Legal Watch | Blockchain Governance: Embracing the Chain of Law and Strictly Controlling the Risk of Coins

Source: Tencent Research Institute

Author: Northwestern Polytechnical University of Humanities and Economics and Law Professor Wang Yanchuan

table of Contents

(I) Introduce a blockchain strategic framework and actively promote the development of blockchain

1. Governments compete for the "platform" of the blockchain, hoping to occupy the commanding heights of the blockchain application

2. China advocates the application of blockchain to all areas of society and promotes good governance in society

(2) Blockchain applications belong to the “land of law” and should be included in the national governance landscape

1. Recognize the legal status of crypto assets and smart contracts, and seize the crypto trading market

2. Sort out the types of digital currencies and implement differentiated supervision policies

(3) Control the application risks of the blockchain with multiple supervision methods

1. Blockchain service providers are the “grabbers” for blockchain regulation

2. Crack anonymous transactions and increase transaction transparency

(IV) Regulators oppose Libra, central bank plans to implement national digital currency

1. Regulators of various countries "attack on Libra"

2. National central banks plan to launch national digital currencies

(V) Outlook: From "Governance of Code" to "Governance of Law"

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2019 is an important starting point for global blockchain governance. Since the advent of the first bitcoin in 2009, governments of various countries have not actively governed blockchain and its applications. The main reasons are as follows: first, the blockchain is still under development, and premature governance will inhibit technological innovation; Second, whether the applications such as cryptocurrencies and smart contracts on the blockchain are subject to adjustment by law, no consensus has been reached in the theoretical and practical circles; third, the amount of crypto assets and transactions supported by the blockchain is relatively small. Cause significant social risks. Ten years later, the blockchain technology is becoming more mature, and the wealth built around the blockchain is already large. [1] The academic community ’s research on blockchain and its applications has also matured. These factors have changed the “doing nothing” of governments in various countries Attitude promotes blockchain governance. In 2019, there are three phenomena in blockchain governance: First, countries generally recognize the economic value of blockchain, create a "blockchain-friendly government" image through various methods, and grant blockchain application products with laws Status; the second is to start the substantive supervision of the blockchain and reduce the application risk of the blockchain; the third is the Libra white paper released by Facebook, which has triggered a currency war in the digital field worldwide, and large digital enterprises And central banks in various countries are contemplating launching their own digital currencies to seize domestic and global payment and settlement markets.

(I) Introduce a blockchain strategic framework and actively promote the development of blockchain

1. Governments compete for the "platform" of the blockchain, hoping to occupy the commanding heights of the blockchain application

The United States is the earliest and most active country in the application of blockchain, and the US government continues to encourage the development of blockchain. A few days before the U.S. House of Representatives Financial Services Committee held a hearing on Facebook's implementation of Libra, which is July 9, 2019, the Senate Business, Science, and Transportation Committee approved the 2018 Blockchain Promotion Act, [2] requires the U.S. Department of Commerce to establish a standard definition of "blockchain" and break the patchwork understanding of blockchain in states to promote discussion and discussion between industry and government leaders in an understanding and coordination manner Blockchain and its applications. In order to implement the Act, the U.S. Department of Commerce must establish a working group composed of relevant departments within 90 days and submit a report to Congress within one year after the enactment of the Act, recommending the definition of blockchain and research topics. And opportunities for federal agencies to use blockchain. The significance of the bill is: First, the "Bill" has the support of the Senate and the House of Representatives, indicating that blockchain technology has been recognized by the mainstream value of the United States. Secondly, the "Bill" advocates a breakthrough in the application of blockchain at the state level. [3] believes that blockchain can provide services to the federal government, prevent and reduce tax fraud, eliminate bureaucracy and reduce waste. Finally, the promulgation of the "Bill" signifies that the federal government intends to establish a prudent governance framework to oversee the possible implementation of blockchain technology in various public sectors, to provide guidance for future applications of emerging technologies and to prevent their risks.

Other countries have also seen blockchain as an irresistible technical force, and have implemented blockchain support plans one after another. On March 18, 2019, Australia announced the Blockchain Roadmap Strategy. The Roadmap aims to promote the blockchain ’s “regulatory, technology and building capabilities, as well as innovation, investment, and international competitiveness and collaboration”. Development, hoping to help Australia become a global leader in the emerging blockchain industry. [4] On September 18, 2019, the German Ministry of Economics and Energy and the Ministry of Finance jointly issued the "German National Blockchain Strategy". The German government plans to take measures to encourage blockchain development in five areas by the end of 2021. '' Pointed out that blockchain technology is the cornerstone of the future Internet, and Germany will further consolidate its leading position in this field.

2. China advocates the application of blockchain to all areas of society and promotes good governance in society

On October 24, 2019, the Political Bureau of the Central Committee of the Communist Party of China collectively studied blockchain. General Secretary Xi Jinping pointed out that it is necessary to accelerate the development of blockchain technology and industrial innovation and actively promote the development of the integration of blockchain and economy and society. On October 31, the Fourth Plenary Session of the 19th Central Committee was held. General Secretary Xi Jinping pointed out that social governance should be strengthened and innovated, and the social governance system supported by science and technology should be improved. If the two important instructions of General Secretary Xi Jinping are combined and analyzed, it can be seen that the positioning of China's blockchain should not be limited to the economic level, but will extend to all areas of society. The blockchain can completely lay the foundation for trust for the digital society. To promote good governance. [5]

(2) Blockchain applications belong to the “land of law” and should be included in the national governance landscape

1. Recognize the legal status of crypto assets and smart contracts, and seize the crypto trading market

There is no consensus around the world as to whether crypto assets are protected property and whether smart contracts have legal effect. [6] The UK has taken a crucial step in this regard. In November 2019, the UK issued an important legal statement establishing the legal property and contract status of crypto assets and smart contracts. The leader of the statement, Jeffrey Voss of the High Court of the United Kingdom, introduced the statement that although crypto assets have characteristics different from traditional properties, such as virtuality, crypto authentication, and distributed, they still have all the characteristics of property, It is therefore legal property. Smart contracts are a legitimate way to transfer ownership and value between two parties, and courts can enforce smart contract terms. The UK establishes legal status for crypto assets and smart contracts, with the aim of achieving the UK's position as a global fintech leader. [7]

Germany has always banned banks and financial institutions from selling digital assets to customers, but Germany has prepared to pass legislation to give banks the right to sell digital currencies, including bitcoin, and recognize banks as digital currency custodians. The bill is said to have been approved by the Banking Association. The new bill could push Germany into the next center of the cryptocurrency industry. [8]

2. Sort out the types of digital currencies and implement differentiated supervision policies

On January 23, 2019, the Financial Conduct Authority (FCA) issued the Cryptocurrency Assets Guide, which shows that the UK is flexible and neutral in the regulation of cryptocurrency, which is also passed by the British government to the digital currency market. One major good news.

The main content of the Guide is to give instructions on the classification and supervision of cryptocurrencies, clarify the responsibilities of the regulators, and help consumers choose digital currencies and judge transaction costs and risks. The Guide divides cryptocurrencies into three categories: First, decentralized transactional tokens such as Bitcoin and Litecoin, which have not been issued by national financial institutions, such currencies and exchanges engaged in the exchange of such currencies Not regulated. [9] Second, securities tokens are "identical to or similar to traditional instruments such as stocks, bonds, or units in collective investment schemes". These tokens are special investments. [10] The Supervised Conduct Act applies Regulations. Securities tokens are traded on the capital market as a form of transferable securities and are subject to the provisions of the European Union's Financial Instruments Market Directive. Third, utility tokens are those that allow users to access the product, but do not grant the same rights as securities tokens. Unless they are defined as electronic money, the Electronic Money Act is applicable and is not regulated. .

According to the Guide, companies engaged in regulated token business need to apply for a license from the Financial Conduct Authority and obtain authorization, or meet the requirements of the prospectus, transparency and other exemptions, otherwise the relevant personnel will be held criminally responsible. At the same time, the "Guide" also intends to create a sandbox regulatory environment conducive to the development of crypto assets, that is, companies in the sandbox will enjoy separate guidance from the Financial Conduct Regulatory Authority and partial policy exemptions.

Affected by the United Kingdom, on March 28, 2019, the Hong Kong Securities and Futures Commission issued the "Statement on Securities Token Issuance", which clearly states that securities token issuance (STO) [11] should be included in the regulatory scope and should be made in advance. Obtaining a license or registration, otherwise it is a criminal offense. Because securities tokens are "complex products" and can only be sold to professional investors, the issuer should take additional investor protection measures, such as due diligence and risk warnings.

(3) Control the application risks of the blockchain with multiple supervision methods

1. Blockchain service providers are the “grabbers” for blockchain regulation

On January 14, 2019, the Singapore Parliament passed the Payment Services Act, which aims to promote compliance with digital currency transactions through a licensing system. According to the Act, the licenses related to digital currency business are divided into currency changer, standard payment agency and large payment agency licenses. Money changers are also less regulated due to their small business volume. Both standard payment agencies and large payment agencies are subject to more regulation. According to the Act, digital currency exchanges, wallets, mining pools, and OTC platforms are all considered payment service providers and need to apply for corresponding licenses to operate in compliance. Since the promulgation of the Act, relevant institutions have filed with the HKMA license within 6 months. [12] Companies applying for licenses also need to meet anti-money laundering regulations, verify customer identity, and report suspicious transactions to the HKMA. Enterprises applying for licenses must meet the basic requirements of the HKMA for technical security. These companies need to undergo periodic spot checks by the HKMA to avoid illegal operations and avoid penalties such as revocation of licenses. [13] The bill puts Singapore ’s digital currency industry no longer in a gray area of ​​supervision, and also puts Singapore into a country where digital currency regulation is systematized.

On March 15, 2019, the Cabinet of Ministers of Japan passed an amendment to the "Financial Commodities Trading Law", setting a time limit for the application of a cryptocurrency exchange license, 18 months from April 2020 (the expected effective date of the amendment). The quasi-exchange that has not completed the application for a license will not be allowed to continue operations.

Four days before the "Payment Service Act" of the Singapore Parliament, that is, January 10, 2019, the National Internet Information Office issued the "Regulations on the Management of Blockchain Information Services", requiring blockchain information service providers (including node IP) And the user completes the filing procedures, and the real name is registered. Specifically, the blockchain information service provider [14] should report the name, service category, and service provider of the service provider through the Blockchain Information Service Filing Management System of the National Internet Information Office within 10 working days from the date of service provision. Form, application field, server address and other information, fulfill the record filing procedures. [15] The Network Information Office conducts regular inspections of the blockchain information service filing information. The blockchain information service provider shall log in to the blockchain information service filing management system within a specified time to provide relevant information. In addition, blockchain information service providers should also fulfill related security obligations.

2. Crack anonymous transactions and increase transaction transparency

Anonymous transactions are the main feature of the blockchain, but anonymity has also brought trouble to the regulation. For example, the digital currency used for payment has become a "hidden currency", which may become a new tool for criminals' money laundering and terrorist financing. Institutions track the flow of funds. Eliminating the anonymity of transactions, the way to track funds and transactions on the blockchain is "Know Your Customer (KYC)", that is, the blockchain service provider must perform due diligence on customers. New trends have emerged in 2019 to eliminate anonymous transactions.

In June 2019, the Anti-Money Laundering Financial Action Task Force (FATF) issued the "Cryptocurrency Supervision Standards", which proposed recommendations to eliminate anonymization of cryptocurrencies. First, the virtual asset service provider or exchange was locked as a regulatory object and required to Register or register, and then the service provider or exchange obtains and holds accurate sponsor information and beneficiary information for the transfer of virtual assets, so that it can be provided by the authorities when needed. Service providers or transactions need to keep transaction records and provide them to relevant agencies when needed. On October 30, 2019, the Anti-Money Laundering Financial Action Task Force also called on national authorities “to develop clear guidelines or regulations to allow entities regulated by anti-money laundering / combating the financing of terrorism to use reliable independent digital identity systems”, It is also recommended that the regulated institution (cryptocurrency exchange) should "adopt a risk-based approach and rely on digital ID systems for customer due diligence." [16]

In South Korea, most cryptocurrency transactions have a KYC program to handle digital currency transactions, and exchanges must keep separate records and detailed personal information for each user. On October 25, 2019, South Korea was studying the taxation of capital gains on the sale of digital assets. [17] Taxation will increase the transparency of all aspects of digital currency transactions, and the government can grasp the detailed history and personal information of cryptocurrency transactions. With the above measures, in South Korea, except for completely decentralized exchanges and unknown markets, transactions for digital assets are almost impossible to conduct anonymously.

In contrast, China ’s solution to anonymous transactions is more direct and thorough. The "Blockchain Information Service Management Regulations" stipulates that the blockchain information service provider shall, in accordance with the provisions of the "Network Security Law", conduct blockchain information service users based on the organization code, ID number or mobile phone number, etc. Way of authentic identity information authentication. If the user does not authenticate the real identity information, the blockchain information service provider shall not provide relevant services for it. [18]

(IV) Regulators oppose Libra, central bank plans to implement national digital currency

1. Regulators of various countries "attack on Libra"

On June 18, Facebook released the "Libra Coin White Paper", saying that the project will serve global payment and settlement. After the release of the white paper, it attracted worldwide attention. The U.S. House of Representatives' Financial Services Committee held three consecutive hearings within half a month. During the hearing, many people in the industry slammed Libra. The representative view issued by the U.S. Congressional hearing stated that "infrastructure such as payment and settlement It should not be controlled by large banks or large technology companies. Instead, the Federal Reserve and other regulators need to continue to be leaders in bank innovation. "[19]

There are two main reasons to oppose Facebook's launch of Libra. One is that stablecoins are high-risk digital currencies, and there will be a series of issues such as value fluctuations, confidentiality and privacy, anti-money laundering, KYC, consumer protection, and financial stability. [20 ] These issues should not be approved for distribution until these issues have been resolved. [21] Second, countries fear that Libra coin issuers will threaten the status of central banks. German Finance Minister Olaf Schorz pointed out that "the core element of national sovereignty is the issue of currency, and we will not leave this task to private companies." [22] International institutions such as the Financial Stability Board (FSB), European Bank Management EBA, BIS and others have stated that they should maintain close contact with international allies to prevent Libra from becoming an alternative currency. Regulators in Germany, France, India, Singapore and other countries have expressed the same views.

2. National central banks plan to launch national digital currencies

Libra's proposal prompted the central bank to promote national digital currencies. [23] This measure has dual effects: First, it can prevent super-sovereign currency issuers from replacing the central bank. At the same time, strong national credit supports digital currencies, and strong regulation can also eliminate national digital Currency risk. Second, digital currencies can be used to replace the international currency system dominated by the US dollar. At present, the currency system has many problems, such as liquidity shortages, the pressure on government bond rates to fall, and the uncertainty of relying on the Federal Reserve.

China is one of the earliest countries to develop digital currencies. In 2014, the Central Bank set up a legal digital currency research group to focus on the development of national digital currencies. In order to issue and operate digital currencies, the central bank has applied for 74 patents related to digital currencies with the State Intellectual Property Office. On July 8, 2019, Wang Xin, the director of the Central Bank's Research Bureau, revealed that the State Council has officially approved the research and development of digital currency of the central bank, and the central bank is currently organizing market institutions to carry out corresponding work. On August 10, Mu Changchun, deputy director of the Bank's Payment and Settlement Department, revealed to the outside world that the digital currency of the People's Bank of China can be said to be "coming soon."

(V) Outlook: From "Governance of Code" to "Governance of Law"

2019 is a very crucial year for the development of blockchain. Countries have formed rough blockchain governance frameworks. Although these frameworks are still relatively rough, they will undoubtedly affect the direction of blockchain governance in the next few years.

The core philosophy of blockchain governance is to distinguish between blockchain and digital currency. For the former, governments of various countries will continue to release goodwill signals and vigorously support them. In the future, more governments will follow the practices of the United States, Germany, Australia, and China to strategically and The policy approach declares its image as a blockchain supporter and competes with each other to compete for the commanding heights of blockchain technology and applications in order to maximize the national interest. [24] For the latter, governments and legislative bodies of various countries will conduct an empirical review, and will introduce and improve various systematic regulatory measures for digital currencies that are under supervision, such as securities digital currencies. Blockchain service providers and exchanges have become the “entry point” for the government to govern the blockchain ecosystem. By letting these institutions record and apply for licenses, they have the effect of “pointing the dots”. Anti-money laundering and anti-terrorist financing remain the core of all regulatory projects, giving blockchain service providers and exchanges due diligence obligations to customers, obtaining useful information, and being used by the government when necessary. Cracking anonymous transactions and realizing real-name transactions on the blockchain is still the direction of the regulatory authorities of various countries.

The use of efficient and convenient digital currencies for payment and settlement is becoming a mega trend. [25] The release and operation of digital currencies will become an area of ​​fierce competition between large digital enterprises and between enterprises and central banks in the next few years. As central banks and enterprises promote their own digital currencies, a new round of social risks will surely arise, such as operator risks, cyber security risks, fraud, consumer protection and financial crime risks, as well as potential financial systemic risks and stability Sexual problems, studying the causes of these risks, seeking solutions to problems, reducing transaction risks, and maintaining the stability of financial markets are the top priorities of regulatory work in various countries. [26]

Blockchain follows the "rule of code", [27] but the inevitable trend of blockchain governance is from "rule of code" to "rule of law." The legislative and judicial institutions of various countries will follow the example of the United Kingdom, recognize the legal status of crypto assets and smart contracts, ensure the expectations of stakeholders in blockchain transactions, and protect their interests. However, crypto assets and smart contracts have different characteristics from traditional property and contracts. [28] As crypto assets and smart contracts are recognized by law, the work that goes on is how to incorporate these systems into the existing Property Law. Among the "Contract Law" and other laws, through institutional innovation, the owners of crypto assets and the parties to smart contracts can obtain practical legal protection.

References: [1] Data released by CoinMarketCap show that as of October 7, 2019, there were 2,963 cryptocurrencies worldwide, with a total market value of more than 200 billion U.S. dollars. According to data from the SECBIT laboratory smart contract monitoring platform, the total number of smart contract creations on the Ethereum mainnet in October 2018 was 95,139.

[2] See https://www.cnet.com/news/senate-moves-blockchain-promotion-act-forward/

[3] Some experts pointed out that "The Senate passed the Blockchain Promotion Act, which created opportunities to promote the technology at the federal level and made more government organizations aware of how the technology can bring more work to their work. High transparency and efficiency. "See https://cointelegraph.com/news/us-moves-closer-to-accepting-blockchain-still-uncertain-over-crypto

[4] See "People's Network: How Do Countries Meet the Coming of the Blockchain Era?" 》, Https://www.jinse.com/blockchain/538440.html

[5] See Wang Yanchuan: "Blockchain: Paving the Foundation for Trust in a Digital Society", published in Guangming Daily (Rule of Law), November 1, 2019.

[6] Although smart contracts are involved in the laws of several states in the United States, the legal effects of smart contracts are not clearly specified. For example, Arizona issued a bill in 2017 that states: "A signature protected by blockchain technology is considered to be an electronic format and belongs to an electronic signature. Historical records or contracts protected by blockchain technology are considered to be an electronic format. It's an electronic record. "In 2018, Florida enacted a bill that states:" A contract cannot be denied legitimacy simply because electronic records were used in the formation of the contract and the contract contained a smart treaty. "

[7] In response to Judge Voss's statement, some commentators believed that "the statement is an important milestone for the future of blockchain investment and applications. By clearly understanding the legal status of crypto assets and smart contracts, companies can play their confidence more confidently. Potential for transforming financial markets and improving efficiency. "See http://m.globallegalpost.com/big-stories/uk-gives-landmark-statement-on-cryptoassets-74649480/

[8] The person in charge of the crypto asset platform stated: "Germany is becoming a cryptocurrency paradise. German lawmakers are playing a vanguard role in the field of cryptocurrency supervision." See "Blockchain Circuit: China Leads, Germany Embraces Cryptocurrency, India "Developing a National Strategy", http://baijiahao.baidu.com/s?id=1651836389638369575&wfr=spider&for=pc

[9] This digital currency and its exchange still need to be applicable to the "EU Article 5 Anti-Money Laundering Directive (5AMLD)", which will be converted into British law by the end of 2019. [10] FCA determines whether tokens are “special investments” including but not limited to: (1) token holders obtain contractual rights or obligations; (2) token holders can share profits (dividends), income Or other types of benefits; (3) token holders have control, ownership or voting rights over the issuer; (4) specify or show in the project white paper that the token is an investment; (5) the token can be encrypted Trading on currency exchanges or other exchanges.

[11] The so-called STO refers to the issuance of specific tokens with the attributes of traditional securities offerings, which involves the use of blockchain technology to express digitally the ownership of assets (such as gold or real estate) or economic rights (such as the distribution of profits or returns). Equity) security tokens.

[12] In order to extend jurisdiction, the object of applying for a license is not limited to institutions registered in Singapore, but to organizations that actually operate in Singapore.

[13] See "Singapore's" Payment Services Act "officially passed: Exchanges need to start applying for licenses", http://www.sohu.com/a/290337651_100112552

[14] The so-called blockchain information service provider refers to the subject or node that provides the blockchain information service to the public, and the institution or organization that provides technical support for the subject of the blockchain information service.

[15] "Administrative Provisions of Blockchain Information Service Management Regulations" Article 11.

[16] Financial Action Task Force (FATF) Releases Global Digital Identity Guide, http://www.bitcoin86.com/news/48022.html

[17] See Korea: Taxes on cryptocurrency transactions expected to start in 2020, http://www.bitcoin86.com/news/49744.htm

[18] Article 8 of the "Regulations on the Management of Blockchain Information Service Management Regulations".

[19] See https://www.banking.senate.gov/imo/media/doc/Brown%20Statement%207-30-19.pdf

[20] This was the consensus reached by participants during the talks between Libra on September 16 and 26 central banks including the Federal Reserve in Switzerland.

[21] On July 18, 2019, the Group of Seven finance ministers and central bank governors agreed that Libra raised “serious regulatory and system issues, as well as broader policy issues. Prior to implementing such projects, these Problems need to be resolved. " See http://www.g7.utoronto.ca/finance/180602-summary.html

[22] See "German government approves a blockchain strategy to prevent stablecoins from becoming alternative currencies", https://www.cebnet.com.cn/20190919/102602266.html

[23] In September 2019, France, Thailand, Saudi Arabia, and the United Arab Emirates made clear their intentions to promote central bank digital currencies. In October, Canada and Venezuela also began to promote national digital currencies.

[24] On October 7, 2019, the Ukrainian government plans to formulate policies and plans to legalize mining and establish cryptocurrency tax rules within 3 years. At present, many countries such as the United States and South Korea levy taxes on cryptocurrency transactions. In March 2019, Japan passed a draft amendment to crypto assets, which stipulated that the tax rate on crypto asset transactions could be up to 45%.

[25] Many people in developing and lagging countries do not have bank accounts, or the country does not provide good payment and settlement facilities. For marginalized people who have the ability to open accounts, the global payment and settlement tools currently used by people are widely Western Union and SWIFT are very expensive. Digital currencies can solve the above problems. As long as you have a mobile phone with Internet access, you can solve domestic and cross-border payment and settlement problems.

[26] On October 6, 2019, the Liechtenstein Parliament unanimously passed a "Blockchain Bill". The bill aims to strengthen investor protection, combat money laundering, and promote transaction transparency. Parliament has stated that the bill will make Liechtenstein the first country to fully regulate the token economy.

[27] See [French] Primavera de Philippe, [US] Aaron Wright: "Blockchain and Law: Rule of Code", translated by Wang Yanchuan, Yuanzhao Publishing Company 2019 Edition.

[28] See Wang Yanchuan: "Construction of Smart Contracts and Risk Prevention", Journal of Law, 2019, Issue 2.