Sun Guofeng of the Central Bank: ICO is different from blockchain, penetrating supervision is more suitable for China

[Some of the US's fintech regulatory experience is worth learning from for China, especially its penetrating supervision and functional supervision. However, the regulatory sandbox is generally not suitable for widespread implementation in China]

[Since the beginning of 2017, the value of the entire virtual currency market has increased by 811%, equivalent to $146 billion. ICO is indeed a big bubble.]

Recently, Sun Guofeng, director of the Financial Research Institute of the People's Bank of China, made it clear in an exclusive interview with the central bank's media that it is very necessary and timely to stop ICO (initial coin offering), and it is necessary to distinguish between blockchain technology and ICO.

He also said that financial technology has strong risk characteristics and supervision must be strengthened. The United States' experience in penetrating and functional supervision of financial technology is worth learning from, but the regulatory sandbox is not suitable for China.

Blockchain is not the same as ICO

Since April 2016, the central bank has taken the lead in launching a special rectification campaign against Internet financial risks, and the State Council officially issued an implementation plan on October 13. In more than a year, the special rectification working group has launched heavy blows in the fields of P2P online lending and third-party payment. In particular, the recent regulatory rectification of ICOs did not adopt the usual "soft landing" but chose to "brake", defining it as an illegal financial activity and canceling its issuance and trading in China.

Sun Guofeng explained the suspension of ICO in the interview. In fact, ICO is suspected of illegal sale of token tickets, illegal issuance of securities, illegal fund-raising, financial fraud, pyramid schemes and other illegal and criminal activities. At present, it is necessary and timely to stop ICO. However, 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. Blockchain technology research is not only carried out through ICO, but also through various technologies.

Therefore, it is necessary to distinguish between blockchain technology and ICO. Blockchain technology can be applied to many fields and scenarios, including some social management scenarios. Blockchain and ICO should not be equated. We need to further broaden the vision of research and development of blockchain technology.

After the regulatory policies were implemented, a blockchain conference was held in Beijing last weekend to discuss the "return" and development of blockchain.

Experts at the meeting also said that while ICO financing has gradually increased and even replaced venture capital as the main channel for new technology financing, the value of the entire virtual currency market has increased by 811% since the beginning of 2017, equivalent to 146 billion US dollars. ICO does have a big bubble. Moreover, a lot of ICO financing has flowed into bonds, non-ferrous metals, and stocks. It is questionable whether ICO is supporting the development of science and technology. ICO disrupts the financial market, and blockchain technology will also be negatively affected.

Penetrating supervision is more suitable for China

Sun Guofeng pointed out that financial technology still has strong risk characteristics and supervision must be strengthened. He suggested that domestic financial technology supervision should combine micro-functional supervision with macro-prudential management. Some of the financial technology supervision experiences in the United States are worth learning from China, especially its penetrating supervision and functional supervision. However, the regulatory sandbox is generally not suitable for widespread implementation in China.

Sun Guofeng said that the financial attributes of financial technology itself determine that it has strong risk characteristics. From the current risk perspective, there are two factors: one is the risk from financial technology itself, and the other is the factors that increase the financial risk of the financial system. On the one hand, financial technology makes financial risks more hidden, spreads faster, and has a wider impact, increasing financial systemic risks; on the other hand, financial technology increases the "disintermediation risk" of the financial industry; in addition, financial technology will also involve the issue of financial consumer protection. In general, financial technology still has strong risk characteristics and supervision must be strengthened.

At present, the international fintech regulatory models can be roughly divided into two categories. One category is some relatively small and open economies that are international financial centers, such as the United Kingdom and Singapore. Since these countries have relatively small markets, the risks and hidden dangers of fintech development are not very prominent. At the same time, they are responsible for the development of international financial centers and will take some incentives, including the introduction of regulatory sandboxes. The other category is some large economies with particularly large financial markets, such as the United States and China. The United States has some leading advantages in the development of fintech technology and has strict supervision. Although China is clearly ahead in the application scenarios of fintech, there are also regulatory gray areas. What is particularly important is that personal data protection is not as perfect as that of the United States.

In his opinion, some of the US's financial technology regulatory experience is worth learning from China, especially in terms of penetrating supervision and functional supervision. In the United States, no matter what form financial technology appears, it is included in the corresponding financial regulatory system according to the nature of the financial business involved. For example, some P2P businesses involve changes in property rights and are regulated by the US Securities and Exchange Commission. The US Treasury Department regulates money service institutions. Each state has a money transmission law that requires money transmission to be registered with the state government regulatory agency. In addition, the United States also has the Federal Consumer Protection Act and the Federal Financial Consumer Protection Bureau to protect the legitimate rights and interests of relevant consumers from the perspective of behavioral supervision.

"As for the regulatory sandbox, as an international experience, we do not rule out the possibility of pilot projects in individual areas, but overall it is not suitable for widespread implementation in China."

Sun Guofeng pointed out that the main problem with China's financial technology now is insufficient supervision.

From international experience, the targets of regulatory sandbox are all start-ups, and financial technology lacks the motivation to develop itself, so it needs to be encouraged to develop. On the contrary, my country's market is relatively large, and financial technology institutions are relatively easy to make profits and have strong motivation to develop themselves. In this context, if the regulatory sandbox is implemented again, many large, medium and small financial technology institutions will apply, and it may not be able to accommodate so many institutions.

Sun Guofeng believes that China's financial technology supervision should focus on the combination of micro-functional supervision and macro-prudential management. Micro-functional supervision adopts penetrating supervision. According to the financial characteristics of financial technology and the categories of related businesses, relevant regulatory authorities will supervise it to achieve full coverage and avoid regulatory gaps. Macro-prudential management is to incorporate financial technology into the macro-prudential management framework and improve the centralized system of customer reserve funds of payment institutions. He also proposed that systemically important financial technology companies should be included in the macro-prudential management framework.