Zhou Xuedong, director of the People's Bank of China's business department, will gradually introduce Bitcoin regulatory measures

Golden Finance News - As a relatively successful application of blockchain technology in the world, Bitcoin has been accompanied by controversy on both the "good" and "evil" sides since its appearance. Since January this year, after the price of Bitcoin surged again, the Business Management Department of the People's Bank of China and its Shanghai headquarters took the lead in conducting joint inspections of domestic Bitcoin trading platforms, pointing out the problems of some platforms and ordering them to clean up and rectify.

On the morning of March 13, 2017, a reporter from China Business News interviewed Zhou Xuedong, deputy to the National People's Congress and director of the Business Management Department of the People's Bank of China, at the NPC Jiangsu delegation. When asked about the current attitude of regulators toward Bitcoin, Zhou Xuedong told reporters that innovation in blockchain technology is generally encouraged and supported, but using blockchain technology to create a bubble is definitely not supported.

"For a while, the bubble of Bitcoin speculation was indeed too big," said Zhou Xuedong.

He said that further regulatory measures will be introduced in succession, including regulatory guidelines on anti-money laundering. Currently, the guidelines have been submitted to Bitcoin trading platforms for comments.

The Bitcoin hype bubble is too big

According to data from the foreign website Bitcoinity.org on March 13, the trading volume of China's bitcoin trading platform Okcoin has dropped to 9.26% of the global market share, ranking third; another platform Bitcoin China has a market share of 5.59%, ranking seventh; the first place is the Hong Kong-based platform Bitfinex, accounting for 16.47%. The average daily trading volume of major global bitcoin trading platforms is about 680,000.

However, just two months ago, the situation was completely different. In early January this year, the price of Bitcoin soared from last year's low of more than 4,000 yuan to more than 8,800 yuan. The average daily trading volume of major Bitcoin trading platforms around the world increased from 600,000 to about 6 million, and once exceeded 13 million. Among them, the three platforms from China, Bitcoin China, Huobi.com and OKCoin, accounted for more than 98% of the total trading volume.

Zhou Xuedong told China Business News, "If it is an innovation in blockchain technology, the country will definitely encourage and support it, but using blockchain technology to create a bubble is definitely not encouraged."

Zhou Xuedong told Caixin that the Chinese market is different from that of foreign countries. First, China has a very large investor base, especially young people, who are very sensitive to technological innovation and are often willing to invest, and of course willing to take certain risks. However, the trading risk of Bitcoin is still relatively high.

In fact, after checking, it was found that the real transaction volume of Bitcoin is not that high. It is mainly because some institutions and investors use high-frequency trading to do "counter-trading", that is, to create false transactions and "brushing orders" to increase business volume. Why do they do this? Because some PE and venture investors hope to increase their market share and attract investors' attention and investment.

After the concentrated inspections in the previous period, will my country's regulatory authorities include Bitcoin in normal supervision in the future?

Zhou Xuedong told the reporter of China Business Network, "Some economists believe that this is a bubble and it is only a matter of time before it bursts. However, from a technical point of view, Bitcoin is a relatively successful application with blockchain technology as its underlying technology. In addition, some countries have recognized the legal status of Bitcoin and can use it as a payment tool to purchase goods, which means that they recognize its value. In this way, Bitcoin is likely to continue to exist."

He pointed out that at present, there are different views on Bitcoin both internationally and domestically. Some countries believe that it does not need to be regulated and take a non-regulatory stance. However, in any case, from the perspective of China's national conditions and being responsible to the public, Bitcoin and other online virtual commodity trading platforms do need to be regulated to a certain extent.

Anti-money laundering supervision guidelines will be issued and it may be defined as a commodity trading platform in the future

At present, the only regulatory document on Bitcoin in China is the "Notice on Preventing Bitcoin Risks" (Document No. 289) issued by the People's Bank of China and four other ministries on December 5, 2013. It stipulates that at this stage, financial institutions and payment institutions are not allowed to conduct Bitcoin-related businesses, and are not allowed to price products or services in Bitcoin.

Zhou Xuedong revealed that more specific regulatory policies will be introduced one after another, such as a regulatory guideline on anti-money laundering. The guideline has been soliciting opinions from Bitcoin trading platforms. In addition, the regulatory agencies involved are not just the central bank. Currently, Bitcoin has been included in the scope of national Internet financial regulation, and multiple departments will jointly participate in the coordination of supervision.

"The supervision of trading platforms is not a single supervision by a single department, but must be comprehensive. All departments participate from the perspective of their respective responsibilities and implement functional supervision. For example, tax issues are definitely supervised by the tax department; issues of exceeding the scope of business are supervised by the industrial and commercial departments; issues involving false advertising, from the perspective of enforcement of the Advertising Law, are also supervised by the industrial and commercial departments." Zhou Xuedong said.

Since January this year, the Central Bank's Business Management Department has conducted continuous on-site inspections of Bitcoin trading platforms. Over the past two months, it has reported problems existing in related platforms. Two issues are more prominent: first, some institutions are suspected of engaging in illegal financial business, including financing and currency lending, continuous trading, centralized matching, etc.; second, these institutions have basically not established internal control systems and internal control measures for anti-money laundering.

Zhou Xuedong emphasized to the reporter from China Business Network that the existing Bitcoin trading platform cannot be called an exchange, it is just a website, a trading platform.

"If it is an exchange, it must be administratively licensed and approved by relevant state departments. Many people regard online trading platforms such as Bitcoin as exchanges, but in fact these are two different things," he said.

Furthermore, he believes that "in the future, if it is a commodity trading platform, it will need local approval. If it wants to become an exchange, it will need approval from the securities department or even the State Council. However, as Bitcoin is a virtual commodity on the Internet, it is unlikely that an exchange will be approved."

He suggested that in the long run, commodity trading platforms must be included in the scope of supervision under local management, and local financial offices (bureaus) should implement entity supervision or institutional supervision; while People's Bank of China branches, securities regulatory bureaus, insurance regulatory bureaus, industrial and commercial bureaus, tax bureaus, etc. should implement functional supervision.

At the same time, the pattern of existing domestic trading platforms may also gradually change. Zhou Xuedong said that if the largest domestic Bitcoin trading platforms continue to exist legally in the future, the market will definitely show a certain degree of concentration, and the market share of some institutions will increase; while some small institutions, facing strict supervision, may not make much money, and will lose their living space. Earlier, most platforms were playing tricks and making money by charging capital occupation fees, that is, by financing and lending. Now, these practices are all illegal.

Zhou Xuedong pointed out that in the short term, several red lines must be drawn, such as no leveraged trading, financing and currency lending, no fee-free transaction to push up trading volume and manipulate trading prices, no violation of anti-money laundering regulations or participation in money laundering, no violation of foreign exchange management regulations, no use of Bitcoin as a payment tool instead of legal tender for payment and settlement, no tax evasion, no false propaganda or illegal pyramid schemes, and no illegal conduct of securities, futures and other financial businesses.