“From OTC to OTC” Comparing the Similarities and Differences Between 94 and 621 Policies to Combat Virtual Currencies

Prior to 94, domestic cryptocurrency transactions were conducted through user transfers to exchange company accounts, while after 94, the era of “off-site” cryptocurrency transactions began.

On September 4, 2017, the People’s Bank of China and seven other departments jointly issued the “Announcement on Preventing the Risks of Token Issuance and Financing”(1), and on June 21, 2021, the People’s Bank of China interviewed some banks and payment institutions about virtual currency speculation(2), both of which brought shocks to the cryptocurrency market and plunged the prices of various cryptocurrencies.

1 The 2017 policy was mainly aimed at IC0

The announcement on September 4, 2017 was titled “Announcement on Preventing Risks of Token Issuance and Financing”, and the first sentence of the announcement pointed out that “Recently, domestic financing activities in the form of token issuance, including initial token issuance (IC0), have proliferated, and speculation is prevalent. Suspected of engaging in illegal financial activities, seriously disrupting the economic and financial order”. As we all know, 2017 was a year of various IC0 projects, and although there were an extremely small number of normal projects, the vast majority of them were scams under the banner of virtual currencies. The regulator took note of this risk and introduced the announcement in a timely manner.

According to the announcement, “token issuance and financing refers to the financing body through the illegal sale and circulation of tokens, raising bitcoin, ethereum and other so-called ‘virtual currency’ from investors, which is essentially an unapproved illegal public financing, suspected of illegal sale of tokens, illegal issuance of securities and illegal fund-raising, financial fraud, pyramid schemes and other illegal criminal activities”, is to “bitcoin, ethereum” as a financing body through the “token issuance and financing” of the assets collected.

Before the emergence of cryptocurrencies such as bitcoin and ethereum, criminal activities such as illegal fund raising and financial fraud had to be carried out through fiat currency, while criminal activities were carried out through raising cryptocurrencies, which undoubtedly increased the difficulty of supervision, thus in the 94 announcement, there is a sentence that “financial institutions and non-bank payment institutions shall not directly or indirectly provide products or services such as account opening, registration, transaction, clearing and settlement for token issuance and financing and ‘virtual currency'”.

Before 94, domestic cryptocurrency transactions were conducted through user transfers to exchange company accounts, and after 94, the era of “over-the-counter” cryptocurrency transactions began. In terms of policy implementation, the focus of regulation at the time was on “preventing participation in token financing issues through bitcoin and ethereum” rather than “participation in transactions between fiat currencies and bitcoin and ethereum”.

2 2021’s policy is aimed at the broader “virtual currency trading”

The title of the PBoC’s announcement in 2021 is “PBoC Interviews Some Banks and Payment Institutions on Virtual Currency Trading Speculation” and the first sentence reads “In order to thoroughly implement the relevant decisions and plans of the Party Central Committee and the State Council, implement the spirit of the 51st plenary meeting of the Financial Committee of the State Council, crack down on bitcoin The first sentence is “In order to further implement the relevant decisions and deployments of the CPC Central Committee and the State Council, implement the spirit of the fifty-first plenary session of the Financial Committee of the State Council, crack down on bitcoin and other virtual currency trading speculation, protect people’s property security, maintain financial security and stability ……”, it can be seen that, compared to 2017, the scope of the crackdown includes all “virtual currency”. The problem of “trading speculation”. For “trading speculation”, banks or payment institutions such as Alipay are a very important part of the process, so the scope of this ban is much larger than in 2017.

This is not the first time that restrictions on trading in fiat and cryptocurrencies have been mentioned, as back in 2013, five departments, including the People’s Bank of China, the Ministry of Industry and Information Technology, the Banking Regulatory Commission, the Securities Regulatory Commission and the Insurance Regulatory Commission, jointly issued the Notice on Preventing Bitcoin Risks, with the following requirements for financial institutions and payment institutions.

“They shall not directly or indirectly provide other Bitcoin-related services to their customers, including: providing Bitcoin registration, trading, clearing and settlement services to their customers; accepting Bitcoin or using Bitcoin as a payment and settlement instrument; conducting exchange services between Bitcoin and RMB and foreign currencies; conducting Bitcoin storage, custody and mortgage businesses; issuing Bitcoin-related financial products; using bitcoin as the investment underlying of trusts, funds and other investments, etc.”

And this policy literally seems vague. For example, in the period leading up to September 4, 2017, exchanges such as Hotcoin, OK and BTCChina opened accounts with financial institutions and conducted user top-ups and withdrawals through these accounts. What about the banks that provide financial account services to the major exchanges? Theoretically, the exchanges, not the financial institutions, are the ones that “perform bitcoin and RMB exchange services,” but they do provide bitcoin-related services to the exchanges’ customers.

The reason for this situation was probably due to the lack of understanding of Bitcoin at the time and the small size of the cryptocurrency market, which had limited impact. The September 4, 2017 requirement that “financial institutions and non-bank payment institutions shall not directly or indirectly provide products or services such as account opening, registration, trading, clearing and settlement for token issuance and financing and ‘virtual currency'” can be considered as a response to the The 2013 Notice on Preventing Bitcoin Risks is a refinement of the 2013 Notice, because as a financial institution, setting up accounts for exchanges for users to top up and withdraw fiat currency can at least be considered an indirect service for the exchange of virtual currency for RMB.

3 New Issues in the “OTC” Era

Before 2017, there was no such thing as “frozen cards” in the cryptocurrency world, as the exchanges’ corporate accounts were used for top-ups and withdrawals, and in 2018, there were sporadic cases of frozen cards, while in the last two years, the phenomenon of “frozen cards” has become more and more intense.

The main reason for “card freezes” is the receipt of funds involving telecom fraud. Due to the anonymity of bitcoin, it is a natural way for fraudsters to launder money. Generally speaking, fraudsters will quickly buy coins to transfer funds quickly, but many people who sell coins will have their cards frozen because they received fraudulent money.

Just as illegal fundraising did not emerge with the advent of cryptocurrencies, telecom fraud is not a new thing with the advent of cryptocurrencies. However, there is no doubt that the emergence of cryptocurrencies has greatly facilitated both types of criminal activity, and thus has attracted regulatory attention. If the September 4, 2017 ban focused on illegal fundraising and financial fraud, the June 21, 2021 HAB interview focused on the risk of money laundering. How big the market for money laundering is is evident just from the industry of telecom fraud, according to the People’s Daily and People’s Daily.

“A total of 322,000 cases of telecom network fraud were solved in 2020, 361,000 suspects were arrested, more than 272 billion yuan of funds involved were stopped and frozen, 8.7 million people were dissuaded from being cheated, and a total of more than 187 billion yuan of economic losses were recovered, effectively safeguarding the property security and legitimate rights of the people.”

“From January to May 2021, a total of 114,000 cases of telecom network fraud were solved nationwide, with more than 14,000 criminal gangs broken up and 154,000 suspects arrested. A total of 265.4 billion yuan of funds involved in the cases have been stopped urgently since this year. 99.1 billion yuan of economic losses were recovered for the public.”

In the first five months of 2021, the “stop payment” amount of 265.4 billion yuan is already close to last year’s annual amount of 272 billion yuan, which shows that telecom fraud activities are still rampant, and a large part of these stopped payments will be “laundered” through the very “efficient” money laundering cryptocurrency A large portion of these stopped payments are “laundered” through cryptocurrencies, which are very “efficient” at laundering money. After weighing the benefits of cryptocurrencies to the economy (such as the use of waste water and electricity) against the negatives (environmental issues, money laundering), it is not surprising that the PBoC has further tightened its ban on virtual currency trading.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/from-otc-to-otc-comparing-the-similarities-and-differences-between-94-and-621-policies-to-combat-virtual-currencies/
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