Online virtual currency supervision and overseas legislation reference

1. Four major risks of online virtual currency

The online virtual currency represented by Bitcoin is a major innovation in the global financial technology and Internet finance fields in recent years. As a medium of exchange or a form of digital unit that represents the value of digital storage, online virtual currency has no centralized storage mechanism or issuing and management agency. It is created or obtained through calculation or machine generation. This kind of pure credit online virtual currency is significantly different from digital units that are only used on specific network platforms and can only be used exclusively by issuers or designated merchants (such as Q coins) and cannot be converted or exchanged into legal tender.

In 2009, the concept of Bitcoin was proposed by a person claiming to be Satoshi Nakamoto and finally put into "issuance practice". In addition to the currently popular Bitcoin, there are hundreds of similar online virtual currencies such as Litecoin and Yuanbao Coin. When virtual currencies were first born, they were enthusiastically supported by some libertarians (or anarchists) and geeks, and in the past two or three years, they have been pursued by some speculators around the world.

At the same time, major risk events in the field of online virtual currencies have occurred frequently. First, online virtual currencies represented by Bitcoin are affected by the policies of various countries and speculation by speculators. In particular, from 2009 to 2014, the currency value fluctuated greatly. Since the second half of 2016, the value of Bitcoin has stabilized slightly. Second, before 2015, virtual currency trading platforms were basically not regulated by the government, and some trading platform executives had moral risks and took the opportunity to swindle customer funds. For example, in October 2013, the actual controller of the Bitcoin trading website GBL ran away with the funds, causing 500 victims to lose more than 20 million yuan. Third, the trading platform’s own network security prevention is not in place, and the network is attacked by security, resulting in the theft of virtual currencies stored in the trading platform, especially the Japanese Bitcoin trading platform Mt.Gox, whose stolen Bitcoin market value is as high as 120 million US dollars, and investors have suffered extremely heavy losses. Fourth, some lawbreakers used Bitcoin’s anonymity, cross-border full network circulation and payment convenience in the first few years of Bitcoin to purchase drugs, guns and other contraband. Of course, this kind of anonymity issue was later resolved. Although Bitcoin is anonymous, in the entire operating system, every ledger, every entry, and every transfer is public. It is often possible to check from which address a Bitcoin is transferred to which address (this address is likely to be a certain trading platform).

In view of this, online virtual currencies represented by Bitcoin have attracted the attention of regulators in various countries. However, according to the estimated market value of Bitcoin at the time of writing this article, the global market value of Bitcoin (calculated at 21 million coins) is about more than 10 billion US dollars. With such a limited volume, central governments of various countries may not be motivated to introduce relevant laws to regulate virtual currencies and virtual currency trading platforms. However, the risks in the field of virtual currencies have always been real. In addition to affecting the legitimate interests of investors, it may even affect the exchange rate fluctuations of individual countries with smaller market volumes (such as Cyprus), evade the country's crackdown on money laundering crimes, bypass foreign exchange controls, etc. Therefore, relevant legislation and supervision are not dispensable.

2. The legal dilemma of domestic online virtual currency trading institutions

Since 2012, several online virtual currency trading platforms have emerged in China due to the various business opportunities brought about by online virtual currencies such as Bitcoin. Based on our continuous research and tracking in recent years, we have noticed that several domestic virtual currency trading institutions have attracted more and more investors to participate. In particular, the daily trading volume of some platforms in the past year has been quite astonishing, and some well-known platforms have even traded more than hundreds of billions of yuan a day. During the transaction process, investors need to transfer the transaction funds to the bank account of the trading institution through online banking. Therefore, a large amount of customer funds is stored in the account of the virtual currency trading institution. However, the online virtual currency trading institutions are not approved to absorb public funds, which actually makes the trading institutions face the potential risk of illegal fundraising. At the same time, investors store huge amounts of virtual currencies such as Bitcoin on the trading institutions' equipment. Due to the lack of corresponding regulatory rules, China's virtual currency trading institutions are currently in a dilemma of having no law to rely on.

In fact, online virtual currency trading institutions have mostly borrowed the exchange model. However, there are basic requirements for the compliance of exchanges, such as no capital pool, and customer funds should be held in custody in banks; in terms of the relationship between customers and exchanges, exchanges only do matchmaking and are not allowed to directly engage in virtual currency operations, and exchanges must be approved by provincial governments, etc. Restricted by the "Notice on Preventing Bitcoin Risks" issued by the central bank and five other ministries in December 2013, third-party payment is currently not allowed to connect with Bitcoin trading institutions, and customer funds are not allowed to be held in custody in banks. Although domestic Bitcoin trading institutions have been negotiating with some provincial governments, none of them have obtained exchange licenses. The documents issued by the central bank and five other ministries in 2013 only require Bitcoin trading platforms to be registered (referring to the registration of Internet companies required by the five ministries), but no further requirements are made. In short, the country is basically blank in terms of Bitcoin supervision and legislation, and virtual currency business operations are essentially in a regulatory vacuum in China.

Therefore, the various virtual currency trading institutions in China currently rely entirely on their own moral self-discipline to maintain operations. Obviously, without third-party supervision, relying solely on the moral self-discipline of the institutions, the trading stability is relatively weak, there are potential risks, and the trading institutions themselves have accumulated potential risks. On the one hand, once the senior executives of the trading institutions have moral risks, such as taking away the funds deposited by customers in the institutional accounts or the virtual currencies stored on the institutional hard drives, investors will suffer heavy losses. On the other hand, there have been a series of incidents in the market where investors were defrauded under the guise of virtual currencies. When the relevant legislative practices in foreign countries, especially in New York State, are at the forefront, and China's Bitcoin trading volume accounts for more than 80% of the global share, the legislative experience in foreign countries is worthy of appropriate reference by Chinese regulators on the basis of carefully evaluating its actual effects in the future.

3. New York State’s Legislative Reference

Since one of the main risks of online virtual currencies is closely related to trading platforms, local governments in some countries have taken the lead in issuing virtual currency trading platform regulatory rules, which has become a useful attempt to control risks in the field of virtual currencies. Among them, the relevant regulatory license (BitLicense) issued by the New York State Department of Financial Services (NYDFS) has attracted particular attention in the industry. After nearly two years of investigation and debate, in June 2015, the New York State Department of Financial Services issued the final version of the virtual currency licensing regulations. New York State has thus become the first region in the United States to officially launch virtual currency regulatory rules. The target of this regulatory rule is companies operating in the field of virtual currencies such as Bitcoin.

The New York State Virtual Currency Licensing Regulations include: first, safeguarding consumer assets; second, after any transaction is completed, the trading platform should provide detailed information to customers; third, establish a consumer complaint policy; fourth, disclose risks to consumers. Fifth, establish an anti-money laundering mechanism. Sixth, establish a network security plan. Seventh, establish a chief information security officer. Eighth, keep books and records. Nine, report and financial disclosure. Tenth, capital requirements. Eleventh, compliance executive. Twelve, each licensee should establish a business continuity and disaster recovery plan, etc. After the New York State Virtual Currency Licensing Regulations were issued, various controversies and different evaluations were triggered. In particular, the regulations of the regulatory regulations are very complicated and the requirements for trading platforms are very high, which has caused criticism from some industry insiders. However, the efforts of the New York State Financial Services Department have provided valuable legislative experience for other states in the United States and even other countries to regulate virtual currencies. In particular, the regulatory regulations grasp the three most core issues involving virtual currency transactions, such as consumer rights protection, network security standards and anti-money laundering mechanisms. These three issues are exactly the key points of online virtual currency risk events in the past few years. Therefore, these three cores will also be valuable legislative resources for China to refer to in the future.

IV. Legal Thinking on China's Online Virtual Currency

The legal protection of China's online virtual currency and the supervision of trading institutions have always been in a vacuum. The main authoritative document related to Bitcoin in China is the "Notice on Preventing Bitcoin Risks" jointly issued by the People's Bank of China and five other ministries in December 2013. However, this document is only a "notice" issued by the central ministries and commissions, not a regulatory regulation. It more reflects the attitude of the regulatory authorities towards Bitcoin at that time: Bitcoin is clearly regarded as a virtual commodity, and Internet companies that provide Bitcoin registration and trading services are required to fulfill anti-money laundering requirements. At the same time, third-party payment institutions are prohibited from providing services for Bitcoin transactions, etc. This means that Chinese regulatory authorities regard Bitcoin legally obtained by individuals as virtual property. In recent years, Bitcoin has been accepted as a "currency" that can be used for payment by some world-renowned companies (such as Microsoft, Rakuten, etc.). In some cross-border small payments, Bitcoin is also welcomed for its convenience. At the same time, we have noticed that in recent articles published by important officials of the central bank, Bitcoin is regarded as a "quasi-digital currency."

Given the huge risks in this field, legal scholars are urgently needed to conduct in-depth research and provide valuable legislative suggestions or regulatory countermeasures. However, the research on online virtual currency in the Chinese legal community has just started, and there are serious deficiencies in relevant understanding or research. Some studies titled online virtual currency are actually virtual properties with a unified issuing agency, such as online game coins or promotion points. In the past two years, the research on virtual property published by mainstream legal journals has mostly been limited to online game props or email accounts, etc. This is fundamentally different from decentralized online virtual currency.

In the special research involving Bitcoin, there are inappropriate or even wrong conclusions. For example, some scholars believe that any subject can easily bypass the state's foreign exchange control and transfer assets overseas with the help of Bitcoin. However, in recent years, we have investigated some domestic online virtual currency trading institutions and learned that it is only a theoretical existence to easily transfer large amounts of funds abroad by buying and selling Bitcoin. Whether it is domestic or foreign formal virtual currency trading platforms, there are certain restrictions on large transactions. Once the actor trades Bitcoin exceeding a certain amount, most domestic formal trading platforms usually require customers to provide more identity authentication (i.e., implement KYC policies). Therefore, in practice, it is far from easy to completely get rid of foreign exchange management and other systems through virtual currency transactions! Therefore, at present, in the field of virtual currency, it is necessary to accumulate profound legal research results in order to promote relevant legislation and supervision in China.

At present, foreign legislation mainly regulates trading platforms. However, there are still many legal gaps in the field of online virtual currency that are worth exploring. For example, the security standard guidelines for Bitcoin payment systems and various types of Bitcoin wallets, whether small-amount cross-border payments of Bitcoin are exempted, and the private law protection of individuals holding online virtual currency. At the end of June 2016, the draft of the General Principles of Civil Law was submitted to the 21st meeting of the Standing Committee of the 12th National People's Congress for deliberation. In the draft, online virtual property is regarded as the object of property rights. This means that online virtual currency represented by Bitcoin is expected to be included in formal laws in the future. However, there are various types of online virtual property. In order for various types of online virtual property to be truly regulated and protected by law, it is still necessary for legal scholars to conduct in-depth typological research on them, and to provide more legal norms in the future civil law provisions and separate laws. Crimes involving online virtual currency (such as stealing Bitcoin) and the determination of the amount also require corresponding legal revisions.

In this regard, we believe that, first, it is necessary for the legal community to conduct in-depth research on online virtual currencies; second, due to the limited size of the online virtual currency market, under the premise that the central regulatory authorities do not have sufficient reasons to introduce regulatory rules, local governments can consider introducing corresponding local regulations to regulate Bitcoin trading institutions; at present, given that it will take some time for local regulations to be introduced, an online virtual currency committee can be set up under self-regulatory organizations such as the China Internet Finance Association, and industry associations can take the lead in formulating guidelines for online virtual currency trading institutions in terms of network security, fund custody, virtual currency custody, anti-money laundering mechanisms, risk disclosure, and investor protection.