Bitcoin regulation upgrade: allegedly involving cross-border transfer of assets

Original title: Checking Bitcoin

The trigger for this round of regulatory investigations came from two main aspects: one was that the price of Bitcoin skyrocketed after Christmas, reaching as high as 9,000 yuan per coin; the other was that the media reported that Bitcoin was suspected of transferring assets across borders.

Caijing reporter Zhang Wei and Qu Yanli/Text Yuan Man/Editor

At the beginning of the new year, the virtual currency Bitcoin has once again entered the public eye due to comprehensive regulatory inspections.

On January 6, the Shanghai headquarters of the People's Bank of China, the Shanghai Municipal Financial Office, the Business Management Department of the People's Bank of China, and the Beijing Municipal Financial Work Bureau jointly with relevant regulatory departments met with the main persons in charge of Bitcoin trading platforms including "Bitcoin China", "Huobi", and "Bihang".

"The main purpose of the joint meeting between the People's Bank of China, the China Banking Regulatory Commission, the China Securities Regulatory Commission, the Financial Services Bureau and the State Administration for Industry and Commerce to meet with the platform is to understand the operation of the relevant platform, alert of possible risks, and require it to strictly comply with relevant laws and regulations and operate in compliance with the law. The platform was also urged to conduct self-inspection in accordance with relevant laws and regulations and carry out corresponding cleanup and rectification." A person close to the regulatory authorities told reporters.

However, a simple interview is not enough to show the intensity of the regulatory authorities' investigation into Bitcoin. On January 11, the Shanghai headquarters of the People's Bank of China, the Shanghai Municipal Financial Office and other units formed a joint inspection team to conduct an on-site inspection of Bitcoin China; the People's Bank of China's Business Management Department and the Beijing Municipal Financial Work Bureau and other units also formed a joint inspection team, which entered the Bitcoin and Litecoin trading platforms such as "Huobi.com" and "Bihang" on January 11, 2017.

The inspection team conducted on-site inspections on the trading platform’s implementation of foreign exchange management, anti-money laundering and other relevant financial laws and regulations, and relevant regulations on trading venue management.

According to a reporter from "Caixin", the fuse that has attracted the high attention of regulators this time around includes two main aspects: one is that the price of Bitcoin has skyrocketed since Christmas, reaching a high of 9,000 yuan per piece; the other reason is that domestic and foreign media have successively reported that Bitcoin is suspected of transferring assets across borders.

The person close to the regulatory authorities told the "Finance" reporter that as a technology, the original intention of this large-scale regulatory inspection of the Bitcoin platform is not to make it disappear. The blockchain technology behind Bitcoin is a general trend and should be mainly guided. Blocking will not work. The relevant legal characterization of virtual currencies such as Bitcoin has been ruined by 80% of people.

On January 18, a relevant person in charge of the Business Management Department of the People's Bank of China answered reporters' questions about the on-site inspection of Bitcoin trading platforms. He said that after the joint inspection team composed of the Business Management Department of the People's Bank of China and relevant departments entered "Bihang" and "Huobi.com", it was initially discovered that these Bitcoin trading platforms conducted financing and currency lending businesses in violation of regulations, causing abnormal market fluctuations; the inspection also found that these platforms had failed to establish and improve relevant anti-money laundering internal control systems as required.

According to a reporter from "Finance", relevant platforms have adjusted their financing and currency lending businesses. Huobi.com stopped its financing and currency lending business on the 16th, and issued an announcement on the 19th that Bitcoin's leverage (financing and currency lending) business would be stopped. From now on, no new leverage quotas will be issued, and old users will no longer be able to renew their loans after paying off the corresponding amount.

Subsequently, the price of Bitcoin on BTCChina fell below the 5,800 yuan mark, and the intraday decline further expanded to more than 7%. "In the short term, supervision is based on the principles of maintaining financial market stability, regulating market development order, and protecting investors. However, as the inspection goes deeper, if money laundering and cross-border asset transfer are found, the platform will also be severely punished." said the above-mentioned person close to the regulator.

Bitcoin is a digital currency and a decentralized payment system. Its characteristic is that every player can participate in bookkeeping. Every ten minutes, the system will select the fastest and best bookkeeping player through a certain algorithm, and it will record all the accounts within ten minutes. If you grab the right to bookkeeping and successfully bookkeeping, you will be rewarded with a certain amount of Bitcoin, which is the so-called "mining", that is, the process of Bitcoin generation.

This automatically running system was designed by Satoshi Nakamoto in 2008. Satoshi Nakamoto is a pseudonym, and no one knows his true identity to this day.

A new round of surge

After Christmas in 2016, the price of Bitcoin saw a new wave of skyrocketing. According to market data from Huobi.com, a domestic Bitcoin trading website, the price of Bitcoin reached 6,990 yuan per unit on December 29, an increase of more than 25% in 10 days, approaching the 7,000 yuan per unit mark, which has become the highest price in the past three years.

In January this year, Bitcoin rose for five consecutive trading days, with the largest cumulative increase reaching 31%. According to the market information of Huobi.com and OKCoin, a well-known domestic trading platform, the highest price of Bitcoin during the trading session was close to 9,000 yuan per unit, but it quickly plunged and fell to around 7,100 yuan per unit, a drop of more than 20%.

In fact, Bitcoin first attracted the attention of the Chinese people in 2013, and its historical highest price of 8,000 yuan also occurred in 2013.

After the regulatory authorities issued documents to regulate and strengthen in 2013 and 2014, the price of Bitcoin fell back, especially in 2015, when the price of Bitcoin returned to the level of 1,000 yuan. Compared with the sharp rise and fall in 2013, the price of Bitcoin rose steadily in 2016, from about 2,300 yuan at the beginning of 2016 to nearly 9,000 yuan at the beginning of 2017, and then fell. Especially after the central bank’s interviews and on-site inspections, the price of Bitcoin has been falling all the way, and has been hovering around 6,000 yuan recently.

"There is a very important background factor: under the influence of various black swan events, the hedging function of international currency once highlighted its value; in addition, there are certain gaps in the supervision of this type of virtual currency, and a large number of people are engaged in illegal pyramid schemes, fundraising, fraud, etc. in the name of virtual currency." The above-mentioned person close to the regulator said.

In addition, the recent fluctuations of Bitcoin are also related to the exchange rate trend of RMB ( 6.8554 , 0.0041 , 0.06% ) . Xiao Lei, chief researcher of Gold Wallet, said in an interview with Caijing that the recent fluctuations were also caused by the expectation of foreign exchange control, especially for some IT people, who would think of many ways to invest, such as opening a US stock account, but later found that it was difficult and there were also problems with fund security, so they might buy Bitcoin. Especially in the first few days of the year, many mainland accounts in Hong Kong were cancelled, leading to rising panic.

On the last day of 2016, the State Administration of Foreign Exchange announced that it would strengthen the management of individual foreign exchange information declaration from three aspects. First, the declaration content will be refined to clarify the rules and corresponding legal responsibilities that individuals should follow when purchasing and paying foreign exchange; second, the banks will be strengthened in their authenticity and compliance review responsibilities; third, spot checks will be conducted on individual declarations during and after the event and penalties will be increased. Wu Ge, chief economist of Huarong Securities, believes that the introduction of new policies at this time is a factor in further strengthening institutional management, and is also related to the need to guard against further pressure on exchange rate depreciation in January.

In November last year, there was a media report that "funds can be transferred abroad in 5 minutes, and Bitcoin has been stronger than the RMB recently." The article stated that the technical process of converting RMB into US dollars through Bitcoin is very simple.

This strong exaggeration is unreasonable. Although Bitcoin can transfer domestic funds overseas and is relatively convenient, it still has certain technical barriers, so the overall volume will not be too large.

In Xiao Lei's opinion, it is more difficult to cash out Bitcoin in the United States than in China, because the transaction volume in the United States is not as large as that in China. If the volume is relatively small, such as a few or dozens, it is relatively easy, but it also requires a foreign capital account. In the case of real large-scale money laundering or capital flight, it is actually very difficult. If you can't sell it in the short term, for example, in the first two weeks of January this year, it fell by more than 40%. If you don't sell it during this period, the risk is huge.

Gong Ming, founder of Blockchain Pencil, told Caixin that when individual investors use their RMB to buy Bitcoin at Chinese Bitcoin exchanges, and then sell the Bitcoin at foreign exchanges, and then exchange it for US dollars, it seems that individuals have broken through the limit of exchange quotas, but from a macro perspective, it is just equivalent to exporting a virtual commodity called Bitcoin.

This is because, when you buy Bitcoin on an exchange, it is equivalent to RMB entering the hands of someone else; then when you take the Bitcoin to the United States and sell it, the Bitcoin ends up in the hands of another person abroad and is exchanged for US dollars. There is no flow between RMB and US dollars.

An industry insider said that the domestic price of Bitcoin is too high and there is definitely a bubble, which will trigger some unpredictable events in the future, so it needs to be controlled.

Money laundering suspicion

After a meeting with the platform on January 6, it entered the three major trading platforms on January 11. On January 18, the regulatory authorities in Beijing and Shanghai both spoke out about on-site inspections of Bitcoin platforms.

In addition to trading platforms such as "Bihang" and "Huobi.com" conducting financing and currency lending businesses in violation of regulations, resulting in abnormal market fluctuations, they have failed to establish and improve relevant anti-money laundering internal control systems in accordance with regulations. The "Bitcoin China" trading platform has problems such as operating beyond the scope of operation, conducting capital allocation business in violation of regulations, and failing to implement third-party custody of investors' funds.

In fact, regulators noticed the potential risks of Bitcoin as early as 2013. At the end of 2013, 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 jointly issued the "Notice on Preventing Bitcoin Risks" (hereinafter referred to as "No. 289"), requiring all financial institutions and payment institutions not to price products or services in Bitcoin, not to buy or sell Bitcoin or act as a central counterparty to buy or sell Bitcoin, not to underwrite insurance business related to Bitcoin or include Bitcoin in the scope of insurance liability, and not to directly or indirectly provide customers with other Bitcoin-related services. At the same time, it reminded to prevent the money laundering risks that may arise from Bitcoin.

In 2014, as a detailed and implementation document of Document No. 289, the central bank once again issued a document requiring all banks and third-party payment institutions to close all trading accounts of more than a dozen domestic Bitcoin platforms.

"However, there are still some local financial institutions and small banks that have not interrupted their provision of Bitcoin services. Bitcoin trading platforms run great risks in managing funds through their affiliated companies or legal representatives or senior executives' accounts," said the person close to the regulator.

The first and most influential platform "runaway" incident can be traced back to October 2013, when GBL, a Bitcoin trading platform ranked among the top five in the country in terms of market size and with a transaction volume of up to 50 million yuan, became inaccessible, and a message suspected to be left by a hacker appeared on the homepage. However, this phenomenon disguised as a hacker intrusion was considered to be "self-directed and self-acted", and the GBL platform was also sued in court.

However, in the view of industry insiders, the current supervision is more of a warning. Even if the platform has the energy to help others transfer funds or launder money, it should not get into trouble. "Bitcoin has some characteristics, such as freedom and anonymity. For example, Bitcoin wallets can transfer money. The core is the concept of decentralization. As long as it complies with the protocol, you can create a wallet address. The address can be seen, but the address does not need to be registered with the relevant department. During the use of the address, if it is converted into RMB, it needs to be realized on the trading platform. The trading platform is a real-name system, so the supervision needs to check what it wants to check through the trading platform."

Money laundering refers to the act of concealing and hiding the source and nature of illegal income and the proceeds generated by it through various means in order to make it legal in form.

Gong Ming, founder of Blockchain Pencil, believes that Bitcoin is incapable of converting illegal income into legal income. Transactions between Bitcoins can be anonymous, but as long as there is a transaction or exchange between Bitcoin and any legal currency, all Bitcoin accounts are recorded on the entire network, leaving clues, which is a huge risk for money launderers.

There are strict restrictions on transactions between Bitcoin and global legal currencies. Large Bitcoin exchanges, both domestic and foreign, need to know the identity information and photos of investors, and it is basically impossible to complete it in a purely anonymous state.

Large-scale money laundering will not use Bitcoin. Currently, the global volume of Bitcoin is only 14 billion US dollars, equivalent to 96 billion yuan.

However, the fact that Bitcoin increased by 140% last year and 30% in the first few days of this year has also led to market fraud to a certain extent, and Bitcoin has begun to be used as a financial product in the market.

In Xiao Lei's opinion, China's investment channels are relatively narrow, and people are more willing to pursue high-yield products, just as P2P was very popular in the past few years. As an emerging thing, if Bitcoin can make money, even if people don't know what Bitcoin is, they are willing to open an account to speculate on it.

According to industry insiders, the scale of Bitcoin calculated by a specific computer program is limited to a certain extent. By 2020, the maximum scale will be 21 million coins. Currently, 17 million have been issued. There are five or six million in China. China does not have that many coins, but a small number of coins constitute a large amount of trading volume, which is artificial speculation.

The trading platform once exaggerated that China's share of Bitcoin transactions accounted for 90% of the world. In fact, such high transaction data is a gimmick created by Bitcoin trading platforms to attract investors. China's actual trading volume accounts for about 50%-60% of the world, and most of the trading volume comes from automatically running quantitative arbitrage programs.

The daily trading volume of most European and American exchanges is around RMB 100 million.

Platform risks

The sharp fluctuations in Bitcoin prices are due to the mechanism behind it. There is no limit on the price fluctuations of Bitcoin 24 hours a day and T+0. Industry insiders believe that the Bitcoin mechanism itself is suspected of boosting speculation. At the same time, it has leverage. An insider revealed that the maximum leverage is 20 times. At the same time, it is also suspected of speculation.

A person from a platform told Caijing that the maximum leverage of the platform's financing and currency lending business is four times. For short-term investors, financing means that if they expect the price of Bitcoin to rise, they will borrow money from the platform to buy Bitcoin, and then sell Bitcoin when the price rises, and return the funds to the platform; currency lending means that if they think the price of Bitcoin will fall, they will borrow coins from the platform to sell, and then buy coins at a low price and return them to the platform after the price falls. However, if the expectations are deviated, it will cause great losses to investors.

The hidden risks of Bitcoin mainly include the following aspects: the first risk is capital risk. Bitcoin services are simple, including account opening and withdrawal. Various restrictions will be imposed on withdrawals between account opening and withdrawal. A large amount of money and coins exist in the platform, and there is a risk of running away or misappropriation of the capital pool; the second risk is suspected of illegal payment settlement and foreign exchange risks. Some platforms have opened coin collections and some scenarios use Bitcoin for settlement, which is unauthorized payment and settlement business; the third risk is suspected of cross-border transfer of assets, buying Bitcoin in China and then selling it abroad, forming a counter-price relationship with multiple countries, forming an exchange rate that is separated from the normal foreign exchange rate. There is an arbitrage relationship in the middle, which disrupts the market order and involves financial banks.

Bitcoin investors are mainly divided into four categories: the first category is international speculative arbitrage; the second category is 35-40 years old people with IT background; the third category is business owners; the fourth category is Wenzhou real estate speculators. Due to the difference between domestic and international prices, some investors take advantage of the price difference to arbitrage. Only a few people hold Bitcoin for a long time. Due to the difference between domestic and international prices, most people hold Bitcoin for arbitrage.

"Some market makers push up prices, quickly inflate the bubble by pushing up prices, and then attract small and medium-sized investors to enter. Once the bubble bursts, it will inevitably cause huge losses and constitute a mass incident," said the person close to the regulator.

According to the above-mentioned person close to the regulator, in 2016, local economic investigations reported that there were nearly 100 types of digital currencies on the market. The Ministry of Public Security filed more than 290 cases between 2015 and 2016, most of which involved illegal pyramid schemes, fundraising, and fraud under the guise of using digital currencies, such as Kara Coin and Wanfu Coin.

Central banks around the world have different definitions of Bitcoin. In Germany, Bitcoin is considered a unit of measurement for currency, while in the United States it is defined as a commodity. As early as 2013, the People's Bank of China defined Bitcoin as a virtual commodity that does not have the same legal status as currency.

Xiao Lei believes that Bitcoin is a purely technical thing and cannot be eliminated. That is why so many people are willing to buy it and the price has risen so fast. It is distributed all over the world, with hundreds of thousands of terminals around the world. It is a distributed blockchain, and each blockchain stores complete information, so there is no way to eliminate it. "It does not need to be recognized by any country. Although different countries have different definitions and different regulatory methods, the most important point is that you cannot eliminate it, you must acknowledge its existence."

Regarding the regulation of Bitcoin, countries around the world do not have a very clear attitude, and they seem to be in the trial stage. "At present, Russia, India and Taiwan have a cautionary attitude towards Bitcoin, while the UK is open to it and the US is observing it. International regulation is still relatively vague," said the above-mentioned person close to the regulator.

As for the existence of Bitcoin, which is independent of the central banks of various countries, does it pose a certain impact on the monetary system? Xiao Lei believes that our previous credit system must find physical currency or hard currency, and later endorsed by national sovereignty. Currency can be paper currency, and there may be no paper currency in the future, but currency will exist for a long time in the form of sovereignty. If the concept of the country still exists, then it will be difficult for Bitcoin to become a global currency, but it can be said that it is a global asset.