Digital currency: Finding a balance between “release” and “control”

[Digital currency: Finding a balance between "releasing" and "regulating"] Speculation, money laundering risks, illegal fundraising... In recent years, negative controversies about the risks of Bitcoin transactions have continued. However, from a more macro perspective, digital currencies represented by Bitcoin are attracting great attention from the global financial community. In addition to the active trading market for private digital currencies such as Bitcoin, central banks of various countries are actively exploring the issuance of legal digital currencies, trying to gain an advantage in the development of digital currencies and enhance their voice in the global currency market.

At present, my country's digital currency development has certain relative advantages, and the development of digital currency has a promising future. Experts suggest that the exploration of private digital currency and the research and development of legal digital currency need to form a joint force. It is necessary to strengthen the supervision of private digital currency transactions and prevent transaction risks, while leaving room for market exploration and accumulating experience and lessons for the issuance of legal digital currency. Seeking the "balance point" between market exploration and government supervision is the key to the development of digital currency.

Focusing on the future "digital currency war"

Recently, in response to the skyrocketing and plummeting market conditions of Bitcoin, the central bank has launched a strong regulatory crackdown on domestic Bitcoin transactions: on January 6, the central bank summoned three Bitcoin exchanges, Huobi, OKCoin and BTC China, in Beijing and Shanghai respectively; on January 11, the central bank and local financial departments formed a joint investigation team to enter the above three companies to conduct compliance investigations.

With the deepening integration of finance and technology, digital currency has attracted great attention from the industry. Since 2009, private digital currencies have emerged, and Bitcoin is the most influential one among them. Digital currencies represented by Bitcoin are based on cryptography and blockchain technology, generated by computer programs, and issued and circulated through the Internet. Using digital currencies based on blockchain technology, payment and settlement are carried out simultaneously, without the need for intermediate links such as recording, reconciliation, and clearing, and point-to-point transactions can be realized.

The issuance of Bitcoin is called "mining". The so-called "mining" is actually an incentive mechanism. Professionals said that Bitcoin is issued and circulated in a distributed payment network based on blockchain technology. In the entire distributed payment network, there are a large number of payment nodes, which are used to confirm transactions and maintain the entire network account system. The payment node needs to perform complex calculations when generating new transaction modules, which is regarded as the proof of work of the payment node. Since this calculation is essentially a random collision test with a very low probability, it requires the purchase of equipment and consumes a lot of computing resources, which is costly. Therefore, the node that completes the proof of work first will receive a certain reward, namely "mining". "Mining" is the process of generating new Bitcoins, and it also ensures the efficient operation of the Bitcoin payment platform.

Since its birth in 2009, Bitcoin trading has been popular in the market. In May 2010, Bitcoin completed its first transaction, when an American programmer spent 10,000 Bitcoins to buy a pizza worth $25. In 2011, the price of Bitcoin exceeded $1. In November 2013, the transaction price of Bitcoin reached $1,000, and then exceeded the price of 1 ounce of gold. At present, Bitstamp, BTC-e, and Bitfinex are the major Bitcoin exchanges in the world, and major trading platforms such as Huobi.com, OKCoin, and Bitcoin China have also been formed in China.

In addition to the booming private digital currency transactions, legal digital currency is also about to emerge. Reporters have found that financial authorities in many countries have joined the ranks of researching and issuing legal digital currencies. In 2016, the Bank of England, the central bank of the United Kingdom, and University College London jointly developed a new digital currency "RSCoin". Recently, the Bank of Japan and the European Central Bank have also launched a joint project to study the supporting technology of digital currency. The Dutch Central Bank is studying the country's digital currency DNBcoin and has begun testing the use of blockchain technology between national banking institutions.

Judging from the attitudes of various countries, the development of digital currency has become a "must-answer question" in the fight for the right to speak on future global currencies. Industry insiders believe that the development of digital currency provides my country with a strategic opportunity for the internationalization of the RMB.

He Xiaojun, director of the Financial Development Service Office of the Shenzhen Municipal People's Government, believes that the central bank's leading role in accelerating the research and trial of legal digital currency has provided a new opportunity for the internationalization of the RMB. Legal digital currency uses the country's comprehensive strength as its credit basis, and is based on encryption technology and blockchain architectures. It has higher efficiency in payment, clearing and settlement. In the future, it will help break through the restrictions of existing international payment systems such as SWIFT, use my country's technological advantages in financial technology (FinTech) to expand new paths for the internationalization of the RMB, accelerate the expansion of the use of the RMB in international trade and financing, and enhance the international status of the RMB. He said that my country should elevate digital currency to one of the national strategic choices, and at the same time make efforts in both physical currency and digital currency to achieve innovative breakthroughs in the internationalization of the RMB.

Yao Yudong, chief economist of Dacheng Fund and former director of the Financial Research Institute of the People's Bank of China, said that using blockchain technology to upgrade the SDR to a digital version, namely eSDR, and establish a decentralized, highly secure and highly credible digital international currency system can solve the risks of exchange rate fluctuations and the problems of insufficient SDR liquidity, thereby enabling my country to have greater voice in the international monetary system.

my country has relative advantages in developing digital currency

At present, my country has formed relative advantages in the popularization of financial technology, the research and development of legal digital currency, and the private digital currency trading market, and the development prospects of digital currency are promising.

First, domestic financial technology represented by Internet finance and mobile payment has developed rapidly. In December 2016, Singapore's DBS Bank and Ernst & Young released a research report stating that China's development speed, complexity and scale in financial technology have surpassed other markets. The report shows that between July 2015 and June 2016, China's financial technology investment increased by US$8.8 billion, equivalent to a 252% increase since 2010. 40% of Chinese consumers use mobile payment methods, while only 4% in Singapore; 35% of Chinese consumers will contact insurance products through financial technology, while only 1% to 2% in the Southeast Asian market. The report believes that the high popularity of smartphones, the rapid development of e-commerce and the innovation led by Internet giants such as BAT are the reasons for the rapid rise of China's financial technology.

Data from the China Internet Network Information Center also shows that in the first half of 2016, the growth rates of domestic online payment and Internet financial management users were 9.3% and 12.3% respectively. The scale of Internet financial management users continues to expand, the number of financial products is increasing, and the public is gradually developing the habit of online financial management.

Secondly, the exploration of legal digital currency by the People's Bank of China started early and developed rapidly, and has achieved phased results. Fan Yifei, deputy governor of the People's Bank of China, said that the central bank has organized experts to set up a special research team since 2014 to conduct in-depth research on the issuance and operation framework of digital currency, key technologies, issuance and circulation environment, legal issues faced, impact on the economic and financial system, the relationship between legal digital currency and private digital currency, and the issuance experience of foreign digital currency. At present, the central bank's research on legal digital currency has entered a new stage, including the establishment of a special research institution, the improvement of the issuance and circulation system of legal digital currency, the acceleration of the construction of legal digital currency prototypes, and the research and trial application of various information technologies involved in legal digital currency.

Previously, a recruitment notice reflected the trend of the central bank to increase its efforts in the research and development of legal digital currency. In November 2016, the central bank announced a recruitment notice showing that the central bank's Printing Science Research Institute plans to recruit six doctoral and master's degree graduates in computer science, information security, and cryptography, mainly engaged in the design and development of software and hardware system architecture for digital currency and related underlying platforms, key cryptographic technologies used in digital currency, symmetric and asymmetric cryptographic algorithms, authentication and encryption, etc.

In addition, my country's private digital currency trading market is the most active in the world. The "2014-2016 Global Bitcoin Development Research Report" released by Tsinghua University's PBC School of Finance shows that China is in a leading position in "mining" and trading. The report said that China's Bitcoin trading volume accounts for 80% of the world's total. Among the newly generated Bitcoins, more than 70% are "mined" in China, and the Chinese market accounts for most of the new supply of Bitcoin.

Seeking the “balance point” between market exploration and government regulation

In December 2016, the price of Bitcoin hit a record high of RMB 6,427, with an increase of more than 200% throughout the year. After New Year's Day 2017, within just two or three days, the price of Bitcoin rose from more than 6,000 yuan to more than 8,000 yuan, and then fell to more than 7,000 yuan, repeating the "roller coaster" of soaring and plummeting since 2013. In response, the central bank has stepped up its supervision of Bitcoin transactions, interviewed the heads of major domestic trading platforms, and organized a working group to conduct an investigation.

Experts analyzed that the number of participants in Bitcoin transactions is increasing, but the number of "mining" is limited. The small market capacity and low liquidity make it easy for dealers to manipulate prices, resulting in a sharp rise and fall in the market. At the same time, some lawless elements may create the illusion of making money to attract more users and companies to invest in Bitcoin. When users try to cash out and there is insufficient liquidity, the entire trading system may collapse. In addition, Bitcoin transactions also have risks such as money laundering, illegal transactions, and foreign exchange outflows.

In response to the risks of Bitcoin transactions, countries around the world have taken corresponding regulatory measures. The reporter found that in August 2013, the German Federal Ministry of Finance recognized Bitcoin as a "unit of account", which can have a settlement function like foreign exchange, but does not have the function of serving as a legal means of payment; in 2015, New York State formulated a digital currency regulatory system, and digital currency trading business in New York State needs to apply for a license from the government; in May 2016, Japan approved the Digital Currency Regulatory Act, defining Bitcoin as property.

As early as December 2013, the "One Bank, Three Regulatory Commissions" and the Ministry of Industry and Information Technology jointly issued the "Notice on Preventing Bitcoin Risks", defining the nature of Bitcoin as a virtual commodity that cannot and should not be circulated and used as currency in the market. The notice requires that financial institutions and payment institutions shall not use Bitcoin to price products or services, shall not buy or sell Bitcoin or act as a central counterparty to buy or sell Bitcoin, shall not underwrite insurance business related to Bitcoin or include Bitcoin in the scope of insurance liability, and shall not directly or indirectly provide customers with other Bitcoin-related services.

In this regard, some industry insiders believe that the exploration of private digital currencies such as Bitcoin transactions is an important part of the country's overall digital currency strategy, and blindly restricting market exploration may be detrimental to the implementation of the country's overall digital currency strategy.

Shentu Qingchun, a blockchain technology expert and CEO of Shenzhen Yinlian Technology Co., Ltd., said that currently, large companies have begun to become an important force in blockchain technology research, and Ping An Group and Alibaba have successively established blockchain technology research teams. He said that the government should increase investment in blockchain technology research and development, promote the interaction between industry, academia and research, and especially encourage scientific research institutions to accelerate the transformation of scientific and technological achievements and encourage blockchain technology research with enterprises as the main body.

Li Lin, founder of Huobi.com, believes that the government should maintain an open attitude towards the exploration of private digital currencies such as Bitcoin, actively formulate normative policies, guide market players to innovate rationally, and allow innovative attempts on a small scale.

"On the premise of compliance and controllable risks, I hope the government will allow us to become familiar with and understand the characteristics of all aspects of digital currency through 'trying'. In the future, whether it is issuing supply chain-based digital currency in a certain industry or issuing legal digital currency, what we have accumulated now are experiences and lessons." Li Lin said.

In response to the industry's call, experts said that Bitcoin transactions are risky and the government should strengthen supervision. At the same time, legal and compliant market exploration also needs to be encouraged. The key is to find a "balance point" between market exploration and government supervision to avoid "chaos when left alone and death when regulated."

Zeng Guang, Secretary General of Shenzhen Internet Finance Association, believes that Bitcoin transactions are highly speculative and it is very necessary for the central bank to strengthen supervision. At the same time, he also said that Bitcoin will accumulate some lessons in the process of issuance and circulation, which may provide reference for the central bank to issue legal digital currency. He suggested that Bitcoin should not be "killed with one stick", and there should be a better system design to regulate Bitcoin transactions: first of all, customer funds should be well deposited and completely isolated from customer funds and trading platforms; in addition, the government should do a good job in investor education and establish a transparent information disclosure system.

Liu Junhai, director of the Institute of Commercial Law at Renmin University of China, believes that on the one hand, financial technology innovation should be encouraged, but on the other hand, the high risks involved in financial innovation cannot be ignored. The key is to seek a balance between market exploration and government regulation.

"Supervision must keep pace with the market and establish an effective system of collaborative governance between the government and the market so that the two sides can form a synergy to promote the development of digital currency," said Liu Junhai.