The central bank's first digital currency, Bitcoin, is viewed differently by blockchain

China Times reporter Hu Jinhua reports from Shanghai

On the one hand, China has taken drastic measures to eliminate illegal speculators in the domestic Bitcoin boom, and on the other hand, it has promoted scenario testing of blockchain technology in the financial industry. Before the Spring Festival, the People's Bank of China made its position clear on Bitcoin and the blockchain based on its underlying technology.

A reporter from the China Times learned that on January 25, the blockchain-based digital bill trading platform promoted by the People's Bank of China was successfully tested. The legal digital currency issued by the central bank has been trial-run on the platform. A research and development center will be established in the near future for continuous improvement. After the Spring Festival, the Digital Currency Research Institute under the central bank will also be officially listed.

The day before, the three largest domestic bitcoin trading platforms, OkCoin, Huobi, and Bitcoin China, officially announced that they would start charging 0.02% of transaction fees and stop high-leverage margin trading after being investigated by the central bank for several days. Previously, bitcoin transactions in China were free, and this move led to a sharp drop in bitcoin trading.

"Financial regulators are intent on rectifying the chaos in domestic Bitcoin transactions. These free trading platforms are able to operate normally and make profits. One of the main sources of profit is to provide financing for Bitcoin speculators. The shareholders behind these platforms are overseas funds, so Bitcoin can no longer be simply regarded as a virtual commodity. However, the central bank's positive attitude towards blockchain technology conveys that it is taking a scissor-hand policy towards Bitcoin and blockchain." On February 2, Chen Yu, CEO of a Shanghai science and technology innovation institution, analyzed.

This also means that due to policy factors, Bitcoin and blockchain have parted ways in China.

Blocking Bitcoin Funding

"From the current perspective, Bitcoin is a hype tool in China." During the Spring Festival, Zhang Jiebin (pseudonym), a veteran domestic Bitcoin player, told reporters.

Whether for money laundering, speculation, or asset transfer, Bitcoin plays a powerful role as a carrier in China's capital market. Its transactions had not been regulated before, and it was not until its price was about to break through 10,000 yuan per piece that the regulators became alert.

"A year or two ago, regulators did not realize that Bitcoin would evolve so rapidly in China and attract a large number of professional and non-professional speculators. It was not until they monitored the capital forces hidden behind those trading platforms that they realized that the surge in Bitcoin prices was due to a large amount of capital allocation and suspected money laundering and other activities." An anonymous person close to the regulators said on February 3.

According to the reporter, since the central bank conducted on-site inspections of Bitcoin trading platforms in Shanghai and Beijing on January 11 this year, many problems have been found, especially the hidden financing transactions provided by platforms and third-party institutions to speculators, and whether they violated foreign exchange management regulations and anti-money laundering regulations. On January 24, the three largest Bitcoin trading platforms in China announced that they would charge transaction fees after the inspection, causing Bitcoin transactions to plummet, with hourly transaction volume plummeting by more than 80%. The price of Bitcoin remained at around 6,300 yuan per unit.

"Capital allocation has always been the main means for Bitcoin trading platforms to survive and make profits. Generally, the maximum leverage provided by platforms and third parties to investors is 5 times, which means that investors can use 10,000 of their own funds to mobilize 50,000 leverage on the platform, and the interest is calculated at 1/1000 on a daily basis. Now high-leverage capital allocation has been banned, and at most capital allocation is based on a one-to-one ratio. It is estimated that capital allocation will be banned in the future. The annualized interest rate of capital allocation is as high as 40%, which is a very lucrative profit for trading platforms. Now that it has switched to charging transaction fees, some platforms will definitely find it difficult to continue." On February 3, Zhang Jiebin told the China Times reporter.

According to him, the shareholders of the current major domestic Bitcoin trading platforms are basically foreign-funded, and one platform has received as much as $80 million in overseas financing. These behind-the-scenes funds hope to push up the price of Bitcoin, making Bitcoin an acceptable investment target in China, and then enable the platform to go public one day. Now these capital plans are likely to fail, and a group of high-frequency traders in the Chinese market are considering exiting the market.

It is worth noting that the reason why Bitcoin is so popular abroad is that some large retail giants, such as Overstock, have quickly accepted Bitcoin as a payment method, and even Amazon has begun to "indirectly" accept Bitcoin. It is understood that Amazon Direct now allows consumers to use iPayYou to transfer any amount of US dollars from their Bitcoin wallets to Amazon. Before this, Bitcoin could only be used to purchase Amazon digital shopping cards.

However, in the view of many domestic professionals, it is unlikely that Bitcoin will be linked to large commercial retail institutions or e-commerce platforms in China. As an unrecognized virtual commodity, it does not have the attributes of legal tender. This is the red line drawn by the central bank. Even if an e-commerce platform is interested, the regulator will not allow it.

"The problem is that if the Bitcoin is not mined by miners and does not require direct consumption of cash, who would use cash to invest in Bitcoin and then exchange it for cash for shopping? Even if the Bitcoin is mined by miners, it consumes various costs such as time and manpower. Using Bitcoin as a medium of exchange for barter is not worth the cost." A professor at the Shanghai Advanced Institute of Finance said.

Parting ways

Although the price and reputation of Bitcoin plummeted after this incident, the blockchain, which became famous because of Bitcoin, has attracted the attention of global financial institutions and even central banks.

Our reporter learned that the central bank has been strictly supervising Bitcoin transactions in China, while making every effort to apply blockchain technology. On January 25, the central bank began to promote scenario testing of blockchain technology in the financial industry. This means that the People's Bank of China will become the first central bank in the world to issue digital currency and carry out real applications, and will take the lead in exploring the practical application of blockchain.

On December 15 last year, the registration and circulation of the entire life cycle of the central bank's digital bills based on blockchain and the DVP settlement function based on digital currency have been fully realized, showing that the application verification of digital currency in the digital bill scenario has been implemented. At present, the online deployment of the digital bill platform and the digital currency system simulation operating environment has been completed as planned, and network connection has been established with the pilot banks.

"The introduction of digital currency for settlement can achieve the synchronous transfer of capital flow and information flow of digital bill transactions, thereby realizing DVP bill-to-payment settlement; at the same time, the blockchain digital identity solution solves the problem of repeated KYC authentication of users between different financial institutions." At the time, a person from the Shanghai Interbank Bond Market who participated in the research revealed.

In the banking industry, the application of blockchain technology is expanding. On January 10, China Postal Savings Bank and IBM jointly announced the launch of a blockchain-based asset custody system, which was launched in October 2016 and has successfully executed hundreds of transactions in a real business environment. This is the first successful practice of China's banking industry to apply blockchain technology to the core business system of banks. In December last year , China Zheshang Bank also officially launched a mobile digital bill product based on blockchain technology and built a mobile digital bill platform based on blockchain technology, which can provide customers with the functions of issuing, signing, transferring, buying, selling, and redeeming mobile digital bills on mobile clients, and realize public and secure accounting on the blockchain platform.

"The reason why banks are rushing into the blockchain field is simple. Banks can greatly improve transaction efficiency by using their own permissioned blockchain to record all customer transactions, instead of recording transaction data in various types of software that will quickly become outdated. We expect to have specific scenarios implemented this year." On February 3, a person from China Ping An Group also revealed to our reporter.