Contemporary Financier: Looking at Virtual Currency Regulation from China’s First BTC Criminal Case

The regulation of virtual currency should not be too strict to prevent truly promising innovations from being strangled in the cradle, while also being wary of new criminal methods brought about by this new thing.

On October 26, 2013, the Bitcoin trading platform GBL suddenly "ran away" on the pretext of being hacked. All executives disappeared, and a huge sum of 30 million yuan was taken away, causing direct losses of more than 20 million yuan to users. On December 2 of that year, the Dongyang City Public Security Bureau of Zhejiang Province released an official Weibo that the three main persons in charge of GBL had been arrested, and the first Bitcoin trading platform fraud case in China entered the judicial process. This is the first Bitcoin criminal case handled by a Chinese judicial institution.

This case shows that completely unregulated Bitcoin has risks and flaws that it cannot resolve on its own. Therefore, moderate intervention of government power is beneficial and necessary for its healthy development.

The United States is the country that first applied Bitcoin and developed the most applications. In order to prevent regulatory policies from curbing technological innovation, the regulatory authorities do not completely deny the currency attributes of Bitcoin. Their regulation of Bitcoin is also mainly based on anti-money laundering to prevent it from becoming a money laundering tool for criminals. This has set an example for other countries to formulate regulatory policies for virtual currencies.

On December 5, 2013, the People's Bank of China, together with the Ministry of Industry and Information Technology, the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission, issued the "Notice on Preventing Bitcoin Risks" (hereinafter referred to as the "Notice"), which clarified that Bitcoin is a "cyber virtual commodity" rather than a currency; financial institutions and payment institutions are not allowed to conduct Bitcoin-related business; Bitcoin Internet sites and related institutions must fulfill anti-money laundering obligations, etc.

The release of the "Notice" caused a sharp drop in domestic Bitcoin prices in the short term, but in the long run, due to speculation, the price of Bitcoin contains a high risk of bubbles. The central bank's introduction of restrictive measures this time will prompt prices to fall, help squeeze out follow-up investors, reduce speculative behavior, and be conducive to the application and development of Bitcoin as a currency.

Bitcoin may not be the final form of virtual currency, and its Internet attributes have only just begun to subvert traditional currencies. Although it has encountered many real "bottlenecks", the logic of Bitcoin is in line with the direction of world currency development in terms of improving payment security, reducing costs, and eliminating international trade barriers and regulations. Therefore, its supervision should not be too strict to prevent truly potential innovations from being strangled in their infancy, and at the same time, we must be vigilant against new criminal methods brought about by this new thing.

Regulatory challenges

It can be seen from the regulatory practices of various countries on Bitcoin that the current regulatory difficulties of virtual currencies mainly lie in the following aspects.

Lack of legal basis for regulation

At present, countries have only expressed their attitudes or regulatory policies towards virtual currencies in the form of statements and documents, and no country has made a major breakthrough in legislation. In China, under the basic strategy of rule of law, supervision must be based on laws. Without legal basis, the effectiveness and influence of regulatory actions are very limited.

There are difficulties in actual supervision

At present, the supervision of virtual currencies in various countries mainly focuses on two aspects: one is to tax it as an asset, and the other is to require relevant service personnel to fulfill their anti-money laundering obligations based on the anti-money laundering law. In China, the conditions for carrying out these two tasks are not yet met.

Regulation by a single country is unlikely to work

In theory, a country cannot technically ban Bitcoin, because the country cannot prevent people from downloading Bitcoin wallets or mining clients on their computers. In addition, even if Bitcoin disappears, it cannot prevent the creation of other virtual currencies, because Bitcoin is highly substitutable, and new virtual currencies can be created by slightly changing the algorithm. In fact, although some countries have explicitly banned the use of Bitcoin in their own countries, it has basically no impact on the application and development of Bitcoin in the world, but only forces the country's virtual currency transactions to go underground. Therefore, the impact of a single country's introduction of a policy on Bitcoin is very limited, and joint action is required from all countries.

Solution

The regulation of virtual currencies should be carried out in stages. Based on the use of Bitcoin in China, at this stage, the regulation should start with anti-money laundering, accumulate regulatory experience, and then expand the scope of regulation when conditions are ripe.

Correctly position virtual currency and confirm it through legislation

First of all, the attributes of virtual currency should be clarified. Virtual currency is not only a commodity, but also plays the role of currency to a certain extent. Only by recognizing the currency attributes of virtual currency can the payment, settlement, custody and other behaviors related to it be carried out in the open, which is more conducive to supervision; then it will rise to the legislative level. Departmental regulations or administrative regulations can be issued first, and then rise to the legal level when the time is ripe. Only under the protection of the law can we ensure that regulatory actions can be carried out effectively and effectively.

Anti-money laundering measures for virtual currencies

First, clarify the subjects of virtual currency anti-money laundering obligations and establish a registration system. The subjects of anti-money laundering obligations should include virtual currency trading platforms or websites, institutions that provide virtual currency and legal currency exchange services, e-commerce platforms that accept virtual currency payments, and institutions that provide other virtual currency services. Institutions engaged in virtual currency-related businesses should register or file with relevant regulatory authorities.

Secondly, establish identity authentication, transaction review and transaction reporting systems related to virtual currency transactions. Require virtual currency service providers to register and verify customer identity information. By promoting digital certificates or electronic signatures, strengthen user identity authentication and improve the authenticity of online payment information. Establish transaction review and reporting systems to record virtual currency transaction information, IP addresses used by customers, etc., to ensure that transactions are traceable. Establish an automatic reporting system for virtual currency payment transactions, require obligated entities to establish identification indicators for large-value and suspicious virtual currency transactions, conduct analysis of related accounts, use data warehouses and data mining technologies to conduct correlation analysis on massive amounts of transaction information, identify suspicious behavior, and report to anti-money laundering regulatory authorities.

Thirdly, establish a private key escrow system. Under the condition that national laws provide security guarantees, it is possible to consider establishing a private key escrow system led and managed by government departments. When anti-money laundering supervision and criminal investigation require it, the government escrow agency can use private keys to decrypt virtual currency transaction information.

Finally, formulate punishment clauses for violating the anti-money laundering obligations of virtual currencies to prevent crimes through deterrence. The punishment should include fines, orders to suspend business for rectification, closure, prohibition of senior executives from working, and criminal liability for serious cases.

Strengthening international cooperation in supervision

Countries must strengthen communication and exchanges, and discuss and study some basic issues about virtual currencies, such as the attributes of virtual currencies, regulatory principles, and strategies for dealing with crimes. International cooperation in the field of anti-money laundering should be strengthened through multilateral and bilateral conventions and treaties, including: international exchange and sharing of anti-money laundering intelligence, criminal judicial cooperation in evidence collection and prosecution, etc. The principle that international law is superior to domestic law in terms of effectiveness should be used to limit the scope of application of the confidentiality laws of relevant countries, that is, by regulating the limits of customer privacy rights, law enforcement agencies can use the money laundering clues provided by virtual currency service providers as clues for investigation and evidence for prosecution.