First release|Deng Jianpeng: What about the United States to accelerate the regulation of stablecoins in China?

This article was originally created by Deng Jianpeng, a professor at the School of Law of Central University of Finance and Economics, and authorized Golden Finance to publish it.

Since 2020, stablecoins have become the key “infrastructure” of the crypto market, with a huge potential impact. According to Forbes’ prediction, 2022 stablecoins will become mainstream. According to a report by the US President’s Working Group, between October 2020 and October 2021, the utilization rate of stablecoins has increased by 500%, and this rate of adoption does not seem to decrease. I have previously analyzed the various risks of stablecoins in depth. Next, I want to talk about two issues: First, the United States accelerates its efforts to regulate stablecoins; second, how should Chinese regulators respond?

1. “Foreplay” of U.S. regulatory policy ─ intensive inquiries, reports and hearings

After the US Financial Stability Supervisory Board released its report on stablecoins in November 2021, Deputy Secretary of the Treasury Nellie Liang recently stated that “if Congress does not enact legislation, regulators will try to use the power they have.” Regulators claim that investor runs on stablecoins may cause damage to the market, and if such a run occurs, the huge scale of the market crash may disrupt traditional financial markets.

Also in November 2021, the Congressional Banking Committee wrote to a number of stablecoin issuers, including Coinbase, Gemini, Circle, Paxos, TrustToken, Centre, Binance US, and Tether. In the letter, the committee asked issuers to provide stablecoin purchases, minting processes, restrictions, and issuance and redemption data, and summarize their company’s redemption mechanism (including its conversion into U.S. dollars).

In December 2021, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing on stablecoins. The committee chaired Sherrod Brown and Senator Patrick J. Toomey. ) Host with the topic “Stablecoins: How do they work, how do they use them, and what are their risks?”.

At the hearing, Brown revealed that the replies of stablecoin issuers were not very clear, which made lawmakers unable to believe that most ordinary customers can get more protection after purchasing stablecoins. Senator Patrick J. Toomey (Patrick J. Toomey) agreed that stablecoins need a new regulatory system, “Stable currency supervision should be strictly customized and coordinated in the United States and globally. In addition, supervision should seek to maintain the United States. International competitiveness. Regulators should recognize that privately issued stablecoins will not undermine the international status of the U.S. dollar, but well-managed stablecoins can actually support it. Finally, regulation should allow stablecoins to interoperate with the current financial system. “

Before the hearing began, Tumi published the principles of stablecoin supervision on the Banking Commission website. Tumi proposed the following principles, which will affect his upcoming stablecoin legislative framework:

Stable currency issuance should not be limited to depository institutions.

First, the business model of stablecoin issuers is different from that of traditional banks.

Second, requiring all stablecoin issuers to become banks will stifle innovation.

Third, the supervision of payment activities should create a level playing field.

Stablecoin issuers will choose from at least three regulatory systems based on their business models: (1) Operate in accordance with traditional bank charters; (2) Obtain special-purpose bank charters specifically designed for stablecoin suppliers in accordance with the new legislation; ( 3) Register as a money transmitter under the existing state system, and register as a money service company under the FinCEN federal system. (4) All stablecoin issuers should adopt a clear redemption policy, disclose requirements for assets supporting stablecoins, and may meet liquidity and asset quality requirements. (5) Commercial entities should be eligible to issue stablecoins, as long as they comply with these systems. (6) Interest-free stablecoins are not necessarily regulated like securities. (7) Supervision should protect the privacy, security and confidentiality of individuals using stablecoins, including allowing customers to choose not to share any information with third parties. (8) In view of emerging technologies such as stablecoins, the financial supervision requirements under the Banking Secrecy Law should be modernized, including requirements for existing financial institutions.

At this hearing, Dispat of Circle (the issuer of stable currency USDC) and Masari’s lawyers jointly proposed a stable currency regulatory framework that will limit the types of reserve assets that stable currency issuers can hold , And will establish a general system for minting and redeeming stablecoins. It is worth noting that at this stablecoin hearing, Tether, the most risky stablecoin issuer recognized by the industry and the largest market capitalization, did not attend. Currently, USDT is still the dominant stable currency.

On December 21, Fitch Ratings issued a report stating that improved supervision may alleviate the credit risk of stablecoins. Fitch believes that the US regulatory approach is particularly important for the medium-term development of the industry, because most of the major stablecoins currently traded are pegged to the US dollar, and this situation is expected to remain unchanged in the medium term.

In summary, the U.S. Congress has a more detailed and profound understanding of the discussion, connotation, and risks of stablecoins. Some regulatory guidelines have roughly taken shape, which will surely directly shape the stablecoin market in the next year or two, and then rely on its strong The ability of financial supervision and the “long-arm jurisdiction” mechanism to discipline the crypto market cannot but arouse the attention of Chinese regulators.

In addition, some leaders of the US financial regulatory agency believe that it is not necessary to vigorously promote digital legal currency and issue digital dollars like China. Most stablecoins are linked to the US dollar. For ordinary people, their functions and payment convenience are almost exactly the same as digital legal currencies, and they even play a huge role in expanding the international power of the US dollar. In addition, Chinese investors actually hold a huge amount of stablecoins. At the same time, China’s financial regulatory agencies have not issued detailed reports and regulatory guidelines on the risks of stablecoins. The author believes that this area is extremely worthy of attention. I would like to put forward the following policy recommendations:

2. The current limitations of China’s stable currency regulation

Compared with the investigation and prosecution activities of the US prosecutors on USDT, the Chinese judicial institutions have deficiencies in the following aspects: First, the scope of Chinese judicial prosecutions is limited, and the supervisory initiative is insufficient. According to Article 18 of the Criminal Procedure Law of the People’s Republic of China, the cases directly filed and investigated by the procuratorate do not include economic and financial crimes such as fraud; second, the scope of China’s jurisdiction is limited. Tether’s place of registration and operation are all overseas, and my country’s judicial authorities lack effective jurisdictional basis for USDT issuers, custodian banks, and cryptocurrency exchanges.

At the same time, compared with the exploration of stable currency supervision in the United States, China’s supervision is facing many difficulties: First, the regulators have insufficient understanding of stable currencies such as USDT, and the legal definition is not clear. The “Notice on Preventing Bitcoin Risks” issued by the People’s Bank of China and other five ministries in 2013 only pointed out that Bitcoin is a specific virtual commodity; the “Announcement on Preventing Token Issuance Financing Risks” issued by the seven ministries in 2017 aims to Completely prohibit illegal token financing issuance activities. None of these regulatory documents mention the regulatory intentions, legal definitions and risk warnings for USDT. In November 2020, the “China Financial Stability Report (2020)” mentioned stablecoins for the first time (PBC Financial Stability Analysis Group, 2020). In July 2021, the “White Paper on China’s Digital RMB R&D Progress” pointed out that some commercial institutions The planned launch of a global stable currency will bring many risks and challenges to the international monetary system, payment and clearing system, monetary policy, and cross-border capital flow management (People’s Bank of China Digital RMB Research and Development Working Group, 2021). This shows that my country’s financial regulatory agencies are gradually paying attention to the risks of stablecoins, but they are currently mainly at the stage of risk warning.

Second, my country lacks relatively clear regulatory goals and frameworks for stablecoins, and the corresponding regulatory principles and standards have yet to be published. Taking major international financial organizations as an example, the Financial Stability Board advocates the concept of “same risks, same activities, and same supervision” to qualitatively penetrate stable assets, and proposes to establish effective risk prevention and control, reserve management, transparency, anti-money laundering, etc. A high-level recommendation; the International Securities Regulatory Commission recommended in the “Global Stablecoin Initiative Report” that stable assets with payment functions should be included in the CPMI-IOSCO financial market infrastructure principles; the Basel Banking Committee should include stablecoins in the macro-prudential capital adequacy ratio The regulatory framework applies the most stringent regulatory requirements. The above-mentioned international financial organizations all attach great importance to the risks of stable currencies and have proposed relatively clear regulatory frameworks. In contrast, the incompleteness of the financial supervision principles and frameworks of my country’s stablecoins and other blockchains has caused difficulties in the resolution of law enforcement and judicial disputes.

Finally, my country’s regulatory agencies lack effective regulatory tools, and USDT risk monitoring, identification, and disposal are difficult. First, under the territorial principle, regulatory agencies lack effective law enforcement measures against overseas Tether, Bitfinex and other issuers and exchange entities; second, the existing financial anti-money laundering and foreign exchange monitoring systems have blind spots and loopholes in the monitoring of USDT. A large number of USDT over-the-counter transactions occur at home and abroad, and funds flow point-to-point through bank accounts and third-party payment channels, which is difficult to monitor. In the face of the regulatory dilemma of blockchain finance, traditional models are mostly limited to announcements that prohibit cryptocurrency or stable currency transactions, and the effectiveness of the regulation remains to be discussed.

3. Regulatory countermeasures

First, the legal attributes of USDT should be clarified. It should be noted that stablecoins cannot be regarded as an independent monetary system, because they do not have the two characteristics of a stable value anchor and centralization (Wang Huaqing and Li Liangsong, 2019). Stablecoins are not recognized by sovereign countries or given unlimited legal compensation by social recognition. Private institutions monopolize the issuance of stablecoins and act as credit intermediaries. This private cryptocurrency is a new form of the “digital age” and has changed currency issuance. The main body and credit method of China have forced new changes in the old financial regulatory measures and monetary policy measures based on traditional physical currencies (Zheng Yu, 2020). Stable coins have a relatively large compliance risk, which will weaken the credit foundation of stable coins and will not have a stable value anchor. The circulation of different types of stablecoins in a single market can easily lead to conflicts and confusions in the currency system, increase transaction costs, and are not conducive to the formation of a centralized currency system. Therefore, although stable currency has the economic attributes of currency, it cannot become the legal currency or standard currency of a sovereign country, and it does not have the same legal status as legal currency. Investors use stable currencies such as USDT for legal currency exchange and currency-to-currency transactions, essentially relying on the USD credit behind USDT to trade with other legal currencies or cryptocurrencies, which can be seen as an extension of the US dollar credit on a global scale.

The author believes that USDT is a payment tool supported by the actual purchasing power represented by US dollar assets, which can be characterized as foreign currency notes. After the user invests $1, Tether deposits the user’s $1 into the custodian bank or trust company account as a reserve fund. The user and the Tether company, and Tether and the custodian respectively constitute a credit and debt relationship. Tether is indebted to the user and enjoys deposit claims to the custodian. USDT is the proof of the credit and debt relationship between the user and Tether priced in U.S. dollars. For foreign countries (such as China), USDT in circulation represents a certain amount of foreign currency assets, that is, foreign currency notes. In this regard, my country can include USDT in the broad scope of foreign currency and foreign exchange assets, use foreign exchange, anti-money laundering and other regulatory frameworks to combat USDT speculation, and prudently strengthen the supervision of USDT circulating in China.

Secondly, we should give full play to the regulatory role of judicial initiative at the procedural and substantive levels. At the procedural level, Chinese procuratorial organs should actively strive for jurisdiction over USDT-related entities. According to the principle of liability for commercial activities, the USDT issuer, the actual controller of the exchange, and the place where the infringement occurred are the core of the judicial authority’s establishment of jurisdiction. The judiciary can penetrate the appearance of personality and confirm the actual controller of the issuer and the trading platform based on the appearance of the behavior. Specifically, in the field of infringement disputes, according to Article 28 of the Civil Procedure Law, investors can file a lawsuit against Bitfinex and Tether for market manipulation, fraud, or data privacy leakage based on the place where the infringement is carried out and the place where the infringement result occurs; In terms of cybercrime issues, the “Opinions on Several Issues Concerning the Application of Criminal Procedures in Handling Cybercrime Cases” enumerates the location of the crime of cybercrime cases, that is, where the public security and other law enforcement agencies can locate the Tether server and the location of the computer information system used by the victim , The location of the victim when the victim was infringed and the place where the victim’s property was damaged, etc., filed an investigation against Tether, and prosecuted by the prosecutors. At the same time, judicial authorities can apply for judicial assistance from the judicial authorities in Hong Kong, China where Tether is headquartered or where the server is located, such as joint investigations, judicial collection of evidence, execution of judgments, and the use of the “blacklist” mechanism to freeze USDT. In the process of investigating, fighting crime, and recovering property, the intermediate and high courts that have jurisdiction over the case may also require the issuer to fulfill the fiduciary obligation of fund disclosure, or require relevant exchanges to provide necessary assistance to expand the scope and scope of judicial activities. Intensity.

At the substantive level, we will give full play to the guidance of judicial initiative, and provide useful exploration for the courts to deal with USDT-related cases when they face the “unjudicial” problem. In the judgment, the court can summarize the comparison points of the USDT case, such as the facts of the case, the focus of the dispute, and the main points of the judgment, and refer the case with the unified application of law and the guiding significance of the rules to a higher-level court or a special court (such as a financial court) for trial, and give full play to the case. The binding force of the guidelines. In addition, judges are encouraged to make useful explorations within the legal framework, considering the political, legal, and social effects of judicial judgments based on factors such as financial supervision and financial justice, public interest and individual private interests, and to measure the consequences of such new or difficult cases. The criminal field strengthens the criminal and legal system of stablecoins, and combats USDT’s instrumental tendency in crimes such as theft, fraud, and money laundering; in the civil field, the effectiveness of related actions can be determined under the principles of respect for will autonomy and legal property protection. By giving play to the rule of supplementary rules of judicial judgments, it provides reference for legislation and supervision.

In addition, regulators should speed up the construction of a stable asset supervision system. my country can learn from the experience of the United States and international organizations, penetrate USDT’s trading activities based on the concepts of tolerance, prudence, and pre-regulation, and follow the concept of “same risks, same functions, and same supervision”, from market access, anti-money laundering, foreign exchange management, and Formulate regulatory measures for cross-border coordinated supervision.

In terms of market access, my country’s regulatory agencies can categorize and formulate access standards: In terms of subject regulation, for stablecoin issuers that are not registered in China but actually provide services to Chinese users, the regulatory agency may require issuers and encryption in accordance with the principle of territorial supervision. The managers and actual controllers of currency exchanges, as well as over-the-counter USDT exchangers (OTC) perform anti-money laundering filing and transaction filing obligations. Regarding behavioral content regulation, it is possible to strengthen the supervision of the payment function of stable currencies such as USDT, requiring stable currency issuers, cryptocurrency exchanges, and payment institutions and individual merchants that use stable currencies to apply for prepaid card licenses or online payments similar to third-party payments License, or launch a “crypto asset payment” license. In the future, we can try to introduce stable currency into regular exchange transactions, strengthen the front-line supervision and node management of exchanges and payment institutions, and standardize the access and operating activities of stable currency payment services.

In terms of anti-money laundering, regulatory agencies should eliminate blind spots in anti-money laundering monitoring and incorporate stablecoins such as USDT into the existing anti-money laundering legal framework. Behavior and other elements to improve the pertinence and operability of anti-money laundering supervision; second, in terms of customer identification, issuers, exchanges and exchanges are required to strictly perform KYC procedures such as real-name authentication, weakening USDT’s anti-censorship properties, and promoting the chain Cross-validation and related sharing of transaction data on the off-chain; the third is to strengthen the monitoring and management of bank accounts. Public security agencies and commercial banks should strengthen the full chain monitoring of funds laundered with USDT, strengthen the identification of funds from unknown sources and abnormal bank accounts, and can take measures such as marking, inquiries, limit transfers, and freezing, while focusing on strengthening the USDT The identification and monitoring of over-the-counter exchangers, regular inspections of capital flows, and criminal liability for exchangers who “knowingly” and “negligently” accept stolen money. Fourth, financial regulatory agencies can use the idea of ​​”embedded supervision” to embed smart contracts on public chains such as Ethereum and TRON, dynamically track USDT addresses and blocks in China, and embed anti-money laundering regulatory requirements into the stable currency system; At the same time, the regulatory agency can get in touch with the issuer Tether and the cryptocurrency exchange and establish cooperation, learn from the “fund travel rules” to strengthen the monitoring of large and abnormal funds, and if necessary, require the cryptocurrency exchange and Tether to assist the regulatory agency in the specific USDT Addresses are included in the blacklist and stable currency freeze measures are adopted. 

In terms of foreign exchange management, foreign exchange regulatory agencies should firstly follow the development trend of USDT at home and abroad, strengthen research on USDT issuance, circulation mechanisms and application scenarios, and enhance the professionalism and forward-looking nature of supervisors; second, try to stabilize USDT and others The currency is included in my country’s foreign exchange regulatory framework and balance of payments, establishes the approval, registration and filing management system for the two-way exchange settlement and sales of stable currencies such as USDT and the renminbi, and strengthens the position management of domestic renminbi accounts and foreign currency accounts of individuals or enterprises. Identify suspicious transactions; the third is to strengthen technical supervision, use blockchain, big data, artificial intelligence and other regulatory technology to improve foreign exchange supervision capabilities, collect suspicious account node information, and guide cryptocurrency exchanges, stable currency exchanges and issuers based on risk The principle of neutrality assists in combating USDT-related foreign exchange speculation. When necessary, the use of USDT and other stable currencies in domestic transaction scenarios can be explicitly prohibited.

In terms of cross-border coordinated supervision and coordinated governance, my country’s regulatory authorities should actively cooperate with overseas judicial and law enforcement agencies to deepen their understanding of the risks of stablecoins, jointly explore cross-border stablecoin regulatory innovation mechanisms, and promote the formulation and supervision of international stablecoin regulatory standards Implementation of the framework. At the same time, the central bank can lead the establishment of a “cross-border supervision sandbox” as a collaborative supervision pilot, incorporating stable assets such as USDT into the sandbox observation test. Article 22 of the “People’s Bank of China Law of the People’s Republic of China (Revised Draft for Comment)” promulgated in October 2020 stipulates that “No unit or individual may make or sell tokens, coupons and digital tokens to replace RMB in the market. Circulation.” This prohibitive regulation may be adjusted to a flexible authorization license in the future, that is, “Without the permission of the People’s Bank of China, no unit or individual may make or sell tokens, coupons, and digital tokens to replace the renminbi. Circulate in the market.” Accordingly, in the future, regulators can authorize compliant and technically competent financial technology institutions to issue RMB-pegged stablecoins that are used in specific scopes and scenarios, and use them as a supplementary means of payment, which can be included In the field of electronic currency, together with the digital renminbi, we will jointly promote the construction of digital infrastructure, resist the erosion of the renminbi ecology by stable currencies such as USDT, and open up domestic and foreign application scenarios.

Fourth, the conclusion

As an extremely important “passport” in the cryptocurrency market, USDT has become more and more popular with the rise of the entire private cryptocurrency and the investment needs of Chinese investors. As stablecoins gradually spread to the traditional financial market, they will pose greater challenges to the current financial supervision and legal system. In the absence of legal rules to provide deterministic guidance, China needs to be guided by financial risk prevention and investor rights protection, assess the risk of USDT through economic substance based on a prudential framework, follow up and judge its trends in a timely manner, and formulate targets for USDT and other legal currencies Countermeasures for mortgage-based stablecoins. Regulators by incorporating the USDT stable currency, a new blockchain financial innovation format, into the regulatory vision and legal framework in a timely manner, and updating regulatory concepts and methods are important for enhancing the international competitiveness of the renminbi, protecting the rights and interests of investors, and maintaining my country’s financial security and stability. Practical significance.

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