Securities Daily: The State Council’s financial committee has issued a heavy voice to crack down on bitcoin trading, experts say virtual coin “profit makers” will face multiple risks

Project side, trading platform, miners will face multiple risks

Securities Daily: The State Council's financial committee has issued a heavy voice to crack down on bitcoin trading, experts say virtual coin "profit makers" will face multiple risks

On May 21, the Financial Stability Development Committee of the State Council (hereinafter referred to as the “FSC”) pointed out in its meeting that it would “crack down on bitcoin mining and trading, and resolutely prevent the transmission of individual risks to the social sector. The FSC’s heavyweight voice once again clarified the financial regulators’ strict regulatory attitude towards bitcoin.

Bitcoin prices once briefly fell nearly $5,000 to more than $33,000. As of May 22, over 170,000 people in the crypto-digital coin market exploded in 24 hours, translating to over RMB 6.45 billion in funds going up in smoke, and related blockchain concept stocks in the U.S. stock market also saw heavy losses.

Bitcoin and other crypto digital coins have surged and plummeted with huge risks, and many investors have suffered property losses. Several industry experts have pointed out that the launch of the digital RMB, the high energy consumption of bitcoin mining and money laundering issues are important factors contributing to this round of regulation. Investors should also fully understand the nature and risks of bitcoin and other crypto-digital coins, and refrain from participating in any form of trading or speculation activities.

Preventing individual risks
Transmission to the social sector
This year, the market for crypto-digital coins such as Bitcoin has been extremely hot, and the myth of “100 times coin” and “1,000 times coin” has stimulated the market’s sensitivity, and a large number of domestic individual investors have followed the trend to enter the market. This year, the crypto-digital coin market has become popular with speculation on worthless air coins, and soaring and plummeting has become the norm, attracting more and more investors to participate in high-leverage trading, with frequent blowouts and huge risks.

From past policies, “preventing financial risks” is the main purpose of China’s strict regulation of crypto-digital coins. Financial regulators have repeatedly stressed that bitcoin and other crypto-digital coins do not have monetary properties and should be protected against related financial risks.

On May 18, China Internet Finance Association, China Banking Association and China Payment Clearing Association jointly issued the “Announcement on Preventing the Risk of Speculation in Virtual Currency Trading”, emphasizing that crypto-digital coins do not have monetary properties and should not and cannot be used as currency in the market. Financial institutions, payment institutions and others are not allowed to carry out business related to crypto-digital coins. In fact, back in 2017, in order to implement the spirit of the National Financial Work Conference, protect the legitimate rights and interests of investors, and prevent and resolve financial risks, seven ministries and commissions, including the Central Bank, jointly issued the Announcement on Preventing Risks of Token Issuance and Financing. In addition, at the Boao Forum for Asia 2021 Annual Conference, Li Bo, deputy governor of the central bank, clearly stated that “it is necessary to ensure that crypto assets do not trigger serious financial risks.”

The Finance Committee meeting, on the other hand, reiterated the prevention of financial risks, emphasizing “resolutely preventing the transmission of individual risks to the social sector” and maintaining the stability of the financial order.

“At present, the limited scale of virtual coins such as bitcoin entering the trading market easily creates an illusion of ‘odd goods available’ for investors, and is easily influenced and controlled by a few institutional investors or individuals. At the same time, many investors tend to hold the mentality of ‘get rich overnight’, and trading leverage is usually magnified to 5 times or even higher, which makes trading risky for investors in the case of high price volatility.” Chief researcher of China Merchants Union Financial and part-time researcher of Fudan University Institute of Finance Dong Ximiao told the Securities Daily.

In this context, virtual coin investors jumping to defend their rights due to the bursting of positions have occurred from time to time. According to several media reports, on May 20, a user of virtual coin trading platform was suspected of jumping from a rooftop to defend his rights, and on May 19, several virtual coin trading platforms staged “unplugging” operations due to the collective plunge of bitcoin and other crypto-digital coins. Coinbase, the largest crypto-digital coin trading platform in the U.S., had its website and app down, and another trading platform, Coinan, announced the suspension of some crypto-digital coin withdrawals. Investors who are keen to trade with high leverage may have suffered losses because the trading platform was down and unable to operate.

“Bitcoin is far more speculative than other financial and monetary market varieties, and irrational speculation has led to repeated long and short position explosions, causing serious damage to wealth and detrimental to social stability.” Zheng Lei, chief economist of Baoxin Finance, told the Securities Daily.

“Crypto digital coins, as alternative investment targets, trigger more complex and diverse risks compared to traditional financial instruments.”

An industry analyst told Securities Daily that in the crypto-digital coin market, where regulation is missing and information is not equal, the coin price is highly susceptible to influence and manipulation by a few institutional investors, while individual investors are at a disadvantage in terms of information access. In such a situation, it is more likely to lead to widespread asset depreciation of individual investors, resulting in “individual risk”.

He further pointed out that, in particular, some investors have used lending and financing channels to make highly leveraged investments, which means that the risk of significant devaluation of crypto-digital coins may create a higher risk of transmission to the traditional financial sector than before, which will affect the stability of the financial order.

Zhang Xiaoyan, vice dean of Tsinghua Wudaokou School of Finance, believes that the regulatory policy of virtual coins such as Bitcoin is to protect small and medium-sized investors. The trading of virtual coins lacks effective regulation and their prices are easily manipulated, resulting in up and down prices and violent fluctuations. China has a large number of retail investors, and the commonality of small and medium investors is that they have little financial knowledge and do not have a deep enough understanding of virtual coins. The regulatory policy is protecting the hard-earned money of retail investors.

Three major factors
The regulatory strike
The rare voice of the Financial Committee has surprised the industry, and more stringent domestic regulatory measures for crypto-digital coins may be on the way.

Some believe that the direct reason for the FSC’s focus on cracking down on bitcoin is to clarify its non-currency attributes, create a better environment for the launch of the digital yuan, and better maintain financial security.

According to some industry insiders, a clear message from this FSC meeting to ordinary people is not to get involved in bitcoin trading and to prevent individuals from losing their property in the process of trading bitcoin. The properties of bitcoin and digital yuan are completely different. Digital yuan digitizes the currency for easy use, while bitcoin is treated as an illegal currency to be traded for profit. In this way, the legal currencies of various countries will be affected, and the financial regulator’s heavy-handed crackdown on bitcoin will maintain the authority of the digital yuan.

Dong Ximiao believes that the financial management should increase its efforts to crack down on illegal trading activities of virtual coins, maintain the normal economic and financial order, and create a better environment for the official launch of China’s digital RMB. At the same time, investor education should be further strengthened and improved, the relevance and effectiveness of education should be enhanced, and the risk identification and prevention ability of ordinary investors on virtual coins should be improved. Investors should also fully understand the nature and risks of bitcoin and other virtual coins, withstand the temptation to protect their “wallets” and not participate in any form of trading or speculation.

In addition, industry experts generally believe that the high energy consumption of bitcoin will hinder the achievement of carbon emission reduction goals, which has become an important reason for the introduction of this round of regulation.

Zheng Lei said, bitcoin mining power consumption and low carbon emission reduction goals conflict, and since this year, energy and raw materials prices have increased significantly, mining power consumption further exacerbated the power tension.

An industry insider who wished to remain anonymous told the Securities Daily that bitcoin’s impact on carbon neutrality, capital outflow channels, and the use of token (crypto digital coins) for illegal financing in three areas has caused a heavy-handed regulatory crackdown.

In April, an academic paper published in the scientific journal Nature Communications gave the opinion that “Bitcoin mining activities could undermine China’s carbon reduction efforts. According to the paper, the study found that without any policy intervention, annual bitcoin blockchain energy consumption in China is expected to peak in 2024 at about 296.59 terawatt hours, with a corresponding 130.5 million tons of carbon emissions, which ranks in the top 10 of 182 cities and 42 industrial sectors in the country.

“Bitcoin miners directly consume electricity, and the total power consumption of Bitcoin will only increase as network-wide computing power rises.” William Li, chief researcher at OEE OKEx Research Institute, told the Securities Daily that the latest data from the Cambridge University Bitcoin Electricity Consumption Index (CBECI) shows that bitcoin mining already consumes more electricity than more than 100 countries and regions such as Norway and the Netherlands, ranking around 28th in the world.

In addition, there is a risk of the market using virtual currencies such as Bitcoin to launder money, especially in terms of helping domestic capital outflows, causing some impact on the existing foreign exchange system.

Because virtual currencies have characteristics such as anonymity and wide international circulation, criminals have used virtual currencies to exchange across borders in recent years to convert criminal proceeds and gains into legal tender or property abroad, which has become a new means of money laundering crime to some extent.

The reporter noted that in early May, the Hefei police uncovered an underground money laundering case, and it is understood that the suspects used trading of crypto digital coins such as bitcoin to specifically help criminal gangs launder the money, involving a flow of tens of billions of yuan. The scale and number of transactions far exceeded the traditional money laundering model.

“The massive movement of funds in and out through the virtual coin trading route may lead to the failure of the foreign exchange management system. Many governments have warned about virtual coin trading, and the trend is gradually to strengthen regulation.” Zheng Lei said.

Yu Jianing, the rotating chairman of the Blockchain Special Committee of the China Communications Industry Association and principal of Firecoin Education, told the Securities Daily, “Compared with traditional money laundering crimes, the money laundering process of crypto-digital coins involves the conversion of stolen money into virtual currency and the exchange of crypto-digital coins into legal tender, and the transaction process and transaction records between crypto-coins are complicated and numerous and difficult to confirm, especially the on-chain assets The transfer contains multiple transaction addresses and multiple transaction paths, and these assets go through multiple layers of decentralized transfers, mixed coin service systems, and into services and dark networks that do not require identity verification, making a complete dissection of the entire money laundering crime process very difficult.”

Project parties, trading platforms, and miners
will face multiple risks
The crypto-digital coin market fell in response to the Financial Commission’s meeting after the heavyweight voice.

Virtual coin quotation software non-small App data shows that once the news came out, bitcoin prices began to fall from near $38,000, once down to $33,598, down more than 30% in the past month; ethereum once fell to $2,113, and other coins also fell to varying degrees. According to Bitcoin Home data, as of May 22, more than 170,000 people across the network burst their positions in 24 hours, which translates to more than 6.45 billion yuan of funds going up in smoke.

In addition, the impact of this, the same day the U.S. stock blockchain concept stocks also suffered a heavy setback, fell across the board.

According to the data from FUTURE, as of the close of May 21, Bit Mining plunged more than 23% to US$9.75; Ninth City fell more than 11%; Jia Nan Technology and Yibang International fell 9.23% and 7.69% respectively; Coinbase, the “No. 1 crypto asset stock”, fell 3.88% to close at US$224.35. Coinbase closed at $224.35, with its market value shrinking to $46.813 billion.

In the medium to long term, the Financial Committee’s heavy-handed attack aims to maintain financial order and security, and virtual coin project owners, trading platforms and miners may face multiple legal issues.

“The impact of this FSC meeting on the virtual coin industry depends on the strength of management’s disposition.” Zheng Lei said mining may be banned first, and some domestic companies are still providing services to buy and sell virtual coins in yuan, and may stop such services in response to regulatory requirements despite having servers located outside the country.

“This will certainly have a profound impact on the ecology of the virtual coin industry.” Ding Feipeng, director of the criminal department of Beijing Shanghuang Law Firm, told the Securities Daily that, for one, token issuance and financing in the name of mining may be comprehensively called off, and clues suspected of illegal fund raising, illegal issuance of securities or illegal offering of token tickets and other crimes may be transferred to judicial authorities; second, contract trading on virtual coin trading platforms, I’m afraid, cannot continue to run, and even further accountability cannot be ruled out Third, after domestic mining is completely banned, miners and others will face the pressure of transformation or domestic sales to export, and some model coin miners, may face the risk of closure or user rights defense. In addition, virtual coin project parties, trading platforms and mining farms, etc. may appear a new round of “sea tide”.

On May 18, the Inner Mongolia Development and Reform Commission issued an announcement on the establishment of a reporting platform for virtual currency “mining” enterprises, which is fully open to receiving reports on four types of virtual currency “mining” enterprises. As early as the end of February, Inner Mongolia requires a comprehensive retreat “mining” project: on the one hand, the requirements of the “new virtual currency mining project is strictly prohibited”; on the other hand, the requirements of the “comprehensive cleanup and shutdown of virtual currency mining project. On the other hand, it is required to “completely clean up and shut down virtual currency mining projects, and withdraw them all by the end of April 2021”.

In an article written by Guan Qingyou, the chief economist and president of RuYi Financial Research Institute, it was pointed out that from the perspective of ordinary investors, an investment target with huge volatility and obvious headiness like bitcoin is not suitable for everyone, and investors should recognize their own position and choose the target that matches their situation for investment.

Posted by:Helen,Reprinted with attribution to:
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