In the latest “China Financial Stability Report (2023)” released by the People’s Bank of China, encrypted assets are classified as “other industries and emerging risks” and it is pointed out that they possess dual risks in terms of digital technology and finance. Additionally, the report claims that due to China’s early active regulation of “token issuance financing” and “cryptocurrency trading platforms,” it has demonstrated outstanding risk management and regulatory capabilities in the field of encrypted assets.
Table of Contents
Dual Risks of Encrypted Assets
China Claims to Control the Related Risks of Encrypted Assets
International Cooperation is Needed
Recently, the People’s Bank of China issued the “China Financial Stability Report (2023)”, in which encrypted assets are classified in the chapter on “other industries and emerging risks”. The report points out that encrypted 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 compensation and enforceability, and should not be regarded as legal tender. They are also not subject to appropriate regulation. This has led to the emergence of dual risks in both finance and digital technology.
In terms of finance, encrypted assets face risks such as asset price bubbles, volatile price fluctuations, liquidity issues, and high leverage.
In terms of digital technology, these risks include:
– Ineffective regulation 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, which are susceptible to hacker attacks
– Governance deficiencies 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 counter-terrorism financing due to the anonymity of assets
The report claims that China has shown outstanding risk management and regulatory capabilities in the field of encrypted assets due to its early active regulation of “token issuance financing” and “cryptocurrency trading platforms”.
This notification clearly defines activities such as virtual currency exchange, buying and selling virtual currency, providing transaction matching 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 pledged to prohibit related transactions and close 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 in designated venues, and any illegal buying and selling of foreign exchange, especially in serious cases, will face criminal liability.
For example, in November, the Qingdao police in Shandong Province, China successfully cracked a major underground money laundering case involving nearly 70 billion RMB across 17 provinces and cities nationwide. The case involved a money changer who collaborated with an underground bank to engage in illegal buying and selling of virtual currency business. The State Administration of Foreign Exchange pointed out that the underground bank purchased virtual currency and sold it on overseas platforms to achieve the conversion of RMB and foreign currencies, constituting illegal buying and selling of foreign exchange.
Another example is on December 16th, the Higher People’s Court of Guangdong Province issued a notice warning against illegal foreign exchange transactions using virtual currencies. In the case, the defendant purchased USDT with RMB through a virtual currency platform and obtained profit from price differences. This act was identified as a disguised foreign exchange trading and was sentenced under the crime of illegal business operations.
Lastly, the report points out that due to the high risks, speculative nature, and inadequate governance mechanisms of encrypted assets, they have significant spillover effects on the stability of the global financial system. Furthermore, due to the cross-border nature of encrypted assets, international cooperation is needed in regulation.
Regulatory agencies and international organizations in multiple countries have begun to assess the risks of encrypted assets, generally following the principle of “same business, same risks, same regulation” in order to match the risk levels of encrypted assets and strive to reduce regulatory data gaps, reduce regulatory fragmentation, and eliminate the possibility of regulatory arbitrage.
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ICO
China
Token Issuance Financing
Cryptocurrency