Officials from the State Council and the China Banking Regulatory Commission: Bitcoin's monetary attributes are constantly increasing, but there are risks

Bitcoin is a virtual currency based on the Internet. Since its birth in January 2009, its global acceptance and trading scope have significantly expanded, its price has continued to rise, and it has been sought after by many investors. However, due to its unclear legal status, the vulnerability of trading platforms and its susceptibility to illegal transactions such as money laundering, Bitcoin has attracted widespread attention from the international community and has been included in the legal framework of anti-money laundering and consumer protection. my country has rapidly developed into the world's largest Bitcoin trading market. With the recent surge and plunge in prices, speculative risks that cannot be ignored have accumulated. The fundamental characteristic of Bitcoin is its non-sovereign supranational nature. my country should deny its monetary attributes for a considerable period of time, and at the same time, it should face up to the rapid development of various online virtual currencies, adjust the monetary statistical caliber in a timely manner, and redesign the supervision and judicial protection system of online payment tools and online finance.

Bitcoin is a virtual currency generated by executing a specific algorithm based on open source peer-to-peer (P2P) software. Since its birth in January 2009, Bitcoin has been accepted significantly worldwide, its trading scope has been expanding, and its price has risen rapidly. However, due to its unclear legal status, fragile trading platforms, and susceptibility to illegal transactions such as money laundering, countries have different attitudes towards Bitcoin, and there are many controversies. Since 2013, my country's Bitcoin trading has developed rapidly and has become the world's largest Bitcoin trading market. The recent surge and plunge in Bitcoin prices and the rapid expansion of speculative risk exposure deserve close attention.

Basic concepts and features of Bitcoin

Bitcoin (BTC) is a network-based, peer-to-peer anonymous virtual currency with source code available to the public. Designed and developed by Satoshi Nakamoto in 2008, Bitcoin is the world's first decentralized, distributed, anonymous digital currency.

The public can obtain Bitcoin in two ways: one is to generate it by executing a public complex algorithm on a computer, commonly known as "mining". In the first four years of Bitcoin's birth, 10 million Bitcoins were produced. The half-life of this number is 4 years. The total amount of Bitcoin will eventually approach 21 million in 2140, and the number will no longer increase thereafter. The second is to purchase it with other currencies through specialized trading platforms such as Bitcoin China and Mtgox.com, commonly known as "buying it as a merchant".

Bitcoin has the following basic characteristics: First, it is non-sovereign and supranational. Bitcoin is a product of the development of the global network and does not belong to a certain country. Second, it is decentralized. The issuance and payment of Bitcoin do not have a central bank or other administrative departments as the central control center, and its transfer and payment are centrally managed by network nodes. The Bitcoin system records its transactions through distributed data blocks of the entire network, and the entire Bitcoin system bears the transaction risks together. Third, it is anonymous. Technically speaking, the parties to a Bitcoin transaction can hide their true identities by changing the payment address at will. Traditional electronic currency relies heavily on the account system and must collect the personal information of both parties to complete the transaction. Bitcoin uses public key technology and no longer relies on the account system. Both parties to the transaction can generate their own private keys at will, and then inform the payer of the public key corresponding to the private key to receive the payment. The next time it is used, a pair of public and private keys can be regenerated for trading. This one-time one-key approach can achieve completely anonymous transactions and is difficult to track. Fourth, it has network robustness. Bitcoin relies entirely on a peer-to-peer network and has no issuing center, which means that the outside world cannot shut it down unless there is a continuous global power outage or the entire Internet is blocked. Fifth, it is non-unique. As a virtual currency with no entry threshold, since the source code of Bitcoin is open to the public, other online virtual currencies with similar functions can be created by modifying the parameters.

Bitcoin's monetary properties continue to strengthen, but there are risks

As the number of Bitcoin recipients and the scope of Bitcoin acceptance continue to expand, the monetary attributes of Bitcoin are constantly increasing. Since its birth, the global acceptance and trading scope of Bitcoin have expanded significantly. Currently, merchants in more than 200 countries accept Bitcoin, and dozens of trading platforms are spread all over the world. More than 100,000 Bitcoins are exchanged for cash every day, and the number is still growing rapidly. Due to its convenient and cheap payment characteristics, it has become fashionable for programmers to use Bitcoin to pay wages and repay debts. Bitcoin is gradually acquiring the functions of a general medium. Dorit and Adi (2012) also found that as of May 13, 2012, the vast majority of Bitcoins mined from the global network were not involved in various transactions, but were kept as a means of storing value.

Specifically, the current risks of Bitcoin as a currency medium are as follows:

First, the legal status is unclear. Worldwide, Bitcoin can be recognized as a virtual commodity and protected by law; but the legal status of Bitcoin as a "currency" has not yet been established in any country. If Bitcoin is not officially recognized as a currency by law, it will bring inconvenience and insecurity to merchants and individuals who accept it in tax declaration.

Second, the trading platform is vulnerable. Bitcoin trading platforms are usually websites. Once hacked, they may cause huge losses to Bitcoin holders and traders. On June 19, 2011, a security vulnerability in the Mt.Gox Bitcoin trading center caused the price of 1 Bitcoin to drop from $15 to 1 cent. In August 2011, another Bitcoin trading platform, My Bitcoin, announced that it had been hacked, resulting in the disappearance of more than 78,000 Bitcoins (equivalent to about $800,000 at the time). If network and technical security are not guaranteed, the development of Bitcoin will face a fatal bottleneck.

Third, there is a lack of currency anchors, large price fluctuations and the risk of a Ponzi scheme. Bitcoin lacks the support of national credit, and its value depends entirely on the trust of the participating entities. It lacks an anchor for value setting and is easily hyped by the market, triggering a Ponzi scheme.

As the use of Bitcoin in the Internet and even in the real economy has expanded, it has attracted a large number of speculators to intervene, causing the price of Bitcoin to be exchanged for cash to fluctuate like a roller coaster, making it more suitable for speculation rather than investment. When it was first created in 2009, the price of Bitcoin was very low, only about 3 cents, and by November 19, 2013, the price of Bitcoin had climbed to nearly RMB 8,000, but the price fell to RMB 4,150 the next day, and even dropped to RMB 2,888 during the trading session.

There has been a debate about whether Bitcoin investment constitutes a Ponzi scheme. The ECB's research report pointed out that if Bitcoin users want to cash out, there must be new demand for Bitcoin, which is very similar to a Ponzi scheme. The biggest problem with investing in Bitcoin is information asymmetry. It is very complicated and may be difficult for potential users to understand. Once users try to cash out and the network liquidity is insufficient, the entire system may collapse.