Wang Yongli, former vice president of Bank of China: Bitcoin is developing rapidly, but the risks are worrying

Since 2016, the transactions of "online digital currencies" (or "encrypted digital currencies") such as Bitcoin and Ethereum have been expanding in China, and the prices have risen rapidly. Since 2017, ICO (Initial Coin Offering, usually translated as "initial issuance of tokens", the basic model is a new type of online crowdfunding model that uses "online digital currencies" instead of legal tender as the object of public fundraising, and issues new "online digital currencies" as a return, thus bypassing strict supervision like IPO) based on "online digital currencies" has developed rapidly in China. The rapid rise in the price of "online digital currencies" is attracting more and more people and funds to invest in it, and has also attracted more and more widespread attention from the whole society, triggering a fierce debate on its compliance and the necessity of supervision. However, so far, no consensus and legal and regulatory standards have been formed, and the result is: the debate is fierce, the development is rapid, and the risks are worrying!

In fact, the most important prerequisite for whether and how to regulate the increasing number of "online digital currencies" and their ICOs is to have an accurate positioning of "online digital currencies".

1. The current positioning of “virtual goods” needs to be re-examined

In China, the Notice on Preventing Bitcoin Risks jointly issued by the People's Bank of China, the Ministry of Industry and Information Technology, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission in 2013 pointed out that "Bitcoin should be a specific virtual commodity, which does not have the same legal status as currency and cannot and should not be circulated and used as currency in the market." This is the only normative legal document in China that defines the nature of "online digital currency" so far.

Because relevant departments define Bitcoin and other "online digital currencies" as "virtual goods" rather than currencies, monetary authorities and financial regulatory authorities have not imposed necessary constraints and supervision on them. This has instead provided a very free development space for the widespread trading, circulation and even ICO of "online digital currencies". Although regulators do not recognize "online digital currencies" as currencies, they have actually played the role of currencies in many aspects!

As the "network digital currency" continues to develop and its influence becomes increasingly apparent, in January 2016, the People's Bank of China announced that it would "launch the central bank-led digital currency as soon as possible", which inadvertently provided a huge credit boost to the "network digital currency". Many people suddenly felt that the reason why the central bank was eager to create and launch its own digital currency was because the emerging "network digital currency" was really viable and could really subvert the central bank's legal currency, forcing the central bank to respond quickly. Therefore, it also shows that it is really valuable and even has unlimited potential. We must seize the opportunity to invest as soon as possible! A large amount of funds poured in, causing the price of the limited-scale "network digital currency" against legal currency to soar. The rapid rise in prices attracted more funds to flow in, and bubbles and risks, including market manipulation and fraudulent pyramid schemes, expanded. In particular, the explosive development of ICO is attracting a wide range of public and capital investment, and it brings great risks. If necessary supervision is not carried out, I am afraid that major social problems will arise!

2. Key points to be grasped in the positioning of “network digital currency”

First, "Internet digital currency" is definitely not legal tender, and it is impossible to subvert or replace legal tender.

It must be noted that the world today is still based on the basic pattern of national (regional) sovereignty, independence and autonomy. Legal tender is supported and protected by national sovereignty. Currency issuance and management are important components of national sovereignty. Before the national sovereignty, independence and autonomy pattern cannot be broken or overturned, it will face great challenges and almost impossible to form a monetary system that transcends national sovereignty. For this reason, many people have failed to explore "super-sovereign currency" since World War II. One of the special cases is the euro. It is a consensus reached by relevant countries, participating in the formulation and maintenance of the currency community agreement, concentrating the strength of member states to support a unified regional currency, in order to reduce the cost of currency exchange and settlement between each other, and enhance the international influence of the region's monetary finance. This is a great attempt at super-sovereign currency, and it has been placed with great expectations. However, practice has proved that in the absence of a high degree of unity among member states, the operation of a unified currency is very difficult even in a small region. It will be even more difficult to try to form a unified supranational sovereign currency worldwide. Its challenges are not only technical issues, but also institutional issues.

Bitcoin is a simulation of gold (it has limited reserves, needs to be mined to be produced, and cannot be created artificially by national monetary authorities). The total amount and rules are pre-set in a completely artificially designed network environment (virtual world), and are jointly operated and maintained by affiliated computers (decentralized). Blocks are generated one by one by computers according to the rules, and Bitcoins are generated by competitive calculations (mining) of computers included in the blocks. They can only take effect after being jointly confirmed and recorded by members of the system. Subsequent transfers and payments must also be recognized and recorded by the majority of members, forming a blockchain and distributed encrypted ledger system on the network. Bitcoin is therefore also called "network digital currency" or "encrypted digital currency."

Some people believe that Bitcoin is a revolutionary innovation in the monetary system in the Internet era, which is completely likely to subvert and replace the current centralized sovereign monetary system, and has extremely profound social significance and great value potential. This has also become an important reason for the substantial increase in the price of Bitcoin in exchange for legal tender. However, this may greatly overestimate the true value of Bitcoin.

In fact, although Bitcoin simulates some principles of gold, it is a completely artificial "network number" in a virtual environment. It does not have the real value of gold, nor does it have corresponding real wealth. Using pure numbers without real value as currency is a serious misunderstanding of the monetary system. Currency has always been the most sought-after valuable item in a certain period and within a certain social scope. Even in the pure paper currency stage that is separated from the metal standard, there is a need for currency reserves (generally precious metals or hard currency, as the value support of currency issuance), and on this basis, a corresponding currency management system is formed to strictly control the issuance of currency credit and strive to maintain the value and credibility of currency. Even if more and more currency is de-cashed (digitalized currency), manifested as bank deposits or bookkeeping currency, it does not mean that currency is a pure "number" without value support!

At the same time, Bitcoin is generated and operated in a completely artificial network environment (world). Not only is its total amount limited, but the number of Bitcoins contained in a block generated every ten minutes or so is also defined (halved every four years). It lacks flexibility and is difficult to meet the needs of currency in real-world investment and trade and other economic exchanges (this is also the fundamental reason why precious metals such as gold have withdrawn from the historical stage of currency items); the Bitcoin system itself does not have a monetary output mechanism for financial activities such as loan interest and investment dividends, and it is even more difficult to meet the needs of financial development. More importantly, the Bitcoin system itself is a completely closed system, completely isolated from the real world. Not only is there no comparison of the real identities of the participants, it cannot meet the regulatory requirements of anti-money laundering and anti-terrorism, and if Bitcoin cannot be exchanged with legal currency, it cannot solve any problems in the real world at all, and cannot realize its "value" at all (similarly, the Bitcoin raised by ICO cannot meet the funding needs of the fundraising unit if it is not exchanged for legal currency). In other words, Bitcoin is actually inseparable from legal currency (the trading platform connecting Bitcoin and legal currency has become an indispensable and vital infrastructure for Bitcoin), so it is impossible to subvert or replace legal currency!

Second, the development of the online world requires "online virtual currency" (or "online business district currency", "online community currency", "encrypted digital token", etc.) to operate within a certain platform (business district, community).

With the development of information technology such as the Internet, a relatively independent network world represented by various network platforms is being formed on the basis of the real world. Its high frequency, high speed, and cross-border operation characteristics make it difficult for many offline world operation rules and tools to adapt to the requirements of online network operation. Especially on cross-border network platforms, it often involves multiple national identity documents and multiple currencies. If each transaction requires verification of different identities or currencies, the cost and risk may be huge. Therefore, it is entirely possible to re-assign users new unified identity information according to the standards set by themselves after logging in and storing the real identity of the user offline. Each online transaction only needs to check the unified identity information of the network, and only when necessary, find the corresponding offline real identity. At the same time, you can design and run a unified "network virtual currency" online according to your own rules, but this "network virtual currency" cannot be automatically generated by the system, but can only be generated by exchanging legal currency. When necessary, it can be exchanged back to the required legal currency.

In fact, even in the case of legal tender in various countries in the real world, it does not exclude the use and operation of "commercial circle coins" or "community coins" within a specific scope, such as "meal tickets (cards)" used within some units, "shopping vouchers (cards)" issued and redeemed by some shopping malls, "game coins" used in amusement parks, etc. These tokens are necessary and valuable. Of course, as "tokens", they should also be regulated by monetary authorities and regulatory authorities, and cannot be exchanged or used arbitrarily beyond the prescribed scope, otherwise they may challenge the authority of legal tender and will be subject to regulatory sanctions.

With the development of the online world, the "virtual currency" or "token" operated by such online platforms (business circles, communities) has become more necessary and valuable. It is unrealistic to refuse to recognize it, completely block it, and require that only legal currency and identity information can be used on the Internet!

Therefore, it is most appropriate to define Bitcoin and other online virtual currencies as "online business circle currencies" (online virtual currencies, online tokens). It is necessary to recognize that they can perform the functions of currency within a certain range and must be subject to appropriate financial supervision, but it is also necessary to make it clear that they can only be a supplement or extension of legal tender and cannot subvert or replace legal tender.

Correspondingly, the "central bank-led digital currency" can only be "the network business currency running in the network platform system led by the central bank". Without the network platform system led by the central bank, the digital currency led by the central bank cannot operate. Moreover, the digital currency led by the central bank can only be a supplement and extension of the legal currency system. The two will have an increasingly deep integration, but there is still a long way to go to subvert or replace the existing RMB legal currency system. Of course, considering that the monetary and financial fields led by the People's Bank of China and the network platform system led by it have a relatively wide coverage, and will continue to expand the opening of its business and systems to the outside world, the central bank will adapt to the requirements of network operation to launch network digital currency. It is entirely possible to form the most influential network and digital currency system in the world, and it should be actively explored, accurately grasped, and effectively promoted.

3. Online virtual currencies should be properly regulated

When "online digital currency" is defined as "online business circle currency" (virtual currency, token) and given certain monetary functions, there must be corresponding monetary and financial regulatory requirements, such as: its management and operation rules must be clarified, as well as the scope of operation must be determined, and strict technical means and basic conditions must be formed for implementation; it is allowed to be exchanged with legal currency, but the network platform must obtain and store the legal and real identity information of the parties (in accordance with the real-name deposit system regulations), and the network identity must accurately correspond to the real identity to meet legal and regulatory requirements; the parties can redeem online virtual currency with legal currency, but it must be transferred through a deposit account and legal channels. When it needs to be redeemed, it can only be transferred back to the original currency and the original account, and it cannot be exchanged for other currencies or transferred to other accounts; the trading platforms of various online digital currencies must be open, fair, and just, and must not induce or mislead transactions, and ensure the authenticity of the transactions. The accuracy of information and the continuity and traceability of capital flows, and the conscious acceptance of supervision, etc.; regulatory authorities should strengthen inspection and supervision, effectively discover and severely punish acts of manipulating the market, disrupting order, and seeking illegal profits; they should strengthen professional, objective and fair publicity and reporting, and curb the current prominent one-sided publicity and even exaggeration (there is a lot of publicity at present, including self-media things, which over-exaggerate the effectiveness of blockchain, one-sidedly publicize the sharp rise in the prices of Bitcoin and other online virtual currencies, deliberately publicize the appreciation expectations of Bitcoin and other virtual currencies by certain authoritative institutions and "authoritative figures", and report out of context that a certain country recognizes the legal status of Bitcoin and other virtual currencies, without fully and accurately reporting that it only recognizes Bitcoin and other virtual currencies as online virtual currencies or tokens, with a certain range of monetary functions, and the corresponding regulatory measures to be taken, etc., which are very misleading and have a negative effect of fueling the flames).

According to the above requirements, the existing ICO practice is obviously inappropriate. Bitcoin, Ethereum and other network virtual currencies can only be used within the scope of their specified network platform system. In addition, they can only be exchanged with legal tender, and can only be transferred in and out of the original currency, original account, and original account name, and cannot flow into other digital virtual currency network platforms to become the object of ICO fundraising. As a way of crowdfunding or fund raising, ICO should also be subject to relevant supervision and legal regulations.

Of course, due to the cross-border and cross-border integration and extension of the Internet, Bitcoin, Ethereum and other online digital currencies may be circulated and traded across borders. However, China's strict control may cause a large number of them to be transferred overseas. Therefore, it is necessary to strengthen international communication and coordination, reach consensus and international unified rules as soon as possible, and avoid regulatory loopholes and cross-border arbitrage. However, considering the overheated development of online virtual currencies and ICOs in China, China should clarify the positioning and regulatory rules of online virtual currencies as soon as possible, at least in China, to effectively control and prevent related risks! (Wang Yongli is the former vice president of Bank of China Co., Ltd. and senior vice president of LeTV Holdings)

Original title: "Online virtual currency must be accurately positioned and regulated"