Recently, the price of Bitcoin has soared to a record high of 23,000 US dollars, and it has once again become the focus of attention. As an important part of Bitcoin price discovery, encrypted digital currency exchanges are undercurrents. In particular, China's encrypted digital currency industry has been turbulent recently, and major negative events have occurred one after another.
Many domestic traders found that their bank cards were frozen, and received calls from local economic investigations to assist in the investigation. Two of the three major domestic encrypted digital currency exchanges (hereinafter referred to as exchanges), OKex and Huobi, successively reported that the founders and executives were taken away by the police to assist in the investigation, resulting in one of them being unable to withdraw coins. This series of major events has disturbed the entire industry, especially the exchange at the center of the vortex, which has once again reached a critical crossroads. It’s not just exchanges that face major decisions, but regulators as well. Because what is in front of the regulators is the ultimate problem that has been pending for many years and has to be answered until now: How should China's digital currency exchanges be regulated?
Due to different starting points and perspectives when looking at issues, regulators and regulated persons often have different opinions. At this time, it is necessary to refer to some neutral and objective third-party viewpoints. As an independent financial commentator and digital currency researcher, the author takes this opportunity to provide the author with years of research and thinking on industry regulation, hoping to contribute to the healthy and orderly development of the industry.
Digital currency exchange is a trading place developed along with Bitcoin and other cryptocurrencies. In the early days, it was only an institution that provided transaction matching services for cryptocurrency holders. Afterwards, with the global expansion of the cryptocurrency market, it finally formed a specialized The exchange, whose service scope extends from cryptocurrencies to digital assets, provides various derivative transactions such as contracts, futures, and over-the-counter transactions in addition to matching transactions.
Today's exchanges not only undertake the functions of exchanges in a narrow sense, that is, provide transaction circulation and price discovery, but also provide a series of financial services such as banks, brokerages, clearing and settlement. It can be said that the status of the exchange in the encrypted digital currency industry is like the status of a super giant financial holding group company in the traditional financial system. Although it is not "too big to fail", any disturbance will have a huge and far-reaching impact on the entire industry.
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regulatory focus
The first step in effective supervision is to clarify the object and scope of supervision, that is, to figure out who and what to control.
There are various types of exchanges and complex systems, including domestic and foreign, spot and futures transactions, fiat currency and digital currency transactions, currency-to-currency transactions, and on-exchange and off-exchange transactions. Is it to grab the beard and eyebrows, or to focus on effective supervision?
In fact, there are no encrypted digital currency exchanges in the strict sense in China. On September 4, 2017, nine ministries and commissions jointly issued the "9.4 Ban", prohibiting the issuance of digital tokens and the public trading of tokens. Afterwards, major domestic exchanges began to go overseas one after another. Some exchanges are fully internationalized, not only transferring the company's registration place overseas, but also focusing on overseas technology, operations and markets. Some exchanges only register the company overseas, and the technology is still in China. Although there are operations and markets overseas, they are mainly domestic. The industry joked that the latter belongs to the exchanges whose spirit has gone to sea, but the body is still in the country. This type is the main target of supervision.
Secondly, which is the focus of supervision, centralized trading on the market or trading outside the market? This problem involves the efficient frontier of regulation. In terms of virtual digital currency supervision, the effective boundary of supervision should stop at legal currency, and should not be extended to digital currency. There are 4 main reasons:
First, the regulatory status is special and should not choose sides in the world of digital tokens.There are tens of thousands of currencies in the digital token world, and there are more than a dozen highly liquid mainstream currencies, such as the familiar Bitcoin, Ethereum, Tether, Ripple, and Libra, which is still in preparation. Which currency is supported by regulation, or which currency is prohibited, is a statement, which does not conform to the detached and neutral identity of the regulator.
Second, the currency does not have any effect on the essence of the problem. For example, recent policies have severely cracked down on illegal activities that use virtual digital currency to evade foreign exchange. This illegal and criminal behavior will not make any difference because it uses Bitcoin, Ethereum or Tether. Essentially, these coins are all tools of the same class. Just like before the encrypted digital currency, there is no essential difference between the US dollar or the euro used for foreign exchange evasion.
Third, even if the regulation crosses the border to suppress a currency, it will not have any effect.Encrypted digital currency is based on blockchain technology and has the characteristics of decentralization, borderless, anonymous and difficult to trace. Governments around the world have so far not had a successful experience in effectively suppressing a currency. For example, Bitcoin is a purely distributed virtual digital currency without any center. Any regulatory measures against Bitcoin are like shaking a fist at the air, which has no focus. Tether, known as the U.S. dollar in the encrypted digital currency world, has an initiating organizational entity, unlike Bitcoin, which is purely decentralized. Even if the U.S. government hates it, it is powerless and helpless. Because, there are dozens of similar popular USD stablecoins on the market. Now creating a currency is so simple that anyone can learn it in 10 minutes. If any stablecoin falls, many stablecoins will stand up. Therefore, the supervision of a single currency is a worldwide problem, which is still unsolved.
Fourth, legal tender is the most powerful weapon for regulation.In the field of legal currency, it is completely opposite to encrypted digital currency. We have a mature financial system, complete user identification mechanism (KYC) and anti-money laundering mechanism (AML) rules and regulations. As long as the border of legal currency is guarded, and the gateway from encrypted digital currency to legal currency is strictly guarded, no matter how turbulent encrypted digital currency is, it will only be limited to a small number of people and will not affect the well-being of the general public. Taking legal currency as the main regulatory tool is a common means of global regulation at present.
Since the effective boundary of supervision is legal currency, the answer to the focus of supervision is on-exchange centralized transactions and off-exchange transactions. As long as legal currency is involved, it is the focus of supervision. At this stage, due to the "9.4" ban, domestic centralized trading has eliminated fiat currency, only currency transactions exist, and some data is already within the scope of regulatory control, so centralized trading on the market is no longer the focus of supervision.
The OTC transactions involving legal currency are divided into: individual scattered OTC transactions and centralized and organized OTC transactions. Individual scattered and distributed over-the-counter transactions are difficult to supervise. The so-called "law is not as good as the public" means that the public is large and scattered, so it is difficult to monitor and enforce laws and regulations. For example, the author and a friend talked about Bitcoin during dinner. The friend was curious and wanted to try it, so he bought some Bitcoins that were previously mined with me. As long as the money he transferred to me is legal and clean, this kind of transaction cannot be supervised and is very difficult. forbidden.
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How to manage off-market transactions
The two major exchanges currently involved in the accident have centralized OTC trading services, and it is speculated that the cause of the accident is that the OTC trading services are suspected of assisting money laundering and evasion of foreign exchange. How to manage the OTC trading services for exchanges that are registered overseas but whose business is mainly in China?
One way is simple and straightforward, and that is to completely ban OTC trading services. It is undeniable that many illegal and criminal activities illegally transfer stolen money and evade foreign exchange through centralized over-the-counter transactions of encrypted digital currencies. However, this one-size-fits-all approach seems to solve the problem on the surface, but it is not. because
First, users can choose OTC trading services of overseas exchanges.The trend of digital currency globalization and its cross-border characteristics make it impossible to fundamentally eliminate the public's demand for digital currency purchases. Even if digital currency exchanges are temporarily expelled from the country, digital currency holders will still go overseas through other channels. Exchanges purchase digital currencies, which instead causes capital outflows and is not conducive to financial stability. Overseas exchanges are beyond the scope of their jurisdiction in terms of supervision and are beyond their reach.
Secondly, with the development and progress of the blockchain, the decentralized exchange Decentralized Exchange (DEX) has gradually matured. The exchange has no central node, and everyone is a node of the exchange.If centralized over-the-counter transactions are completely prohibited, users can choose to use DEX. Losing centralized over-the-counter trading services is actually a big loss to supervision, because in reality, it is precisely because of the centralized over-the-counter trading services of domestic exchanges that they can assist relevant departments in tracing illegal money laundering and evasion of foreign exchange. If users all use overseas exchanges or decentralized exchanges, how will future supervision crack down on illegal transactions? Some people say that encrypted virtual digital currency is neutral, like a gun. Since gangsters can use guns to commit crimes, law enforcement officers can also use guns to maintain social order. A one-size-fits-all ban on over-the-counter trading services is a bit like a total ban on guns, and it is also a loss to law enforcement officers.
On the issue of guns, the international practice is to strengthen gun control, hold guns in accordance with the law, and make guns a weapon to protect the safety of the people instead of endangering society. Similarly, for over-the-counter trading services, the best supervision is to include over-the-counter transactions in the supervision, standardize and license according to law, in principle, it should be sparse rather than blocked.
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Where is the Chinese exchange headed?
Where is the future of Chinese exchanges? It's about compliance. The real difficulty lies not in the method and method, because there are many methods, and the exploration experience of various countries can also be used as a reference. The real difficulty lies in the identification of the identity of the Chinese exchange. Since encrypted digital currency is a new thing, our existing regulatory system does not have ready-made laws and regulations to regulate it, and there is no special department responsible for it. Therefore, once any regulations related to encrypted digital currency are issued, they are jointly produced by major ministries and commissions, which shows that it is difficult to determine their identity.
There is a catchphrase in the supervision system: whoever owns the children, that is, to distinguish supervision responsibilities according to actual business functions. But in the current exchange, there is no father, no mother, and no claim. Not only does the exchange have no parents, it has not yet registered an account, and it is difficult to do anything. Therefore, it is easy to touch the red line of laws and regulations, which puts industry leaders in jeopardy.
China's exchanges have been eager to obtain regulatory approval for many years, and the mood of seeking regulatory approval is vivid on paper. Unfortunately, this problem has not been well resolved.
In fact, the issue of the ownership of the exchange is not complicated. Its functions are currently mainly divided into two parts: OTC transactions involve payment business, and on-site centralized transactions involve exchange business. According to the responsibilities of the traditional financial system, the former is under the supervision of the central bank, and the latter is under the supervision of the China Securities Regulatory Commission. Tube. The encrypted digital currency exchange can be managed according to the management method of the financial holding group, and multiple departments of a company are supervised. If this method is not suitable, then the exchange can be divided into two, and each individual company is directly under the management of the department.
The benefits of incorporating regulation are obvious. In addition to regulating the market and fighting crime, it can also return wealth registered overseas to the country, increase tax revenue, and create employment.
In fact, the fundamental problem is to go back to the root, how should China's encrypted digital currency industry be positioned? Is it a complete negation of nothing good, or is it remarkable that you can use your strengths to avoid weaknesses and give more guidance? If this question is answered clearly, it will be easy to solve the exchange problem, and then how to supervise it will naturally be solved.
China's encrypted digital currency exchanges have been leading the world for more than 5 years. How to supervise is always a big issue that determines the survival of exchanges, but it has been unresolved. Now that the consequences are prominent, it is finally time to make a choice.
