New Bitcoin regulation is coming? We may need some differentiated ideas

Recently, regulators have taken action in the field of virtual currency. After the bubble-like development of ICO ushered in the big regulatory hand, delisting, currency withdrawal, and everything went back to zero, the virtual currency market represented by Bitcoin and Ethereum, after a brief stabilization, also received news of regulation. According to Caixin, regulators intend to ban domestic virtual currency exchanges, and domestic first-tier virtual currency exchanges such as Huobi.com and OKCoin have also issued statements one after another. Although they said that "no notice has been received from the regulatory authorities and the authenticity of the news cannot be confirmed", they also stated that they will support any decision of the regulator and protect the safety of investors' assets.

Affected by the rumor, the virtual currency market experienced a sharp drop. According to Huobi.com data, on September 8, Bitcoin fell from a high of 29,200 yuan to a low of 23,131 yuan, a drop of 20.78%, while Ethereum fell by 23.3% at one point. For the market, the news came very suddenly, and many people were caught off guard. So, what is the logic of regulating virtual currency exchanges such as Bitcoin? Where is the boundary for preventing risks in virtual currency transactions? Can virtual currencies and ICO tokens really be generalized? Let's talk about them one by one.

One distinction is not to ban virtual currencies, but to ban exchange transactions

Let’s start with the collapse of ICO tokens. On September 4, the People’s Bank of China and seven other ministries and commissions issued the “Announcement on Preventing Risks of Token Issuance and Financing” (hereinafter referred to as the “Announcement”), defining ICO as “an act of illegal public financing without approval” and requiring “organizations and individuals that have completed token issuance and financing should make arrangements for liquidation, reasonably protect the rights and interests of investors, and properly handle risks”. Although tokens are mentioned in the “Announcement”, all measures are centered around “ICO” behavior, and it does not declare tokens or virtual currencies illegal.

“Any so-called token financing trading platform shall not engage in the exchange of legal tender and tokens or virtual currencies, shall not buy or sell tokens or virtual currencies or act as a central counterparty to buy or sell tokens or virtual currencies, and shall not provide pricing, information intermediary and other services for tokens or virtual currencies.”

Ultimately, it is also to fundamentally eliminate ICO activities.

The reason is not difficult to understand. The token itself is not the key to the problem. The "illegal" behavior carried out through the token (including "illegal" public financing such as ICO) is the problem. Just like "money" itself is not illegal, "robbing money" and "money laundering" are illegal and criminal acts. In fact, Ethereum is the token issued by Ethereum through ICO. Bitcoin is not issued through ICO, and its nature is no different from that of tokens. Restricting the transaction of tokens naturally leads to the issue of restricting the transaction of virtual currencies such as Bitcoin and Ethereum. Therefore, there is the rumored news of "completely banning virtual currency exchanges."

As the saying goes, irregular Bitcoin transactions do bring about problems such as money laundering, dark web transactions, market manipulation, and speculation, but the technology is not wrong, and Bitcoin itself is actually not wrong. A person close to the leadership team in the Caixin report also mentioned,

"What needs to be closed is the Bitcoin exchange, not Bitcoin", "It only prohibits the on-site trading of virtual currencies in China, not prohibiting all transactions between virtual currencies and legal currencies in China", etc.

On the contrary, we still need to recognize and even value the value and significance of Bitcoin itself.

On the one hand, Bitcoin and Ethereum have been gradually accepted by mainstream countries in the world. They can be traded across borders and peer-to-peer on the Internet. Bitcoin, in particular, has gradually evolved into the most potential investment product that is likely to replace gold. At this point, it is difficult for any country to ban it. As Sheng Songcheng, a consultant of the People's Bank of China, said in his article,

“As the most important and well-known blockchain technology carrier and application, Bitcoin is a global blockchain asset that can be traded overseas or underground, so it is difficult to completely ban it.”

On the other hand, Bitcoin is backed by the world's largest public chain, which is already difficult to be manipulated by a single force and is truly decentralized. While countries are generally exploring the use of blockchain alliance chains and abandoning the "decentralized" characteristics of blockchain, it is necessary to retain a completely decentralized, non-manipulable public chain to reserve another possibility for the commercialization of blockchain technology. After all, no one dares to guarantee whether the future of blockchain will be alliance chains or public chains. At this time, no country can make a single decision to ban Bitcoin, otherwise it will lose the imagination space in the public chain field during the development and evolution of blockchain.

Regulating Bitcoin transactions is a good idea, but it cannot be generalized.

Bitcoin itself is not guilty, but a series of characteristics derived from Bitcoin do bring troubles to the real world. For example, the benchmark effect of skyrocketing prices has triggered a virtual currency bubble, the market is still small and easy to manipulate, its semi-anonymity facilitates criminal activities, its cross-border circulation characteristics affect the effectiveness of domestic foreign exchange policies, and its payment tool characteristics even pose a potential threat to legal currency. Therefore, we must first face up to a series of risks and problems derived from Bitcoin.

The most serious one is probably the potential threat to legal tender, which is technically impossible. Restricted by factors such as transaction throughput and scalability, Bitcoin is unlikely to become a mainstream payment tool in terms of performance, even with the deployment of Segregated Witness and the subsequent official operation of the Lightning Network. At the same time, as a system that relies on mining to maintain operation, large-scale transactions of Bitcoin are bound to conflict with the trend of green environmental protection, and Bitcoin's own deflationary properties are not suitable as a currency in the modern economic system. The withdrawal of gold from the payment currency stage is a precedent that can be used as a reference. Therefore, even if all countries in the world accept Bitcoin as a payment tool, Bitcoin can only become a supplement to the existing monetary system, and it is impossible to truly replace the circulation of legal tender.

As for the other issues, they are all problems arising from the transaction and circulation links. As a global investment product that is gradually being recognized, it is naturally subject to bubble risks, market manipulation risks, breaking foreign exchange controls, and even facilitating criminal activities. This is true for Bitcoin, and it is also true for other global investment products. Since everyone admits that Bitcoin itself should not be banned, the next risk prevention measure is to start from the transaction link and reduce the risk as much as possible.

Supervision of the transaction process and standardization of on-site exchange transactions are obviously the best starting points. Let's take the ICO chaos as an example. Why did ICO evolve from a small and beautiful tool to support innovation and entrepreneurship to a means of illegal fundraising? The chaos of the primary market (ICO issuance) is the source, but the secondary market's promotion is the key. If exchanges can all conduct strict project review (many exchanges have almost zero review, and air coins can be easily listed for trading with money and public relations), air coins will have no secondary market circulation channels, prices will not rise, and bubbles will not rise; without the opportunity to "get rich", the primary market ICO of air coins will naturally have few participants, and the bubble of the entire ICO market may not be out of the question.

As for ICO tokens, they have just been listed for trading, the number of participants is limited, and the blockchain applications behind the tokens are mostly imitations or even fictitious. To regulate ICO token transactions, all exchange transactions can be directly banned. However, for virtual currencies such as Bitcoin and Ethereum that are widely recognized internationally, regulating their trading links is far from being a one-and-done solution by banning all on-site transactions. Different scales and impacts require different treatment methods, and it is not appropriate to generalize.

What are the differences between Bitcoin and other virtual currencies? Why do they need to be treated differently?

Why Bitcoin transactions need to be handled differently

The difference of Bitcoin can be summed up in four words: "too big to fail". During the subprime mortgage crisis in 2007, Lehman Brothers could go bankrupt, and a number of small banks could go bankrupt, but Goldman Sachs and Citibank could not go bankrupt either, because they were "too big to fail". After several years of development, Bitcoin has been recognized and accepted by more and more countries and institutions, and it can no longer be banned like ICO tokens. Let's look at the "internationalization" of Bitcoin from two aspects:

First, as an investable asset, there are continuous new developments. For example, in December 2016, the British Stock Exchange approved the first Bitcoin investment fund; in July 2017, a former Bain manager launched a $50 million Bitcoin and Ethereum fund for Latin American users; in September, the first Canadian fund management company to apply to operate a Bitcoin investment fund was approved. Although the US SEC recently rejected the application for a Bitcoin ETF fund, it also left room for further development.

“The main market for Bitcoin is unregulated and Bitcoin is still in a relatively early stage of development. Over time, as the size of the Bitcoin-related market develops, the issue of the listing of a Bitcoin ETF will be considered.”

Second, as an acceptable payment tool, there have also been some important breakthroughs. For example, in March 2017, Japan "recognized that virtual currencies such as Bitcoin have 'property-like value' and can be used for payment and digital transactions"; in July, Australia announced that "the purchase of digital currencies will no longer be subject to consumption tax, allowing digital currencies to be regarded as currencies that meet consumption tax requirements." It is reported that the acceptance and use of Bitcoin in Australia is growing, and businesses such as coffee shops, real estate agencies, car manufacturers and bookstores are already accepting this virtual currency as a payment method.

As for China, we are still taking a "cold treatment" approach to Bitcoin and other virtual currencies. Both of the above-mentioned routes for Bitcoin are still difficult in China. The problem is that as Bitcoin continues to gain more recognition internationally, the recognition of Bitcoin itself has become a general trend. In this case, the cold treatment method will become increasingly inappropriate. For Bitcoin, we may need some differentiated regulatory ideas.