels have recently reported that Bitcoin is popular as a payment tool in the so-called "Dark Web" world. It is understood that the "Dark Web" is full of various serious illegal and criminal activities, such as smuggling, drug trafficking, arms, pornography, assassination, etc. In recent years, Bitcoin has become the main payment tool of the "Dark Web". One of the original intentions of the invention of Bitcoin was to evade supervision. It has the characteristics of anonymity and convenient cross-border flow. It has now become the preferred tool of the "underground economy".

Yang Dong, deputy dean of the Law School of Renmin University of China, said that virtual currency trading platforms have risks such as lack of legal operating licenses, inflated prices, suspected illegal activities such as money laundering and evasion of foreign exchange controls, suspected pyramid schemes and fraud, insider manipulation, technical and information security risks, and "dark web" transactions. When talking about the risks of the "dark web", Yang Dong believes that the "dark web" serves the gray area and even illegal needs. "Dark web" transactions are not strictly protected by measures, and effective measures such as anti-money laundering and KYC are not strictly implemented, and anonymous transactions are even deliberately allowed. The government's inability to effectively regulate the "dark web" has not only increased the risk of engaging in illegal and criminal activities through Bitcoin transactions, but also brought huge crises to investors.

In addition, currently, illegal financial activities supported by Bitcoin and various virtual currencies are diverse and spreading. Reporters learned that in the special rectification of Internet financial risks, a large number of illegal financial activities such as "Kara Coin", "Wanfu Coin" and "Mafuluo Coin" were found, which used virtual currencies as props and guise, but were actually pyramid schemes and illegal fundraising. Recently, ICO activities have emerged, which use the issuance of virtual currencies to raise funds. Industry insiders believe that these activities use the innovative concept of virtual currencies to package various illegal financial activities, and use the difficult-to-track characteristics of Bitcoin and various virtual currencies to make it more difficult for regulators to identify, define and crack down on illegal financial activities.

The closure of trading platforms does not conflict with the development of blockchain technology

In response to the current risks of various virtual currency trading platforms such as Bitcoin, regulatory authorities have strengthened supervision and cracked down on them. On September 4, the People's Bank of China and seven other ministries and commissions jointly issued the "Notice on Preventing Risks of Token Issuance and Financing", stating that token issuance and financing is essentially an act of illegal public financing without approval, and clearly requiring that all types of token issuance and financing activities should be stopped immediately.

The Internet Finance Association of China recently stated that various so-called "currency" trading platforms have no legal basis to be established in my country.

It is rumored that the Beijing Internet Finance Regulation Office has also issued the "Work Requirements for Cleaning Up and Rectifying Virtual Currency Trading Venues in Beijing", requiring all trading venues within its jurisdiction to formulate clearance plans.

"Stop ICO. In fact, ICO is suspected of illegal sale of tokens and tickets, illegal issuance of securities, illegal fundraising, financial fraud, pyramid schemes and other illegal and criminal activities. At present, stop ICO is very necessary and timely." Sun Guofeng, director of the Financial Research Institute of the People's Bank of China, said in an interview with our reporter.

Huang Zhen, director of the China Internet Finance Innovation Research Institute, believes that the Chinese government's prevention and control of virtual currency risks, saying "no" to virtual currencies, prohibiting the issuance of tokens for financing, and stopping centralized bidding transactions of virtual currencies such as Bitcoin are important measures to better protect the interests of my country's financial consumers, prevent Bitcoin risks from spreading to my country's financial system, and maintain my country's financial security and stability.

"The closure of the exchange is to implement the requirements put forward by General Secretary Xi Jinping at the National Financial Work Conference to prevent systemic financial risks." Yang Dong believes that in the post-virtual currency trading platform era, we must strengthen risk awareness and strengthen technology-driven supervision. He said that whether it is the suspension of ICO or the recent suspension of virtual currency exchanges, it is a warning for Bitcoin. As one of the main tools used in ICO project transactions, Bitcoin's value, risks and regulatory policies are all related to the development of ICO. From the perspective of investors, short-term speculative profits may cover up the potential risks of Bitcoin. Once the potential risks break out, investors will suffer serious economic losses.

It is worth noting that after the regulators stopped ICO, many people in society questioned blockchain technology and even held a negative attitude. In this regard, experts said that the regulators’ closure of virtual currency trading platforms was not aimed at the blockchain technology behind them, and they still encouraged the development of blockchain technology.

Sun Guofeng told reporters: "This does not prevent related financial technology companies, industry institutions, and technology companies from continuing to study blockchain technology. Blockchain itself is a good technology. It is not only through ICO that blockchain technology can be studied. It can also be studied through various technologies. Therefore, it is necessary to distinguish blockchain technology from ICO. Blockchain technology can be applied to many fields and scenarios, including some social management scenarios. Blockchain and ICO should not be equated. It is necessary to further broaden the horizons of research and development of blockchain technology."

"Although ICO has been stopped and virtual currency transactions need to be regulated, blockchain technology itself is still worth encouraging." Sheng Songcheng believes that the diversification of application scenarios is the biggest driving force for the rapid development of blockchain technology. The contradiction between strong market demand and technical barriers has prompted many technology companies to speed up their research. The new generation of blockchain systems is constantly improving in encryption technology, high-frequency trading, energy consumption and other aspects. However, blockchain is developing rapidly in China, and it is inevitable that there will be a mixed bag of good and bad. The timely intervention of supervision is a care for the blockchain industry, which can make the blockchain industry develop more steadily.

Yang Dong said that we must clearly distinguish between virtual currencies such as Bitcoin and blockchain technology. Closing down virtual currency exchanges and prohibiting Bitcoin platform transactions does not conflict with the current vigorous development of blockchain. Our rejection of risks does not mean that we reject innovation. Only by expelling financial crimes such as pyramid schemes and illegal fundraising that use virtual currency trading platforms and other tools under the guise of blockchain can we create a healthy and good financial technology ecological environment for the development of blockchain applications.