In the latest “China Financial Stability Report (2023)” released by the People’s Bank of China, cryptocurrency assets are classified as “other industries and emerging risks” and are identified as having dual risks in digital technology and finance. Additionally, the report claims that China’s early regulation of “token issuance financing” and “cryptocurrency trading platforms” has demonstrated outstanding risk management and regulatory capabilities in the field of cryptocurrency assets.
Index:
The dual risks of cryptocurrency assets
China claims to have contained the related risks of cryptocurrency assets
The need for international cooperation
Recently, the People’s Bank of China issued the “China Financial Stability Report (2023)”, which classifies cryptocurrency assets under the chapter of “other industries and emerging risks”. The report points out that cryptocurrency assets create new asset forms and business models due to their reliance on cryptography and distributed ledger technology. However, these assets are not issued by monetary authorities, lack legal validity and enforceability, and should not be regarded as legal currency. They are also not subject to appropriate regulation, leading to the generation of dual risks in finance and digital technology.
In terms of finance, cryptocurrency assets face risks such as asset price bubbles, severe price fluctuations, liquidity issues, and high leverage.
In terms of digital technology, these risks include:
– Lack of effective regulatory mechanisms for smart contracts, which can easily lead to market crashes
– Security vulnerabilities in the interaction between on-chain and off-chain transactions on the blockchain, making them susceptible to hacker attacks
– Governance flaws in decentralized finance, which can be controlled by a few insiders and harm the interests of other investors
– Issues related to anti-money laundering and anti-terrorism financing due to the anonymity of assets
The report claims that China has demonstrated outstanding risk management and regulatory capabilities in the field of cryptocurrency assets thanks to early regulation of “token issuance financing” and “cryptocurrency trading platforms”.
This notification clearly defines activities such as virtual currency exchange, buying and selling virtual currencies, providing transaction matchmaking services, token issuance financing, and trading of virtual currency derivatives as illegal financial activities. In line with this policy, numerous banks and financial institutions such as Alipay have committed to prohibiting related transactions and closing accounts involving virtual currencies.
In summary, the Chinese government explicitly states that virtual currencies do not enjoy the same legal status as legal tender, and any business activities involving virtual currencies are considered illegal financial activities. Furthermore, Chinese law stipulates that foreign exchange transactions must be conducted at designated places, and any illegal foreign exchange trading, especially those with severe circumstances, will face criminal liability.
For example, in November, the Qingdao police in Shandong, China successfully cracked down on a major underground money laundering case involving nearly 70 billion RMB across 17 provinces and cities nationwide. The case involved a money changer who engaged in illegal buying and selling of virtual currencies in collaboration with underground banks. The State Administration of Foreign Exchange pointed out that the underground bank used the purchase of virtual currencies and their sale on overseas platforms to facilitate the conversion between RMB and foreign currencies, constituting illegal foreign exchange trading.
Another example is a notice issued by the Guangdong Higher People’s Court on December 16, warning against the use of virtual currencies for illegal foreign exchange transactions. In the case, the defendant purchased USDT with RMB through a virtual currency platform and gained profit from the price difference, which was identified as a disguised form of foreign exchange trading and sentenced under charges of illegal business operations.
Lastly, the report states that the high-risk nature, speculative characteristics, and inadequate governance mechanisms of cryptocurrency assets have significant spillover effects on the stability of the global financial system. Additionally, due to the cross-border nature of cryptocurrency assets, international cooperation is needed in regulation.
Regulatory agencies and international organizations in many countries have begun evaluating the risks of cryptocurrency assets, generally following the principle of “same business, same risks, same regulation”. The aim is to match the risk level of cryptocurrency assets and strive to reduce regulatory data gaps, lower regulatory fragmentation, and eliminate the possibility of regulatory arbitrage.
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ICO
China
Token Issuance Financing
Cryptocurrency