[Editor's note] Faced with the new challenges of digital currency, economists are divided into two categories, one is scornful, and it is not worth mentioning that digital currency is a speculative bubble; the other is cautiously accepted and begins cutting-edge exploration. As the digital currency grows, more and more economists join the second camp. For this reason, Kay unveiled a series of articles on “Digital Currency in the Eyes of Economists”, which is the most comprehensive review of digital currency literature. In the classification , market , exchange , price , risk , supervision and the future, summarize the global economists' research on the frontier theory of digital currency, and provide a useful reference for interested researchers. This article is the sixth article in this series of articles, and the next article is the final article, so stay tuned.
The rapid rise of digital currencies, the participation of a large number of private and institutional investors, and huge price volatility have prompted national regulators to pay more and more attention to this industry. In particular, after Facebook recently announced the establishment of a coalition to issue Libra's non-sovereign stable currency, the world's attention has refocused on digital currency. Libra coins challenged the sovereign currencies of various countries and forced national regulators to speed up the steps to deal with the challenges and impacts of the digital currency on the financial system. However, we have to emphasize a fact that is often overlooked – the digital currency industry is still very young, only 11 years old, and it has only attracted the attention of the regulatory authorities for only three years, and the definition of the digital currency itself is controversial. Therefore, the supervision of digital currency is still in its embryonic stage. Not only are the countries in the world very different, but they are always in rapid dynamic changes.
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Academic discussion on digital currency regulation mostly focuses on the legal scope, such as the legal definition of digital currency, whether it is legal, the legal nature of ICO, how to prevent money laundering, how to coordinate global norms, etc. less. Considering that the most important factor in determining the development direction of the digital currency industry is supervision, we systematically sort out and discuss the global supervision of digital currency.
Global regulatory overview and national status
Global regulatory overview and status quo Global countries define and regulate digital currencies differently. According to https://coin.dance/poli, there are 111 countries with no restrictions in 251 countries. According to the trading volume and influence of digital currency, the main analysis is concentrated in the United States, China, Japan, South Korea, the United Kingdom, Russia, Singapore and so on.
The regulation of digital currency in the United States has become the vane of global regulation and has a very important exemplary role. As early as 2012, the US Congress held a hearing on Bitcoin. In 2015, the State of New York took the lead in passing the world's first licensed digital currency license Bitlicense. In 2017, the Commodity Futures Trading Management Board CFCT approved the Chicago Board Options Exchange CBOE and the Chicago Futures CME to launch bitcoin futures. By 2018, the US regulatory action has become more frequent, but the attitude toward cryptocurrencies has changed: from the initial debate on digital currency is the pros and cons, to the identification of digital currency innovation and the need to regulate regulation.
In 2019, due to Facebook's Libra plan, which touched the foundation of the US dollar hegemony, it rekindled the enthusiasm of the US Congress for digital currency. The two-day Congressional Libra hearing on July 17 and 18, 2019 attracted worldwide attention. Libra plans to support less and oppose more in Congress. The opposing members even proposed a proposal to "ban large technology companies from launching digital currencies."
Because there is no uniform regulation on the attributes of cryptocurrencies, and the United States implements federal and state grading supervision, the US regulatory policy on digital currency is relatively complicated.
Specifically, there is the Federal Reserve at the federal level, and the Fed has always maintained a more detached attitude. The reason is that the digital currency is not a real currency, and the Fed has no legally authorized responsibilities and obligations to directly supervise. As in December 2017, Yellen, then chairman of the Federal Reserve, said: "The Fed has no responsibility for supervising bitcoin. It only requires banks under the jurisdiction of the Fed to be very careful when dealing with bitcoin-related businesses. Responsibility under the Anti-Money Laundering Act and the Bank Secrecy Act."
But the Fed’s desire to evade regulation was broken by Facebook’s Libra plan. Libra is essentially a non-sovereign stable digital currency, replacing the global dollar system that the United States is proud of. Therefore, the Fed is duty-bound to become the most important regulator of Libra, and the Fed has been pushed to the focus of attention. Congress has therefore held several hearings on the Fed’s attitude toward Libra. In general, the Fed is still neutral to Libra. After all, Libra spent a long time communicating with the Fed until the Fed acquiesced to officially announce it, and the Fed still supported innovation. However, due to opposition from Congress, the Fed’s support for Libra has begun to falter.
In any case, the Fed is essentially a regulator of stable currency. The world is eagerly awaiting the Fed’s measures to regulate Libra, because any decision she made will play a decisive role in the future development of digital currencies, especially stable currencies.
The Internal Revenue Service (IRS) considers taxation as a starting point and determines that Bitcoin and other encrypted digital currencies are property rather than currency , and are regulated in accordance with the capital gains tax law, and corresponding regulations have been introduced. Individuals and institutions need to declare each year based on capital appreciation or loss.
The biggest impact is that on November 29, 2017, San Francisco federal judges decided that Coinbase (the largest digital currency exchange in the United States) must submit a list of users with more than $20,000 in transactions between 2013 and 2015 on the platform. . At that time, IRS calculated that a large number of taxpayers did not truthfully declare the profit of the digital currency, so they asked Coinbase for transaction information. Coinbase refused on the grounds of customer privacy, so IRS sued Coinbase. After this incident, many customers (but could not estimate) moved digital assets to overseas exchanges to avoid US taxation.
Recently, the US Taxation Bureau has recruited a lot of jobs and asked for digital currency experience. The US Taxation Bureau official explained that this move is to strengthen the illegal behavior of taxpayers to evade taxes through digital currency.
The US Securities and Exchange Commission (SEC)'s regulation of digital currencies is mainly reflected in ICOs and ETFs. The SEC's attitude is clear: the digital currency generated by ICO is a security, so the issuance process needs to be regulated in accordance with the securities laws. Bitcoin is not produced by ICO, so Bitcoin is not a security and is not regulated by the SEC. But the ETF of digital currency belongs to the regulatory scope of the SEC.
At present, the SEC requires all ICOs to register, follow the process of Security Token Offerring (STO) and follow existing securities regulations. If the legal STO is not taken in accordance with the SEC requirements, the SEC will take a severe law enforcement strike. In the second half of 2017 and 2018, the SEC joined forces with other law enforcement agencies to intensively crack down on illegal ICO activities and effectively curb the momentum of illegal ICOs in the United States.
Of course, the suppression of illegal financing is one aspect, and the other SEC also provides legal channels for application. As of October 2018, the SEC has approved 39 STO projects (according to the Annual Report on the Global Blockchain Industry Panorama and Trends (2018-2019)” issued by the Fire Coin Research Institute. As for the STO transaction, it can be traded through the existing Alternative Trading System (ATS) under the SEC's supervision. In July 2019, the SEC first approved blockchain startup BlockStack to publicly issue the digital currency BlockStack Token using the RegA+ method (one of the four exemptions from the IPO public financing method). BlockStack was eventually issued at $0.30 per coin, raising $28 million. The SEC also approved Props to issue STO in the same way, raising $25.6 million. This is the first such Token product release approved by the SEC, which marks the legal compliance of the STO, which has been moved from planning to implementation.
The digital currency ETF is not so lucky, the SEC has repeatedly rejected the digital currency ETF application for three consecutive years. The SEC believes that the current digital currency ETF can not protect investors, mainly because the digital currency information is opaque, the market price is easy to manipulate, the ETF is difficult to price, the fluctuation is too large, the liquidity is not enough, and the deposit of digital currency is not ready. . The digital currency ETF currently seems to be very difficult to pass the SEC.
The Commodity Futures Management Committee CFTC identified bitcoin as a commodity and stated in its statement that its regulatory targets include bitcoin fraud, manipulation, and other commodity futures transactions directly linked to Bitcoin. Therefore, CBOE and CME were approved to launch bitcoin futures. Recently, CFTC has increased the enforcement of bitcoin fraud and market manipulation. However, due to liquidity reasons, CBOE has stopped bitcoin to add new futures contracts in March 2019.
FinCen, an agency under the Ministry of Finance, believes that digital currency is closer to currency. FinCen's regulation of digital currencies is focused on preventing the use of digital currency crime and money laundering. All organizations involved in digital currency in the United States are required to register as a Money Service Business (MSB) on FinCen and need to set up a corresponding compliance department internally to prevent money laundering and crime in digital currency. On the afternoon of July 15, 2019, US Secretary of the Treasury Steven Mnuchin held a press conference, emphasizing that any cryptocurrency must meet FinCen's requirements for anti-money laundering and counter-terrorism financing. FinCEN's responsibilities in this regard.
The OCC (office of currency comptroller), the full name of the Monetary Management Office, is an organization that manages the federal bank under the jurisdiction of the Ministry of Finance and can be understood as the responsibility of the CBRC. In 2016, OCC proposed a federal-level license management program for financial technology companies, and began accepting applications in August 2018. Before this management method came out, Fintech had no federal-level unified regulatory system, so each company had to deal with different regulatory requirements in different states. In order to conduct business, it required to apply for different licenses in each state. The purpose of the OCC is to support non-bank financial institutions and support the development of financial technology companies. Many digital currency companies, including Circle and Coinbase, have also applied for such licenses. However, due to the unclear relationship between the federal and state interests, the current OCC management plan is not going very smoothly.
CFPB US Consumer Protection Agency protects digital currency investors or holders from financial investors against digital currency fraud.
In addition to federal-level regulation, US states define and regulate digital currencies in a variety of ways. Except for the adoption of a clear Bitlisence license in New York State, most states do not have specific regulatory measures. Instead, they use digital currency as a payment instrument and fall into the category of money transfer (Money Transittment), which requires a corresponding currency transfer permit ( Money Transmitting License, MTL).
In response to the challenges of the digital currency to the US regulatory system, the US government's FSOC (US Financial Stability Regulatory Commission) coordinates federal agencies such as the SEC, CFTC, FED, OCC, CFPB, and FinCEN to jointly monitor digital currencies. After several rounds of hearings in Congress, the US legislature tends to let the SEC and CFTC together monitor the digital currency at the federal level, and let the Fed manage the digital currency with stable currency functions.
China’s regulation of digital currencies is dominated by the central bank. In 2013, the People's Bank of China issued a notice on the prevention of bitcoin risk, positioning Bitcoin as a specific virtual commodity, there is a greater risk. In September 2017, the central bank again issued a ban on the open trading of digital currencies and the ban on ICO. In 2018, the Beijing regulatory unit prohibited the issuance of STO. Although China is a big currency trading country, due to the government's restrictive attitude towards digital currency, many institutions have moved their headquarters away from China to countries and regions that are friendly to digital currencies, such as Singapore and Hong Kong.
Hong Kong, China, before November 2018, implemented differential regulation of digital currency. If it belongs to securities, it is classified by the CSRC. By November 2018, a new Statement on the Regulatory Framework for Management Companies, Fund Distributors and Trading Platform Operators for Digital Asset Portfolios (the “New Regulations”) was issued, confirming the CSRC’s overall supervision of digital assets. Status and implementation of a licensing system, in certain circumstances, the implementation of sandbox supervision (Sand-Box Regulation)
Singapore’s digital currency is under the MAS of the Monetary Authority of Singapore. As early as November 2017, MAS issued the “Guide to Digital Token Offerings”, which is considered as a clarification of MAS’s regulation of digital asset financing. Sex documents. An updated guide was released in November 2018. Singapore's regulations regulate the classification of digital currencies, one is divided into capital market products (Captial Marekt Product), which is a security and follows the Securities and Futures Act. The other type is the Utility Token, which is relatively free and flexible. But regardless of the category, it is necessary to follow the AML and KYC regulations. At the same time, Singapore also allows digital currency to enter the regulatory sandbox for regulatory experiments. In general, Singapore’s regulation is relatively loose and friendly.
Japan is the first country in the world to provide legal protection for digital assets. On May 25, 2016, the Japanese cabinet signed an amendment to the “Finance Algorithm” and incorporated the digital currency into the legal regulation system, recognizing the digital currency bitcoin as a legitimate means of payment. The bill was implemented on April 1, 2017 and is of great significance in the regulation of global digital assets. The supervision of digital currencies is the responsibility of the Financial Services Agency (FSA), which requires a license. At the same time, research associations and industry self-discipline associations were established to jointly promote the development of the digital currency industry. In February 2018, the National Tax Agency of Japan determined that digital assets were other personal incomes and included digital assets in the scope of taxation.
The British government mainly adopts a wait-and-see attitude toward digital currencies. The Bank of England issued a statement in 2018, hoping to raise the digital currency exchange to a management standard comparable to that of a stock exchange, and said it would step up its efforts to crack down on illegal financial activities in digital currencies and impose stricter regulations on digital currency exchanges. At the same time, the FCA (Financial Conduct Authority) approved 11 blockchain and digital currency companies to enter the sandbox supervision.
Regulatory challenges and academic research
From the supervision of digital currency in various countries, it can be concluded that the current global regulation of digital currency mainly focuses on the following challenges.
First, how to prevent the currency function of digital currency from becoming a criminal law for money laundering. The anonymity of digital currency, the irreversibility of transactions, and the difficulty of chasing internationally are well suited as tools for criminals. This has been criticized by the public and is the focus of the regulatory body. The regulatory layer mainly adopts direct and indirect methods. In the direct way, like the US FinCen agency, all companies involved in digital currency are required to register and have a compliance team to do AML and KYC. This has gradually been emulated by other countries. The indirect method is to strictly regulate financial institutions such as banks that have contact with digital currencies, and strictly control them in AML and KYC. Because digital currency ultimately needs to be in contact with financial institutions, mutual exchange of legal and digital currencies is realized to achieve entry and exit of digital currency. Because of this, traditional financial institutions, especially banks, are particularly cautious and careful about transactions with digital currencies, and do not want to be the subject of regulatory penalties. This has also caused a major problem for the current digital monetary institutions: it is difficult to find financial institutions that are willing to cooperate.
There are some discussions in the academic community about crimes caused by digital currency, especially bitcoin, such as cybersecurity, tax evasion and tax evasion. Jafari et al. (2018) suggested that when formulating laws, comprehensive consideration should be given to the problem. Carry out all-round research on virtual currency, so that virtual currency can exert its technological advantages. Kaponda (2018) suggested that relevant legislation, regulatory agencies, and law enforcement agencies take protective measures to increase supervision and strengthen risk education for citizens.
Foley et al. (2018) used Network Cluster Analysis (SLM) and Detection Control Estimation (DCE) to analyze bitcoin trading user data for 2009-2017 and found that about 25% of Bitcoin users and 44% of Bitcoin. Transactions (number of times) are related to illegal activities; 20% of Bitcoin transactions (amount) and 51% of Bitcoin holdings are related to illegal activities (see table below). In terms of time series, the proportion of transactions using Bitcoin for illegal activities has decreased, but the absolute number continues to increase.
Table: Estimated size and activity of legal and illegal user groups
Second, for the securities attributes of digital currencies, how to regulate their issuance and transaction custody to ensure the rights and interests of investors. At present, all countries have standardized securities laws, so it is the consensus of all countries to incorporate digital currency and ICO into the existing securities law. However, the difficulty is that digital currency is not the same as ordinary securities. Its issuance, custody, transaction and liquidation cannot use the existing system. Therefore, it is necessary for the regulatory authorities of various countries to constantly explore and experiment. Because of the volatility of digital currency, opaque information, and insufficient liquidity, the market is easily manipulated without being regulated.
Gandal et al. (2017) are one of the few articles on price manipulation in the study of bitcoin transactions. The author cleverly used the bitcoin exchange Mt.Gox to disclose as many as 18 million pairs of user transaction data from February to November 2013, identifying and analyzing the transaction's suspicious transactions. Of course, Gandal's findings are attributed to Mt.Gox's data breach. However, other data are undisclosed and unregulated exchanges, and there is a huge incentive to manipulate the market, which is why the SEC has repeatedly rejected the Bitcoin ETF. One. In the face of these problems, the regulatory authorities need to find proper solutions and coping strategies to protect the rights and interests of investors.
Third, global collaboration prevents regulatory arbitrage. Digital currency is inherently global, so generation, trading, and transfer are borderless. Due to the different attitudes of countries towards digital currency and the different degree of supervision, there is a general regulatory arbitrage phenomenon: digital currency practitioners, registering companies or headquarters to countries or regions with relatively loose regulations, and comparing them through the Internet. Strict country service. Typically, after the US cracked down on ICO and tax collection, and after China banned digital currency trading and ICO, many companies moved to Singapore and Hong Kong, but customers still came from the US and China. Regulators in various countries are also aware that the regulation of digital currency requires global collaboration. Therefore, there is a question about global regulatory cooperation on the G20. However, due to the early exploration stage of national supervision, the global regulatory cooperation has to wait for the figures of various countries. It is only possible after the currency is relatively mature.
The fourth is whether to launch a sovereign digital currency and how to launch it . Digital currency has not been considered a currency. One of the important reasons is that there is no endorsement by the state, and it cannot be a stable measure of value. Central banks in many countries have begun to seriously study digital currencies, hoping to issue their own Central Bank Digital Currency (CBDC) with reference to the characteristics and underlying technologies of existing digital currencies. Interested national central banks have central banks in Canada, China, Singapore and Sweden. Facebook's recent Libra program has spurred central banks in various countries, and we look forward to seeing mainstream countries break the deadlock and launch influential and accepted CBDCs.
The digital currency is like a dislocated wild horse, running all the way. Supervision is like a western cowboy with a set of horses, and is chasing after the digital horse. Regulation determines the future direction of digital currency. Digital currency can only have a future if it is compliant.
After the supervision is finished, the next one is the final article of the final article, so stay tuned.
=== References: ====
* Jafari, Saman and Vo-Huu, Tien and Jabiyev, Bahruz and Mera, Alejandro and Mirzazadefarkhani, Reza, Cryptocurrency: A Challenge to Legal System (May 2, 2018). Available at SSRN: or http://dx.doi. Org/10.2139/ssrn.3172489
* Kaponda, Kombe, Bitcoin the 'Digital Gold' and its Regulatory Challenges (February 14, 2018). Available at SSRN: https://ssrn.com/abstract=3123531 or http://dx.doi.org/10.2139/ Ssrn.3123531
* Foley, Sean and Karlsen, Jonathan R. and Putnins, Talis J., Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed Through Cryptocurrencies? (October 21, 2018). Available at SSRN: https://ssrn. Com/abstract=3102645
Digital Currency in the Eyes of Economists: Series Preface
The digital currency in the eyes of economists – Classification: Bitcoin with no place for souls
The digital currency in the eyes of economists – market articles: will there be no leek in the currency circle?
The Digital Currency in the Eyes of Economists – The Exchange: The Glory of the King
The digital currency in the eyes of economists – price articles: ups and downs in the bubble
The digital currency in the eyes of economists – risk articles: the wind