Huobi.com's Li Lin advises that China's authoritative magazine discusses Bitcoin for the first time

Recently, the authoritative financial industry magazine Tsinghua Financial Review published an article titled "Current Bitcoin Industry Development Status and Policy Research". Tsinghua Financial Review is aimed at senior and middle-level leaders in China's policy-making departments, and mainly provides reference for economic and financial policy makers. Wu Xiaoling, former deputy governor of the People's Bank of China, serves as editor and chairman of the academic committee. This is the first time that a policy recommendation on the Bitcoin industry has been published in a relatively influential magazine in China. The author is Li Lin, the founder of Huobi.com, China's largest Bitcoin trading platform.
 

Current Bitcoin Industry Development Status and Policy Research

Article by Li Lin (Founder and CEO of Huobi.com, the largest Bitcoin trading platform in China) Article editor by Zhang Qian

From mid-2014 to mid-2015, the price of Bitcoin continued to fluctuate at a low level, which indicates that Bitcoin has entered a period of rational development after the previous excessive hype. This is also the best time to eliminate speculative bubbles, re-examine the properties of Bitcoin, sort out Bitcoin industry rules, and explore industry development ideas.

The concept of Bitcoin and its development in my country

In 2009, a cryptographer named Satoshi Nakamoto published a paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System". The paper described an electronic currency system implemented through peer-to-peer technology, which enables online payments to be initiated directly by one party and paid to another party without going through any financial institutions in between. This is the birth of Bitcoin technology.

Subsequently, Bitcoin gradually spread around the world and attracted people’s attention. In 2013, with the influx of large amounts of global funds, especially hot money from China, Bitcoin reached a peak of RMB 8,000 per coin (data from Huobi.com on November 19, 2013), creating a wealth myth of a 20,000-fold increase in three years, and at the same time it attracted great attention from the public and government regulators.

On December 5, 2013, the central bank and five other ministries and commissions issued the "Notice on Preventing Bitcoin Risks", stating that Bitcoin is not issued by the monetary authorities, does not have monetary attributes such as legal tender and compulsion, is not a real currency, and cannot and should not be used as currency in the market. Affected by the news, the price of Bitcoin fell by 35% within 40 minutes. In February 2014, MT.Gox, the world's largest Bitcoin trading platform at the time, announced its closure, casting a shadow on the Bitcoin industry, which was already troubled by compliance issues. Since the second half of 2014, the price of Bitcoin has continued to decline and is currently stable at around 1,500 yuan per coin.
From mid-2014 to mid-2015, the continuous low-level price fluctuations marked the entry of the emerging industry of Bitcoin into a rational development period. But this is also the best time to eliminate speculative bubbles, re-examine the properties of Bitcoin, sort out industry rules, and explore industry development ideas.

Properties of Bitcoin

As a value transmission network, the Bitcoin network has at least three attributes: technical, financial, and sociological.

Technical attributes

From a technical perspective, the Bitcoin network protocol is a decentralized, peer-to-peer value transfer protocol, which can be understood as a huge public accounting system that is not manipulated by any third party and cannot be tampered with. The blockchain technology that this accounting system relies on records all transactions in the entire network database in the form of a block created approximately every 10 minutes, ensuring that duplicate payments and false payments will not occur. Blockchain technology is currently considered to have revolutionary significance in the Internet era, and Bitcoin is just an application form based on it. In Silicon Valley, there are already many startups and projects focusing on the research and development of blockchain technology applications in real life.

Financial attributes

From a financial perspective, Bitcoin can be seen as a digital investment product similar to electronic gold or a global standardized digital asset. Its constant total volume, easy portability, wide audience, low transaction costs and huge imagination space have made more and more investors believe that it has investment value. Wall Street has also gradually recognized the value of Bitcoin. In September 2014, the Digital Currency Council was established in Manhattan to provide consulting, trading and certification services to financial professionals. In January 2015, the New York Stock Exchange, the United Services Bank of the American Automobile Association (USAA), the Spanish Foreign Exchange Bank (BBVA) and Vikram Pandit, former CEO of Citigroup, invested in Bitcoin service provider Coinbase; in March of the same year, Nasdaq entered the Bitcoin field for the first time. At the same time, Bitcoin relies on the Internet to circulate globally, so in certain specific application scenarios, such as cross-border payments and virtual economic value transfer media, Bitcoin can be used as an efficient and low-cost means of circulation and payment tool, and assume the function of a financial instrument.

Sociological attributes
From a sociological perspective, the Internet represents the trend of information liberalization, while Bitcoin represents the trend of financial liberalization. As a completely decentralized electronic currency that does not rely on any single authority for issuance and can achieve value transfer without going through the banking system during cross-border and cross-currency transfers, Bitcoin is believed to have the opportunity to improve the inefficiency and high cost of the existing global financial system in the process of financial globalization, which is its sociological significance.

Current status of global Bitcoin industry development

At present, there are about 5 million Bitcoin users worldwide, with a total market value of about RMB 22 billion. Due to Bitcoin's Internet financial attributes and cutting-edge technology, almost all companies involved are startups. According to statistics, there are about 103 Bitcoin companies worldwide that have received angel round investment or above, of which 30 are located in Silicon Valley, San Francisco, USA. There are about 20 large-scale Bitcoin companies in my country, with about 800,000 users and a transaction volume of about 70% of the world (since RMB exchanges are free transactions, while US dollar exchanges charge more transaction fees, this data is for reference only). As of April 2015, the entire industry has received a total of about US$676 million in venture capital, of which US$400 million has been invested in Bitcoin startups in Silicon Valley.

From the perspective of the industrial chain, the current Bitcoin industry mainly consists of four major areas: production (commonly known as "mining"), trading, storage, and application.

Production: The Current State of Bitcoin Mining

From a technical perspective, mining is essentially the process of packaging transactions in the Bitcoin accounting system and generating blocks. Each successful packaging of a block can earn a number of Bitcoins as a reward. This is also the way Bitcoin is issued. The Bitcoin network is designed to generate one block every 10 minutes or so. In order to obtain this accounting power, you need to solve a mathematical problem specified by the system first, and this problem is designed to require powerful CPU computing power to solve. At present, China has a strong competitive advantage in mining, and the computing power distributed in China accounts for about 50% of the total Bitcoin computing power on the entire network.

Trading: Market Structure

Trading is currently the most important form of Bitcoin application in the financial field. There are currently more than 100 Bitcoin trading platforms in the world, and the top ten exchanges are basically distributed in the United States, China and Eastern European countries, accounting for more than 90% of the global total trading volume. "Bitcoin-US dollar" and "Bitcoin-RMB" are currently the most important trading markets, and there are also trading markets in other global mainstream currency zones such as the euro, yen, won, and Australian dollar.

Since 2015, compliance has gradually become the focus of the US dollar market. The US trading platforms Coinbase exchange and ItBit have both received large investments and relevant business licenses. In my country, since no relevant departments have issued licenses for digital currencies, compliance has not become a major competitive barrier. Currently, there are major trading platforms on the market, such as Huobi, Okcoin and Bitcoin China.

Storage: The evolution of wallet technology

Since Bitcoin uses a distributed and decentralized billing system, it is not very convenient for ordinary users to store and transfer Bitcoin. As a result, Bitcoin wallets that provide Internet-based cloud storage services have emerged. Users can store their Bitcoin in online wallets and send and receive Bitcoin through the Internet.

The world's largest Bitcoin wallet company is Blockchain.info, which has 3.66 million users. The second largest is Coinbase, which has 2.3 million users. As it has been committed to building compliance in the United States, its growth potential has greatly increased. For domestic users, due to the lack of Bitcoin payment ecology, users are more willing to store Bitcoin on trading platforms. On the one hand, it is convenient for real-time transactions, and on the other hand, they can also enjoy the advantages of online wallets for convenient storage, withdrawal and recharge.


Application: Real-life application scenarios
In addition to transactions, payment, cross-currency exchange, etc. are also the main applications of Bitcoin at present.
Currently, there are more than 100,000 merchants around the world that accept Bitcoin payments, including well-known companies such as Microsoft, Dell, and Newegg.com. Globally, BitPay, the largest Bitcoin payment company, has officially started cooperation with Paypal, and Internet financial companies represented by Circle are also exploring the application of Bitcoin. However, there is no doubt that the development of Bitcoin applications has not yet become the mainstream of the Bitcoin industry, both globally and in my country, and is still under exploration.

The current status of Bitcoin regulation in major countries around the world

How to effectively comply with and regulate the emerging Bitcoin and electronic currency industries has always been a core issue of concern to regulatory authorities in various countries. At present, mainstream European and American countries regard Bitcoin as an investment product or asset, and gradually begin to implement legal supervision and taxation; a small number of countries recognize the currency status of Bitcoin; and very few countries prohibit the use of Bitcoin.

US Regulatory Status and New York State’s BitLicense

It is undeniable that the United States is at the forefront of the world's financial powers in terms of Bitcoin regulation. In 2013, the United States had already included Bitcoin in the legal system of securities law. In 2015, the establishment of Coinbase, the first Bitcoin exchange in the United States to obtain a financial license, marked the legality of trading Bitcoin in the United States. On May 20, 2015, the New York Stock Exchange under the Intercontinental Exchange (ICE) announced the launch of the "NYSE Bitcoin Index", which is the first Bitcoin index calculated and disseminated by an exchange. On June 4, 2015, the New York State Department of Financial Services (NYDFS) released the final version of the digital currency company regulatory framework BitLicense, which is the world's first formal and clear regulatory law for the digital currency industry. When the dust settled, it had been two years since the first version of the BitLicense draft.

The formal implementation of the BitLicense makes New York the first state in the United States to officially launch Bitcoin and digital currency regulation. The law stipulates that all companies and individuals who provide digital currency services to New York residents must apply for a BitLicense, and the registration application period is 45 days. In addition to paying an application fee of up to $5,000 and additional application costs stipulated by NYDFS, applicants must also submit detailed information on the company's operations, financial and legal history, and plans for running digital currency businesses. Only after the BitLicense applied for by a company or individual is approved can it become a compliant operator, and any unit that does not apply for a BitLicense may face sanctions. The bill has clear provisions in anti-money laundering, digital asset security, business continuity, disaster recovery, and consumer protection. The scope of virtual currency business operations clearly refers to companies engaged in "financial intermediaries", and software providers are not within the scope of application.

The release of the New York State BitLicense can be said to be a landmark event, positively linking digital currency, an emerging Internet financial industry based on technological innovation, with government regulation. In fact, since 2011, EU countries, the United States, and relevant government departments in my country have successively expressed their opinions on how to regulate the digital currency industry. For regulatory authorities, on the one hand, effective regulatory measures can effectively protect the interests and property safety of users, stabilize the national financial system, and prevent financial crime risks such as money laundering; on the other hand, overly strict or unclear regulatory arguments will cause market panic, suppress industry innovation, and affect the survival and development of startups in the industry.

It is worth mentioning that compared with its neighboring country, the United States, Canada is a little quiet and lagging in legislative progress, but the recent news that the Canadian Senate Committee called for relaxing the regulation of digital currencies has won more voices in the digital currency industry. The committee believes that digital currencies and blockchain technology are "clever" and have the potential to meet the key needs of both the financial sector and unbanked areas, and should be utilized using a "light-touch" regulatory approach.

Regulatory status in the EU and the UK

In October 2012, the European Central Bank released the "Virtual Currency System" report, which positioned Bitcoin as a "third type of virtual currency" that can be used to purchase virtual or physical goods and services. Since this type of virtual currency does not have the nature of legal tender, it is not subject to existing legal regulation in its connection with traditional currencies. In this report, the European Central Bank issued a risk warning for Bitcoin in four aspects: credit, liquidity, operation and law. In July 2014, the European Banking Authority (EBA) once again asked EU banks to stay away from virtual currency transactions such as Bitcoin until the relevant regulatory bill is introduced.

Guided by this tone, EU countries such as Finland, Norway, France, Ireland, Poland, Lithuania, the Netherlands, Spain, and Germany have successively issued some official policy information, but the overall attitude is relatively consistent, that is, to distinguish Bitcoin from the existing legal currency system in terms of supervision.

The UK is one of the most friendly countries to the development of the Bitcoin industry, which may be due to the UK's tradition of adhering to market economic principles. In May and September 2014, the Bank of England issued reports stating that Bitcoin is a "commodity". Although it is worried that the widespread use of digital currency will weaken the central bank's ability to control the economy, it also recognizes that blockchain technology is a "real technological innovation." Most importantly, based on the definition of currency as a store of value, a medium of exchange, and a unit of account, the report recognizes that "digital currency can be used as currency for anyone on the Internet."

In March 2014, the British tax department planned to abandon the plan to tax Bitcoin transactions; in November of the same year, the Treasury official stated that "digital currency and digital currency exchanges are now unregulated in the UK." Generally speaking, the British government is concerned about the potential risks of the Bitcoin industry on the one hand, and supports financial innovation in this field on the other. This proactive attitude shows the British government's willingness to control the future of world finance and its determination to build London into the world's Bitcoin center.

Russia: Clearly against Bitcoin

Russia is the only major country in the world that is clearly against Bitcoin. Against the backdrop of Western economic sanctions, severe domestic inflation and a sharp depreciation of the ruble, Russian officials are particularly worried about Bitcoin becoming an alternative currency to legal tender, impacting its monetary policy, and fostering money laundering and illegal transactions. In August 2014, the Russian Ministry of Finance published a bill aimed at banning Bitcoin and all alternative currency activities. The revised bill in October mentioned a series of administrative fines, including companies and citizens issuing, creating or deliberately disseminating information about digital currencies, and indicated that the law applies to most Bitcoin industry practitioners, from miners, exchanges to ordinary users.

Major Asian countries such as Japan, South Korea, and Singapore generally welcome Bitcoin

As a global economic power, Japan has not yet regulated Bitcoin or other digital currencies. However, after the famous Mt.Gox incident in the Bitcoin world (its exchange is located in Tokyo), the Bank of Japan said it was studying the issues related to Bitcoin. In March 2014, the Japanese Cabinet decided to prohibit banks and securities companies from engaging in Bitcoin business, but did not make a qualitative definition of Bitcoin, and did not take any regulatory measures on Bitcoin transactions. At the same time, it adopted a flexible policy on the consumption tax on Bitcoin purchases. All these contents show that Japan will become a truly "friendly" country to Bitcoin.

The South Korean government previously refused to recognize Bitcoin as a legal currency due to concerns about Bitcoin's lack of measurable financial structures and indicators. However, South Korea is a big supporter of entrepreneurship and innovation. South Korean Bitcoin company Korbit received strong support from the government in its early days. South Korea's supportive attitude is undoubtedly a good thing for the development of the Bitcoin industry.

Similar to South Korea, the Singapore government recognizes Bitcoin transactions and has designed tax rules to manage transactions of this virtual currency. The tax bureau announced in 2013 that Bitcoin will be treated as a commodity for tax purposes. When Bitcoin is sold or used as payment for goods, a certain tax will be collected. However, if Bitcoin is bought and sold as a long-term investment plan, the profits generated from it will be regarded as investment income and will not be taxed.

In summary, from a global perspective, regulators in various countries that have responded positively to the development of the Bitcoin industry have basically defined Bitcoin as an asset or commodity. When formulating specific rules, they draw on the more mature regulatory system in the traditional financial industry, such as digital currency storage institutions drawing on asset management companies, and digital currency trading service companies drawing on the regulatory framework of asset and commodity trading platforms. Finally, according to the development status of each country, the country's particularity is fully taken into account. The main considerations include how to protect the security of users' digital assets and prevent financial crimes such as money laundering using digital currencies.

Domestic Bitcoin development trends and policy recommendations

In December 2013, the central bank and five other ministries and commissions issued the "Notice on Preventing Bitcoin Risks", which is the only official policy document in China. It has been a year and a half since then. As mentioned above, in the past year and a half, the development trend of the Bitcoin industry has become clearer, and the policies of governments around the world on Bitcoin have also changed significantly. Based on the analysis of the development trend of Bitcoin, we put forward some thoughts on my country's Bitcoin industry policy.


Bitcoin development trend
In the future, there are four possible directions for the development of Bitcoin. First, Bitcoin becomes a global digital asset and investment product, which is also the main role Bitcoin plays in the world. Second, it becomes a financial instrument in specific scenarios. At present, the value transfer between different clearing systems around the world is time-consuming and costly, and Bitcoin, as a medium of global flow, can solve this problem well. Third, Bitcoin becomes a new payment network, but since new Internet financial companies have upgraded and innovated the industry, the development of the payment network is still unclear. Fourth, it is a development trend with a wider range of innovation and more imagination. Bitcoin and blockchain technology have become an innovative protocol used in distributed transactions, smart contracts, decentralized systems, the Internet of Things and other fields, helping these fields to develop faster.


Some thoughts on my country's Bitcoin industry policies
First, in terms of regulations, it is possible to consider distinguishing the objects into Bitcoin and Bitcoin blockchain technology.

The former is a financial asset and financial instrument, while the latter is an innovative technology that can be widely used in multiple fields. Legislation in the financial field is mainly based on regulating the financial market, preventing systemic risks and financial crimes. By regulating this field separately, we can avoid the suppression of innovation in the field of Bitcoin and blockchain technology by Chinese companies due to overly strict legislative rules.

Second, in terms of the regulatory system, we can consider incorporating core areas such as digital asset trading and digital asset storage management into the existing mature regulatory system. In view of the asset security issues that Chinese users are concerned about, whether digital asset trading platforms can be included in the OTC Internet Asset Trading Platform Management Measures for regulation, and whether digital asset storage and management institutions can be included in the regulatory system of asset management institutions are all ideas worth exploring.

Third, during the legislative process, the regulatory measures and aftereffects of the United States can be fully studied and followed up in a timely manner, so that the policy risk is relatively low. Observing and studying the latest developments and implementation effects of the United States, which is currently relatively advanced in legislation, and improving digital currency supervision in a timely manner in combination with domestic actual conditions may be a low-risk strategy.

Fourth, at the academic research level, it is recommended to encourage and strongly support the research and innovation of Bitcoin technology. As an innovative technology, Bitcoin technology has great potential in the future. Citi, IBM, MIT and other internationally leading financial technology companies and academic institutions have invested a lot in Bitcoin technology and achieved initial results. In order to maintain the international academic leadership in this field, it is necessary to support Bitcoin technology in terms of policies and public opinion.