Cryptocurrency supervision and legislation prospects

【Abstract】As an application of blockchain technology-virtual digital currency, there is a risk of impact on the current financial legal relationship, and it also brings about the problem of virtual digital currency supervision. Virtual digital currency supervision has problems such as consumer protection, global asset flows and the opposition between the respective supervision of a single sovereign country, and it is difficult to determine the legal liability subject. To this end, it is necessary to clarify the legal attributes of virtual digital currencies. At the same time, in order to balance the innovation and risk of the blockchain, the “supervisory sandbox” method can be used to supervise the blockchain. The core is to establish the technical standards for blockchain financial enterprises. Entry system, financing review and registration system, and investor suitability management system.

The technical characteristics of virtual digital currency and its legal challenges

The European Union Banking Authority defines virtual digital currency (Crypto Currency) as a digital representation of value. It is not issued by the central bank or monetary authority, nor is it linked to legal currency. It is based on blockchain technology and is accepted by the public, so it can be used as a means of payment, and it can also be used as a means of payment. Transfer, store or trade in electronic form. Bitcoin is the earliest application of blockchain technology in the field of digital finance. According to the definition of ISO 22739 issued by the International Organization for Standardization, blockchain is a distributed ledger formed by sequentially adding blocks confirmed by consensus using cryptographic technology. The distributed ledger in the Bitcoin system records transactions in a distributed manner. Sharing and synchronization, the construction and application of distributed ledgers pay more attention to the application of smart contracts, cryptography and consensus mechanisms. At the same time, the synchronization of distributed ledgers can be realized in accordance with the decentralized or multi-centralized technical architecture.

Before distributed ledgers, the initial bookkeeping method in human economic activities was a single bookkeeping, and each business was recorded one account. After a certain period of time, an “inventory” must be carried out to sort out all the previous accounts. Because single bookkeeping has problems such as revenue and expenditure and difficulty in external verification, it has been gradually replaced by double-entry bookkeeping. Its important feature is that two or more accounts must be recorded for each business, and there is objective cross-checking between accounts. Relationship, the results of the account records can be balanced by trial calculations. However, due to the fact that the participants in double-entry bookkeeping are limited to the internal cashier, accountant, and general manager in charge of the unit and enterprise, plus external auditors at most, the possibility of fraudulent accounting still exists.

Unlike double-entry bookkeeping, where two or more accounts are recorded for the same transaction, the transaction information recognized in distributed bookkeeping will be confirmed to form a block and be recorded in the ledgers of all participants, each on the blockchain Blocks will be stamped with a unique “time stamp”, which can confirm that specific data exists at a specific time. In this distributed accounting technology, the accounting information of all N participants is exactly the same, and it is almost impossible to tamper with. For example, in a WeChat group of 100 people, the group owner sent a red envelope that can only be received by 10 people. The record of grabbing the red envelope is exactly the same on each mobile terminal. The “time stamp” records the exact time when the 10 red envelopes were received. As with the recipient, since all the group friends’ terminals simultaneously recorded the red envelope receipt results to form a distributed accounting, no one suspects that the red envelope account is a “fake account”. Since the birth of the WeChat red envelope, trillions have been issued. There has never been a false accounting record. The same is true for the record of sending bitcoins on the blockchain. The receiver can accept bitcoins through his own private key, but everyone on the chain records the transaction, thus ensuring the uniqueness of the same transaction. Avoid double payment. Distributed accounting ensures that if you want to modify the transaction information in a block, that is, one of the “ledgers”, you must modify all the contents of the block and its subsequent connected blocks, just like on the mobile phones of all group friends Modify the red envelope distribution record, so it is almost impossible to tamper with.

As the underlying technology of virtual digital currency, distributed ledger technology is a revolution in double-entry bookkeeping that has lasted for hundreds of years. This mechanism has greatly increased the difficulty of tampering with information, making “no fake accounts” truly technically realized. . The natural trust gene brought by distributed ledger technology has an epoch-making change in double-entry bookkeeping technology that may make false accounts. Its significance is no less than the transition from single ledger to double-entry bookkeeping, which will bring about the economic life of human society in the future. Significant impact and lasting impact.

Virtual digital currency based on blockchain technology, since the world’s first batch of bitcoins came out in January 2009, has continuously impacted human traditional financial thinking and has aroused widespread concern and controversy in the society. Different from traditional financial products, the existing financial market adopts distributed ledger-based blockchain technology to strengthen the protection of investors and improve the efficiency of risk management. The application of blockchain technology in the financial service industry may change The structure of the financial service industry and the future development direction of the entire financial industry. However, the emergence of encrypted virtual digital currency brings both challenges and risks. First of all, the global flow of encrypted virtual digital currency will have a certain impact on financial stability, including the risk exposure caused by the direct or indirect participation of financial institutions, and the operational risks caused by the application of encrypted virtual digital currency in payment and local currency settlement. The traditional financial market has increased the unstable factor of virtual digital currency assets. Secondly, virtual digital currency brings huge risks to the protection of financial consumers. In the past 12 years, as the price of Bitcoin increased from almost 0 to the highest of 63,000 US dollars in April 2021, the increase was astonishing, which triggered the general public’s pursuit of almost all virtual digital currencies, resulting in many valueless digital currencies. “Air coins” have become popular, making investors lose their money, and the issue of investor protection is extremely prominent. Finally, the disintermediation of encrypted virtual digital currency has brought regulatory difficulties. On an international scale, the challenge posed by blockchain is the contradiction between the global flow of virtual digital assets and the single regulatory legal system of each sovereign country. The anonymity of encrypted virtual digital currency brings about the problem of difficulty in determining the subject of legal responsibility, and it is easy to be used in illegal and criminal activities such as terrorist financing, money laundering, and dark web transactions.

It is also based on these risk factors of encrypted virtual digital currency. As early as December 2013, five ministries and commissions including the People’s Bank of China issued the “Notice on Preventing Bitcoin Risks”, identifying virtual digital currency as a specific virtual commodity. , Does not have the same legal status as currency, and prohibits relevant institutions from conducting business activities related to virtual digital currencies. On September 4, 2017, seven ministries and commissions including the People’s Bank of China jointly issued the “Announcement on Preventing Token Issuance Financing Risks”, confirming that the virtual currency issued in the Token Issuance Financing (ICO) is financing in the name of “commodity” The reality of “funds” is essentially an act of illegal financing without approval. On September 24, 2021, ten ministries and commissions including the People’s Bank of China and the Cyberspace Administration of China jointly issued the “Notice on Further Preventing and Disposing of the Risks of Virtual Currency Trading Speculation”, emphasizing that virtual currency-related business activities are illegal financial activities, and for the first time clarified that overseas The provision of services by virtual currency exchanges to residents in China via the Internet is also an illegal financial activity.

International experience of virtual digital currency supervision and legislation

General supervision usually refers specifically to a specific subject of a crime, and only when the subject is specific can it be made to bear the corresponding legal responsibility. The anonymity of encrypted virtual digital currency makes it difficult to determine the actual legal liability subject, which brings challenges to the fight against crimes using virtual digital currency as a tool. Since a country’s supervision of virtual digital currency transactions or exchanges is usually only within the scope of a sovereign state, the supervision and coordination of international organizations is very important. In response to the challenges and risks posed by blockchain-based virtual digital currencies, countries and international organizations have begun to develop independent or joint regulatory rules.

In 2017, the Bank for International Settlements Payment and Settlement System Committee (CPSS) and the International Organization of Securities Regulators (IOSCO) jointly issued the “Financial Market Infrastructure Principles” , which contains six elements: reduce complexity; improve end-to-end processing speed, thereby Improve the availability of assets and funds; reduce the coordination work across multiple ledger management infrastructures; improve the transparency and non-tampering of transaction records; improve network resilience through distributed data management; reduce operational and financial risks. As the two organizations CPSS and IOSCO represent the international banking supervision system and the securities supervision system to a certain extent, the financial market infrastructure principles jointly proposed by the two organizations have important guiding value for the future digital finance field. In particular, the argument that “distributed ledger technology fundamentally changes the way assets are stored” in this principle is very forward-looking under the current situation that the current financial system still relies on traditional double-entry bookkeeping, and reducing financial risks is no matter the current situation. China’s financial system is universal for virtual digital financial systems.

The 2009 G20 London Financial Summit decided to establish the Financial Stability Board (FSB). The FSB proposed in 2017: In view of the rapid development of financial technology, international institutions and national authorities should consider financial technology issues in their existing risk assessment and regulatory frameworks, and for the first time raised the issue of virtual digital currency allocation. The FSB further confirmed in October 2018 that encrypted digital assets are a kind of private assets with the functions and characteristics of digital transaction methods. Given that many encrypted digital asset platforms are transboundary in nature, these issues require international coordination. The FSB has never been absent in the development of virtual digital currencies. It vigilantly monitors the potential financial stability risks associated with encrypted digital assets. Due to its global flow characteristics, it is the common responsibility of the international community to prevent impacts on international financial stability.

It can be seen that international organizations such as CPSS, IOSCO, and FSB have fully realized the possible impact of encrypted virtual digital currencies and derivative stablecoins on the financial system, and have put forward the ideas of full attention and prudential supervision in the future. China is the world’s second largest economy and an important member of these three international organizations. Their regulatory thinking and regulatory methods for virtual digital currencies are of high reference value for China. In addition to the aforementioned international organizations, many countries have begun to regulate emerging virtual digital currencies through their domestic administrative, legislative and judicial systems.

The United States’ supervision of blockchain, virtual currency, and ICO is mainly carried out within the framework of its Securities Act. In 2017, the U.S. Securities and Exchange Commission (SEC) required all ICOs to be registered unless exempted. In 2018, the California Consumer Privacy Act was passed. The bill aims to change the way data is processed. It requires all technology company platforms to strictly protect the privacy of customers. For consumers who explicitly require platforms not to sell personal information, The platform must not sell the consumer’s personal information it collects. In October 2019, the United States Commodity Futures Trading Commission (CFTC), Financial Crime Enforcement Network (FinCEN) and the United States Securities and Exchange Commission (SEC) issued a joint statement to remind entities engaged in activities involving digital assets that they need to fulfill their anti-money laundering obligations. The Bank Secrecy Act is obliged to combat the financing of terrorism. In March 2020, the U.S. Congress discussed the “Encrypted Currency Act of 2020”. The draft divides digital assets into three categories: encrypted commodities, encrypted securities, and encrypted currencies. Administrative punishment provides a practical basis.

On May 25, 2018, the EU’s normative legal document on the protection of personal data, the General Data Protection Regulation (GDPR), was fully implemented. The regulations clarify the rights of data subjects such as the “right to portability”, “right to know” and “right to forget”, and how to protect data privacy and technical compliance for companies that collect and use personal data in controlling and processing data. All parties have put forward higher requirements and challenges, that is, not to process personal data in a way that is harmful, discriminatory, accidental or misleading to the data subject. The data subject should obtain the highest degree of autonomy in controlling their personal data; the data subject must communicate with the data controller to ensure their rights; the expected processing should meet the data subject’s expectations, etc. This is a milestone event for the EU in the field of data governance. In the context of today’s information system is pervasive and the digital economy has profoundly changed human life, this regulation, like other EU-level guidelines, applies to all member states and establishes a unified personal data. The protection path of the EU has clearly defined the direction of personal data circulation, which has become the consensus of EU countries in terms of data governance. The promulgation and implementation of the regulations have had a broad and profound impact on global data governance. At the same time, it will also have a profound impact on the launch of virtual digital currencies.

In December 2019, the European Central Bank launched the digital euro “EUROchain” project, aiming to establish a central bank digital currency (CBDC) that is anonymous in digital cash. In order to strengthen anti-money laundering and anti-terrorism financing, the European Central Bank has set up an anti-money laundering bureau and designed a brand new “anonymous voucher”. If users want to transfer CBDC without disclosing information to the Anti-Money Laundering Bureau, they need to use anonymous voucher, and the Anti-Money Laundering Bureau limits the number of coupons provided to each user. Vouchers are issued free of charge and cannot be transferred between users. They are used to limit the amount of CBDC that can be transferred anonymously. On July 14, 2021, the European Central Bank announced that the digital euro will officially enter a 24-month trial phase, which aims to solve key issues in the design, circulation and distribution of the digital euro and pave the way for the official launch of the digital euro.

On April 1, 2017, Japan formally implemented the amendment to the “Financial Settlement Algorithm” passed by the National Assembly. The bill officially recognized virtual currency as a legal means of payment , thus becoming the world’s first country to provide legal protection for virtual digital currency transactions. Since then, the Cabinet meeting passed the “Cabinet Office Order on Virtual Currency Exchange Operators”, which included the payment business involved in virtual digital currencies into the scope of supervision.

It can be found that in the field of virtual digital currency, foreign countries are establishing a regulatory framework, and setting regulatory rules through amendments to existing laws and legislation based on the digital economy is equivalent to setting up a public company threshold similar to listed companies. According to the securities law The requirements of mandatory information disclosure and investor protection are of important reference value for the future supervision and legislation of China’s virtual digital currency.

Establish regulatory rules for virtual digital currency based on blockchain

As a new thing, the global flow of virtual digital currency will have a certain impact on financial stability, including risk exposure caused by the direct or indirect participation of financial institutions, the reputational impact of financial regulatory agencies’ improper or inaction, and encrypted digital assets. Operational risks brought by the application in payment and local currency settlement, wealth effects and risks brought about by the extremely volatile market value of virtual digital currencies. In order to maintain the stability of the financial market and prevent the impact of digital financial assets on the existing financial system, the regulatory measures adopted by China should be said to be timely and appropriate. But the numbers of financial development is not to the people’s will, the virtual digital currency characteristics of the traditional cross-border flows of financial firewall hard work, to make financial supervision and implementation of legal constraints to keep up with the pace of digital financial development of the area Blockchain and distributed ledger technology can contribute to financial stability, so we need to learn from the “regulatory sandbox” system.

The concept of a regulatory sandbox was first proposed by the British government in March 2015. The regulatory sandbox is a safe space and a framework established by regulatory agencies to enable relevant companies to monitor and control the environment within a certain period of time. Innovate to conduct small-scale field tests, enjoy special exemptions, acquiescence, and other limited exceptions. In this safe space, fintech companies can test their innovative financial products, services, business models, and marketing methods without being immediately bound by regulatory rules when related activities encounter problems. The regulatory sandbox can enable more openness and dialogue between regulators and digital financial service providers, and it can also enable regulators to quickly modify and formulate regulatory frameworks. Legislative and law enforcement agencies need to take the lead in formulating relevant blockchain guidelines on the basis of current legal rules. At the same time, they must also consider how to combine traditional legal rules with current technical rules, and give play to their respective advantages. Execution and flexibility are better combined.

China can refer to the UK’s “regulatory sandbox” system to supervise blockchain financial companies, help these companies form a clearer corporate development strategy, reduce the adverse impact of regulatory uncertainty on companies, and contribute to the development of the blockchain field. Innovative development provides better financing channels. Third-party payment represented by Alipay and WeChat Pay has grown to become a benchmark for global financial inclusion under the relatively loose regulatory environment of the central bank. In the current wave of global digital finance development, the establishment of a national-level digital financial supervision sandbox and timely summary of successful experiences and failures can accumulate experience for future legislation and amendments. The blockchain testing supervision sandbox is assembleable. The industrial sandbox is a virtual testing environment formed by many companies in the industry. It can provide services for technology finance, customers, entrepreneurial incubation, education and scientific research, and fund investment. At the same time, sandbox technology also needs online monitoring to cope with real-time changes in the blockchain system, because digital legal currency and digital asset transactions are settled in real time, and transactions are conducted 24 hours a day, a week, and a day. If there is no real-time supervision, the transaction is in progress. Very easy to go wrong. This requires the use of “traditional supervision sandbox + industrial sandbox” for real-time supervision.

In October 2020, Article 19 of the “People’s Bank of China Law of the People’s Republic of China (Revised Draft for Solicitation of Comments)” announced by the People’s Bank of China stipulates that “RMB includes physical and digital forms”, laying the legal foundation for the birth of digital RMB. Article 22 of the law stipulates: “No unit or individual may produce and sell tokens, notes and digital tokens to replace RMB in circulation in the market.” In the future, the new “People’s Bank of China Law” will be officially implemented. Become the basic law of China’s virtual currency supervision.

Since the blockchain industry has not yet formed a unified industry standard and technical guidelines, in order to strengthen guidance and regulation, China should actively participate in the formulation of international standards related to blockchain and digital finance, and connect with the open source institutions and community organizations of international standards. Strengthen the communication between national standards and international standards, and continuously improve the international discourse power of China’s blockchain standard system. For corporate managers involved in virtual digital currencies, they can learn from the financial industry qualification certificate system issued by financial regulatory agencies to keep them away from illegal fund-raising and other activities, and establish a blockchain and digital financial access standard system. Carry out substantive review of blockchain financial companies, not just a simple filing with the National Cyberspace Administration of China, and eliminate those companies that have no blockchain technology under the guise of the blockchain. For investors in blockchain finance, referring to the division of investors in the “Measures for the Appropriateness Management of Securities and Futures Investors” issued by the China Securities Regulatory Commission, blockchain financial companies are required to truly “know your customers” for their investors (KYC )”, sell appropriate products to investors with equivalent investment capabilities and investment levels to prevent financial risks. The blockchain financial supervision regulations established based on these rules will truly bring the healthy development of blockchain finance in the new era.

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