Zhao Binghao: Extraterritorial Experience and Chinese Solution to the Challenge of Encrypted Digital Currency Regulation

1. Questions

On September 4, 2017, seven ministries including the People’s Bank of China issued the “Announcement on Preventing Token Issuance and Financing Risks” (hereinafter referred to as the “Announcement”), and encrypted digital asset exchanges are no longer allowed in my country to directly conduct legal currency and encrypted digital currency. exchange transactions between. Since then, the exchange of encrypted digital currency in China has ended. On September 24, 2021, ten departments including the People’s Bank of China, the Central Cyberspace Administration of China, the Supreme People’s Court, and the Supreme People’s Procuratorate jointly issued the “Notice on Further Preventing and Handling Hype Risks in Virtual Currency Transactions” (hereinafter referred to as the “Notice”), Determining cryptocurrency-related businesses as illegal financial activities. But at the same time, stablecoins have ushered in a leap forward in the world. Since the direct exchange of fiat currency and “virtual currency” and the operation of exchanges as exchange intermediaries are banned in my country, my country’s encrypted digital currency investors have chosen stablecoins as an alternative way of legal currency and encrypted digital currency circulation. In other words, since my country completely prohibits the transaction of fiat currency and encrypted digital currency, it has actually played a certain role in promoting the stable currency represented by Tether (USDT) to become the “fiat currency” of encrypted digital currency in my country. To put it bluntly, my country’s policy of strict supervision of encrypted digital currency has forced the explosive development of stablecoins in China.

From the perspective of the development of the stablecoin industry in China, in order to cope with the domestic regulatory obstacles in China, the stablecoin actively seeks to link the RMB in various ways, and build an encrypted digital financial ecology including China around the world. For example, on September 9, 2019, TEDA officially announced the launch of the stable currency CNHT (Tether Chinese Yuan) linked to the offshore RMB. The Bitfinex exchange, the sister company of TEDA, announced the support of the following three currency pairs exchange transactions on the second day of the CNHT release: Bitcoin (BTC) and CNHT, USDT and CNHT, and offshore RMB and CNHT. The launch of CNHT will further boost the liquidity of the offshore renminbi, but it will also attract the attention of Chinese regulators. Although the liquidity of the trading currency pair with CNHT is limited, in any case, the impact of stable currency on my country’s finance is not only at the theoretical level. In addition, due to policy restrictions and the impact of the regulatory environment, there is no official statistics on the popularity and development of stablecoins in China, but we can still find from the data of some third-party institutions that Chinese investors have a very strong demand for stablecoins . In terms of USDT alone, it is estimated that about 60% of USDT flows to Chinese investors. In addition, unlike traditional foreign exchange payment and cross-border settlement methods, stablecoins do not need to rely on banks and governments, and anyone can obtain the globalized financial services it brings through the Internet. Although the “Announcement” and “Notice” continue to maintain a high-pressure crackdown on the speculation activities of encrypted digital currency transactions in my country, including stablecoins, it is technically extremely difficult to completely ban stablecoins. The convenience and global nature of stablecoins also bring many regulatory challenges such as cross-border money laundering and evasion of foreign exchange supervision. Therefore, my country should actively promote the supervision of stablecoins. This article attempts to propose a Chinese scheme for regulating stablecoins on the basis of analyzing the financial ecology of stablecoins and the world’s major regulatory models.

2. The definition of stable currency and the limitations of my country’s current legal regulations

The People’s Bank of China pointed out that stable currency “will bring many risks and challenges to the international monetary system, payment and settlement system, monetary policy, cross-border capital flow management, etc.” The price of encrypted digital currency has huge fluctuations relative to the legal currency system and digital currency. , so that the encrypted digital currency and the legal currency world lack a stable value anchor, and cannot become a value scale and circulation medium, which hinders the application of encrypted digital currency in the real world. The emergence of stablecoins precisely solves this problem, and its development and growth have become unstoppable. As of July 2021, the market value of stablecoins based on U.S. dollars has exceeded $116 billion, and stablecoins are also widely circulated in my country. How to understand the nature of stablecoins and how to supervise them is an important issue related to my country’s financial stability, the healthy development of the financial system and the future national core competitiveness. However, the legal regulation of stablecoins in countries around the world is just getting started. In July 2021, the current US Treasury Secretary Janet Yellen pointed out at the meeting of The President’s Working Group on Financial Markets that the current stablecoin is growing rapidly, while the legal and regulatory framework still remains. Still missing, the US financial regulators should take immediate action to formulate legal norms and regulatory approaches for stablecoins. The European Union has tried to regulate stablecoins through decentralization legislation.

(1) Characteristics of stable coins

As a type of encrypted digital currency, the generation and development of stablecoins are closely related to the formation and construction of the encrypted digital currency ecosystem. As the name suggests, one of the characteristics of stablecoins is stable value and global circulation. It is a price-stable cryptocurrency with a target value such as USD. Although stablecoins were controversial in the early days of their development, they have gradually been accepted by mainstream finance. Stablecoins do not depend on any country’s central bank, with the vision of becoming a true world currency. Corresponding to the three challenges of high-speed iteration of encrypted digital currency, high value volatility and independent development path, stable currency shows strong practical value and vitality.

The second feature of stablecoins is their unique role as a bridge. The main application directions of stablecoins include providing a measure of value for highly volatile cryptocurrencies; providing a trading medium for encrypted digital currencies; providing an entry medium for the entry of off-chain capital; providing hedging and value preservation functions for the market; Payment provides point-to-point and trustless low-cost payment and transfer channels. As the ballast of the encrypted digital currency market, stablecoins play the role of value scale and transaction medium by virtue of their stable value, and connect the traditional financial market and the encrypted digital currency ecology, solving the important problem of encrypted digital currency transactions and ecological development. question. Therefore, financial regulators and central banks in various countries are paying more and more attention to the impact of encrypted digital currency, especially stable currency, on monetary policy and financial stability.

(2) Classification of stablecoins and attributes of underlying assets

In January 2012, JR Willett published the “Second Bitcoin White Paper”, which first proposed the concept of “anchored asset value cryptocurrency”, that is, the prototype of the concept of stable currency. In 2014, the Nubits project, the Bitshare project and the Tether project successively put forward the prototype of the concept of stable currency, that is, an encrypted digital currency that can effectively achieve price anchoring with legal currency. At present, the industry generally divides stablecoins into the following four categories.

The first type is legal currency asset-backed stablecoins, also known as off-chain mortgage-backed stablecoins. This type of stablecoin uses fiat currency as the anchor collateral, so it cannot be decentralized. Its core requirement is to use 100% legal currency deposits as the issuance reserve to ensure that the stable currency and the anchored legal currency can be redeemed at a par at any time, which is essentially a depositary receipt of a non-financial institution. The most famous stable currency of this type is the stable currency Tether USD, or USDT (United States Dollar Tether), which was issued by Tether Limited on October 6, 2014. In theory, there is a 1:1 correspondence between USDT and U.S. dollars, that is, for every USDT issued, TEDA will reserve one dollar of fiat currency or equivalent assets. So far, USDT has provided good liquidity, but its transparency and potential conflicts of interest have also been widely criticized by the industry, and have evolved into a regulatory and legal crisis in recent years.

Another representative of the fiat asset-backed stablecoin issuer is Stably, Inc. It learned the lesson of TEDA’s lack of transparency, and all the stored fiat currencies of USDS are custodial by Prime Trust, a licensed trust company in Nevada. In addition, Stably, Inc. committed in the white paper to regularly publish audit reports. In addition to mainstream asset-backed stablecoins, there are alternative asset-backed stablecoins. The biggest difference between such stablecoins and mainstream legal currency asset-backed stablecoins is that their underlying anchor assets are not legal currency but other commodities or assets. For example, some stablecoins are not anchored to the US dollar, but to precious metals. For example, one stablecoin DGX represents 1 gram of gold.

The second type is encrypted digital asset collateralized stablecoins, also known as on-chain collateralized stablecoins. Such stablecoins are generally collateralized by one or a basket of encrypted digital currencies, so they are also purely decentralized stablecoins. Taking Dai as an example, its white paper positions Dai as “a price-stable cryptocurrency that can be used as a decentralized leveraged trading platform”. Different from USDT, Dai realizes mortgage, issuance, redemption and risk control through a unique smart contract system, namely CDP-Collateralized Debt Positions, and achieves a 1:1 anchor with the US dollar. As long as the user over-collateralizes a certain amount of Ether (ETH), the system will issue a certain amount of Dai to the user according to the mortgage ratio according to the mortgage debt position mechanism. This on-chain smart contract mechanism, CDP, also brings greater security and transparency to Dai. However, the scale and value of stablecoins in this model are subject to cryptocurrency market volatility. At the same time, although this model has designed mechanisms such as forced liquidation to ensure price stability, it is still doubtful whether the smart contract system can complete global liquidation in a black swan event, and this model also faces the risk of hacking the system or stealing collateral. .

The third type is algorithm-based central bank-type stablecoins that rely on algorithms to maintain stability. Such stablecoins are not collateralized by any assets, as Robert Sams wrote in his famous crypto-stablecoin paper A Note on Cryptocurrency Stabilisation: Seigniorage Shares Such stablecoins, it wrote, are “Bitcoin-like encrypted digital currencies that rely on simple and deterministic money supply rules to control the money supply.” Therefore, he proposed a flexible coin supply rule to respond to currency price fluctuations, and replaced the central bank’s mechanism with an algorithm to maintain the value stability of the coin.

The stable currency BAY issued by the encrypted digital currency exchange Bitbay integrates the algorithm mechanism and the voting governance mechanism, and is the representative of the algorithm-based central bank-type stable currency. The biggest feature of the stable currency BAY is that it does not require third-party custody, auditing or operational supervision, but uses a dynamic link mechanism to achieve stable currency value through “flow” and “freeze” stable coins and a decentralized governance mechanism. This type of stablecoin is less well-known than the first two types of stablecoins, because the mechanism for achieving stability is poor. Due to the lack of the underlying property with anchoring value, when its value fluctuates slightly, a large number of currency holders sell due to panic, resulting in a vicious circle of stampede decline in currency prices.

The fourth category is financial institution-backed stablecoins issued by traditional financial institutions based on their own private chain research and development. This type of stablecoin is quite different from the above three stablecoins in terms of application scope, transparency and group orientation. The application scenarios of financial institution-endorsed stablecoins are generally limited to the empowerment of blockchain technology in the daily business of financial institutions; due to the prestige and reputation endorsement of financial institutions, their transparency is better than that of general stablecoins; their target groups are also Not mass clients, but certified institutional clients or peer clients. The first bank to issue such a stablecoin is Signature Bank, a fully licensed commercial bank located in New York, USA. Signet Bank was the first to launch Signet, a stablecoin based on a private permissioned version of Ethereum, on December 4, 2018. Signet provides a 24/7 real-time payment blockchain technology solution for business customers, not individual customers, and has regulatory approval from the New York State Department of Financial Services. Subsequently, JPMorgan Chase also launched JPM Coin based on the self-developed private chain Quorum in February 2019. In reality, the form of stablecoins is still developing, but its main forms and mechanisms basically revolve around the above four categories.

(3) Legal basis and regulatory loopholes of stablecoins

1. Recognition of the Civil Code: the virtual property attributes of stablecoins

Article 127 of the “Civil Code of the People’s Republic of China” (hereinafter referred to as the “Civil Code”) stipulates that if the law has provisions on the protection of data and network virtual property, such provisions shall be followed. This makes my country’s Civil Code the first code in the world to make provisions on virtual property. According to the “Notice on Preventing Bitcoin Risks” jointly issued by the central bank and other five ministries and commissions on December 5, 2013, my country defines Bitcoin and other encrypted digital currencies as “a special virtual commodity”. Therefore, although the right attribute of virtual property is still controversial, it is undeniable that the value attribute of online virtual property, including stablecoins, as “virtual commodities” has been recognized by the Civil Code.

Article 127 of the Civil Code is located after the enumeration of various civil rights and before the protection, acquisition and exercise of civil rights. From its textual position, it can be inferred that the legislator did not recognize it as a new statutory right. It is only the object of some civil rights listed in the Civil Code. As for the legal nature of stablecoins, scholars also have many disputes. Under the current conditions, stablecoins do not have the characteristics of being widely accepted and used within a country’s territory. Although they functionally meet the requirements of the currency’s medium of exchange and stability, they are not legally recognized. Naturally, it does not constitute legal tender in nature. Regarding whether stablecoins are things, some scholars believe that “although digital currency only exists in virtual space, as long as it can be controlled and dominated with the help of corresponding technical means, it is in the form of data messages. Digital currency becomes the object of ownership, and there are no theoretical and institutional obstacles”, so it can be identified as a kind of thing. However, some scholars believe that the domination of property law shows the order of possession in the real world, the domination of encrypted digital currency in virtual space is difficult to be recognized as domination in the sense of property law, and publicity is difficult to meet the requirements of transaction concepts, nor can it satisfy The principle of legal property rights may cause difficulties in the application of rules, and it cannot be simply characterized as a property. At present, the stablecoin market in my country is still in its infancy, and a regulatory consensus has not yet been formed, and the courts have not formed a unified judgment idea. The existing legal system does not seem to be sufficient to regulate its particularity. To put it bluntly, although China’s civil and commercial laws have laid the foundation for regulating stablecoins, due to the fact that Article 127 of the “Civil Code” actually refers to the civil laws and regulations that directly regulate stablecoins are still missing in my country. Jurisprudence has not been fully recognized by law, which also directly affects the regulation and evaluation of stablecoins by criminal law and administrative law.

2. Lack of criminal norms: Anti-money laundering loopholes and ambiguity in criminal evaluations

Money laundering has become a difficult problem for Chinese financial institutions and regulators because of its high profits, complex and diverse methods and a certain lag in the law. “Faced with the extremely active situation of money laundering in my country, judicial practice has given surprising answers. The key problem in my country’s current anti-money laundering is that judicial application obviously cannot meet the actual needs of my country’s anti-money laundering.” Appearance further magnifies the lag of judicial application in money laundering crimes. In recent years, it is not uncommon for criminals to use encrypted digital currencies, money laundering activities, terrorist financing and evasion of foreign exchange management through stablecoins. However, my country’s current laws and regulations do not clearly regulate the anti-money laundering obligations of stablecoins and the illegal trading of foreign exchange that may be involved. Affected by the absence of stable currency civil and commercial laws and supervision, the criminal legal norms related to stable currency are also in a state of absence, and the criminal legal evaluation of stable currency is vague, which directly affects the crackdown on related criminal crimes.

As for the criminal judicial practice related to stablecoins in my country, although USDT was first issued in 2015, the first criminal judgment document involving USDT in China did not appear until 2019. In 2019, there were only 14 criminal judgments involving USDT in my country, which will increase to 103 in 2020, and is expected to increase further in 2021. From the point of view of the documents, a total of 20 crimes are involved, mainly focusing on the crime of fraud, the crime of helping information network criminal activities, the crime of covering up, concealing the proceeds of crime, the crime of criminal proceeds, and the crime of organizing and leading pyramid selling activities, accounting for the total number of USDT-related criminal judgment documents. more than 85%. The above figures stand in stark contrast to the widespread use of USDT and other stablecoins as intermediaries in criminal activities such as money laundering. A closer look at the reason is mainly due to doubts about the property attributes of stablecoins. When determining the amount of crime, the judicial authorities usually use the legal currency flow of traditional banks as the basis for determining the case, that is, requiring criminal suspects to complete the conversion of stablecoins to legal currency. Electronic data evidence of centralized exchanges and evidence of on-chain data transfer tracking and analysis by professional institutions are still very rare.

3. Administrative supervision and regulation: lack of strong supervision by higher-level laws

Regarding the supervision of currency and finance, the lack of legal norms in my country’s financial law and administrative law is particularly obvious. Since the legislative era, foothold and starting point of the existing laws and regulations are not at the same level as the later fintech revolution, a careful study of the content and the purpose and scope of application of the legislation shows that my country has not yet formed a stable currency-oriented financial system. Administrative and regulatory laws. In addition, my country’s current financial administrative supervision paradigm for encrypted digital currency is controversial in its effectiveness, system and radical “prohibitive” supervision path.

At present, the three normative documents that regulate encrypted digital currency in my country, including stable currency, are neither laws, administrative regulations, local regulations, nor rules, but administrative normative documents in a general sense. This is completely different from the model in which the United States and Europe formulate special laws to regulate the issuance and circulation of stablecoins. In general, the current legal regulatory framework for stablecoins in my country is not high-level, and the legal validity is doubtful. Although the “Announcement” was jointly issued by the seven ministries and commissions, its nature is obviously not a law or administrative regulation, but an administrative normative document or administrative regulation. The “Notice” is only a normative document in terms of effectiveness. Administrative regulations, normative documents, etc. generally only have the function of restraining administrative acts, and should not affect the validity of civil acts. Therefore, the “Announcement” and “Notice” cannot actually be used as a basis for denying the validity of civil actions related to stablecoins and other encrypted digital currencies. It is not appropriate to use this as a basis to conclude that the contract violates the mandatory provisions of the law. In addition, the “Announcement” itself does not explicitly prohibit the public from participating in virtual currency transactions, but reminds the public that there are multiple risks in virtual currency transactions, and investors must bear the investment risks themselves. Therefore, according to the “Announcement”, some courts do not support the return of investment funds for investment in blockchain projects or stable currency transactions, and then determine that the contract is invalid, which is an inappropriate expanded interpretation.

(4) There are different standards for the identification of stablecoins in my country’s judicial practice

In recent years, cases involving the stable currency USDT in my country have mainly focused on civil disputes, and have the following characteristics: First, the number of cases has been increasing year by year. As of August 19, 2021, searching for “USDT” on China Judgment Documents Network, there are 203 civil judgment documents, including 172 judgments and 31 rulings; Disputes over unjust enrichment”. This shows from one side that USDT has emerged in my country’s civil circulation and transactions; thirdly, the vast majority of the parties involved in the case are natural persons. This shows that natural persons with poor risk identification and risk control capabilities in my country are precisely the main users of stablecoins. Therefore, it is of special urgency and necessity to formulate regulatory laws for stablecoins; in addition, the case involves 28 provinces, The autonomous regions and municipalities directly under the Central Government have the characteristics that the overall geographical distribution of cases in the country is relatively scattered, but the distribution of individual regions is relatively concentrated.

In judicial practice, because the courts have different understandings of the nature of stablecoins, the adjudication rules of related cases are confusing and there is no obvious rule. Once the court cites the “Announcement”, many will find that the behavior of buying and selling stablecoins (such as USDT) is not legal, and then determine that the civil legal acts involved are invalid. In this way, the at-fault party does not have to bear the legal consequences, and the counterparty often has no choice but to bear the loss. This is contrary to the original intention of civil and commercial legislation to encourage trade and maintain fair trade order. By analyzing the results of the cases, among the cases involving stablecoins, only more than 30 claims were supported in whole or in part, and the claims in the remaining cases were dismissed. Most of the courts that identify stablecoins as virtual commodities, virtual property or virtual digital assets recognize the validity of transactions involving stablecoins and give reasonable relief to the parties. The determination of the nature of stablecoins often depends on whether the referees can correctly understand Article 127 of the Civil Code and laws, regulations and administrative normative documents such as the Announcement. It is precisely because of such a clear-cut interpretation that diametrically opposed judgments and characterizations of stablecoins have emerged in trial practice.

3. Comparative Mirror of Stablecoin Regulation: From the Perspectives of the United States and the European Union

Stablecoins are used in different countries as cash, deposits, electronic currency, payment instruments, collective investment schemes, securities, commodities, derivatives, other financial products that should be regulated, encrypted financial assets, encrypted digital currency or not subject to any supervision. commodity. The regulation and legal evaluation of stablecoins is still a worldwide problem. Although the regulation of stablecoins in the United States and the European Union is still in constant exploration, its regulatory principles and legislative efforts are quite representative and worthy of serious study and research in my country.

(1) U.S. Supervision Features: Progressive Supervision under the Two-Line Multi-Polar Model

The U.S. financial regulatory system is characterized by a fragmented, multi-polar regulatory agency, and a dual-line state and federal regulatory system. It is the multiple historical financial crises experienced by the United States that have shaped this financial regulatory system, and now stablecoins have once again posed a major challenge to American financial regulation. Under U.S. law, stablecoins may be characterized as electronic money, securities, or virtual goods. Therefore, the regulation of stablecoins is very easy to fall into an uncertain policy regulatory environment similar to initial coin offerings (ICOs) and cryptocurrencies from the beginning. Stablecoins are also subject to traditional financial compliance requirements including anti-money laundering (AML) and know-your-customer (KYC). The current dual-line and multi-polar regulatory system in the United States adopts progressive supervision, trying to regulate the stablecoin ecology with unique “cross-border” character from multiple levels such as judicial, legislative and administrative policies.

1. Judiciary’s exploration of the case-by-case supervision of stablecoins: compliance disputes

In the United States, USDT, as the current stable currency with the largest market value, has been controversial since its birth. TEDA has long pursued a full legal currency margin system, promising to deposit one US dollar in the bank for every USDT issued, and TEDA also promised not to use the US dollar as the underlying anchor asset for credit or investment. However, on March 14, 2019, TEDA suddenly announced that it would change the full traditional currency margin system to a non-full traditional currency margin system. In this way, although the total market value of USDT on the day is still about 2 billion US dollars, according to the new rules, TEDA only needs to deposit part of the 2 billion US dollars in the bank, and the remaining funds can be used for credit or investment business. If TEDA can make a profit, each USDT can still receive sufficient asset support, and even TEDA will send these investment income as interest to USDT holders. However, in the event of a credit default or investment failure, the underlying assets used as margin cannot provide sufficient support for the value of USDT. Obviously, the revised margin system has actually shaken people’s risk predictions for the original USDT.

Looking at the uproar caused by TEDA’s modification of the margin system, it can be seen that the challenges of stablecoin development mainly come from two aspects: regulatory issues and invisible over-issuance. In fact, TEDA’s revision of the margin system is not a hasty business decision, but more of a stress strategy for legal compliance challenges. TEDA claims that its parent company is iFinex Inc., a Hong Kong company registered in the British Virgin Islands (BVI), which is also the parent company of Bitfinex, a cryptocurrency exchange. Not only TEDA and Bitfinex are affiliated companies in terms of holding relationship, but also many senior managers of TEDA and Bitfinex overlap. In addition, TEDA has long been criticized for its transparency, and many observers and media doubt whether TEDA really provides enough fiat collateral for the USDT it issues. In December 2017, TEDA announced that its employment relationship with auditor Friedman LLP had come to an end. Since then, USDT has actually started a “streaking” state without external audit.

The above multiple questions, contradictions and conflicts soon turned into multiple government enforcement actions, administrative lawsuits and investor class actions against TEDA and its affiliates. In fact, New York law enforcement agencies have been investigating TEDA and its affiliates since 2018. On April 24, 2019, New York State Attorney General Letitia James accused TEDA, the cryptocurrency exchange Bitfinex and its parent company iFinex Inc. and other related parties for allegedly endangering the interests of investors in New York State. Fraud, and applied for a writ to the New York State Supreme Court in Manhattan (actually the trial court of New York State). The law the prosecution is relying on is the Martin Act in New York State, known as the “worst law” in the United States.

In this case, according to the prosecution’s allegations, since March 2017, due to the termination of cooperation with mainstream financial institutions such as Wells Fargo Bank (Wells Fargo Bank), the encrypted digital currency exchange Bitfinex was first in a hurry. Two banks in Puerto Rico established business ties to open up access to fiat currency, and unfortunately both ended up going out of business soon after. Subsequently, Bitfinex had no choice but to turn to some “shadow banks” with dubious qualifications, such as Crypto Capital, to solve the urgency of the legal currency channel. However, as Crypto Capital was investigated by various regulators in Poland, Portugal and the United States, the funds were frozen, so it was unable to return the $850 million in its custody to Bitfinex. Prosecutors accused Bitfinex of trying to conceal losses and failing to disclose relevant losses to investors. Instead, they reached out to their sister company, TEDA, for the fiat currency reserves used to redeem USDT, and secretly misappropriated at least $650 million to make up for the finances. deficit. The court then approved the prosecution’s request and ordered the defendants such as TEDA to provide information related to users, operations, and finances, prohibit the defendant from using the US dollar reserves of TEDA, and prohibit the defendant from destroying evidence.

On September 24, 2019, the Appellate Division of the Supreme Court of the State of New York temporarily suspended the prosecution’s request for Bitfinex and TEDA to submit all documents related to the $650 million insider transaction and $900 million credit line incident, but the court ordered that the prohibition continue to be enforced TEDA’s ban on lending funds to Bitfinex. TEDA immediately appealed, asking the court to lift the ban. On December 4, 2019, the prosecution filed an appeal brief reiterating jurisdiction and arguing that the defendants failed to cooperate with the filing of documents and evidence and attempted to block the investigation of potential securities and commodities fraud by the New York State Attorney General’s Office. It is worth noting that the Attorney General of New York State has never brought any formal charges against TEDA and its affiliates. The center of the case is the issue of jurisdiction and whether the defendant must disclose information. On July 10, 2020, the court pointed out that because TEDA has users and employees in New York State, the New York court has jurisdiction over the case. At the same time, the court agreed with the Attorney General of New York State to continue to investigate TEDA, and requested TEDA to cooperate with the investigation and provide relevant information and documents. On February 23, 2021, the New York State Attorney General’s Office announced a settlement agreement with TEDA, ending a legal dispute since 2019.

At the same time, related entities such as iFinex Inc., TEDA, BFXNA Inc. and BFXWW Inc., the relevant operating entities of Bitfinex, have also become defendants in four class actions. The theoretical basis for these class-action lawsuits comes from a paper published in The Journal of Finance, the world’s top financial journal in 2019 – “Is Bitcoin Really Not “Tethered”? (Is Bitcoin Really Un-Tethered?). The paper discloses and analyzes two important findings based on the algorithm analysis of Bitcoin’s data from January 2009 to March 2018. First, the author claims in the article that TEDA is actually a manipulator of Bitcoin price, and has greatly raised the price of Bitcoin by spamming USDT. The specific performance is as follows: Whenever the price of Bitcoin falls, or falls to a key price level, TEDA will issue additional USDT, which will drive the price of Bitcoin to rise sharply. Second, the article pointed out that TEDA has been claiming that USDT has sufficient reserves of 1:1 US dollars. This is also in line with the lawsuit of the New York State Attorney General against TEDA and its affiliated entities. In these four class-action lawsuits, the plaintiffs, all of whom are cryptocurrency traders, brought the following three charges against the above defendants: (1) The defendants violated the provisions of the Commodity Exchange Act prohibiting market manipulation (2) Controlling more than 80% of the stablecoin market by monopolistic means, thereby violating The Sherman Antitrust Act; (3) Planning and implementing extortion, violating the Anti-Extortion and Antitrust Act The Racketeer Influenced and Corrupt Organization Act. As of the end of 2021, these class actions remain outstanding.

To sum up, in line with the unique litigation culture of the United States, both law enforcement agencies and natural persons, legal persons and other organizations who believe that stablecoin issuers have violated their legitimate rights and interests are trying to initiate law enforcement procedures or recover losses through legal proceedings. It is worth noting that the legal basis for the plaintiffs to bring these lawsuits is the very mature legal provisions that are frequently cited in the judicial practice of the United States. In the face of new regulatory disputes and litigation disputes brought about by financial technology represented by stablecoins, the U.S. judiciary has demonstrated its strong adaptability and deductive ability through legal interpretation and reasoning.

2. Compliance supervision

Given the unique and important role of stablecoins in the cryptocurrency ecosystem, U.S. state and federal financial regulatory authorities have begun to seek reasonable paths for stablecoin compliance and regulation. The U.S. regulatory process for stablecoins begins locally. On September 10, 2018, the New York State Department of Financial Services (NYDFS) approved Gemini Trust Company, LLC and Paxos Trust Company, LLC to issue Gemini Dollar (GUSD), a stable currency pegged to USD 1:1 and Paxos Standard (PAX). The biggest difference between these two stablecoins and USDT is that they operate in accordance with regulations and are more regulated. Stablecoins such as GUSD and PAX are hosted by trust companies, so they are all approved by local regulators. Encrypted digital currency is often associated with illegal activities such as money laundering. The premise of the New York State Department of Financial Services approving two stablecoins is that the issuer guarantees that these stablecoins have effective risk control, anti-money laundering and other measures to prevent their tokens from being stolen. For money laundering or terrorist financing. But regulated stablecoins also have drawbacks: while increasing the protection for investors and holders, they also sacrifice privacy and decentralization. The approval of these two projects is of great significance to the increase in the influence of the US dollar, which means that residents of different countries around the world can indirectly hold US dollars by holding cryptocurrencies.

Since then, the stablecoin compliance process has further developed in depth and breadth. In depth, on September 5, 2019, Paxos Trust Company, LLC made another effort to announce the launch of the first encrypted gold coin PAX Gold (PAXG) that can be converted into physical gold by the New York State Financial Services Authority. In terms of breadth, a cryptocurrency exchange has partnered with Paxos to launch HUSD, a stablecoin pegged to the U.S. dollar at a 1:1 ratio. In January 2020, HUSD was also approved by the New York State Department of Financial Services.

At the same time, the compliance tide of stablecoins in the United States has also developed from local compliance to national compliance. Coinbase, an encrypted digital currency exchange known for its compliance operations in the United States, and Circle, a comprehensive blockchain financial services organization, jointly launched a stable currency USDC, which is a representative of this. Circle first created a technical standard CENTRE consortium, in order to realize the interconnection and interoperability of any wallet connected to CENTRE, and realize cross-chain and cross-digital asset conversion. USDC is a stable currency anchored to the US dollar, developed by Circle based on the CENTRE open source architecture, and regulated by CENTRE and the official regulatory framework in the traditional financial field. USDC is pegged to USD 1:1. For every USDC a user buys, Circle will deposit 1 USD to the designated Silvergate bank and send the minted USDC to the user. The issuer of USDC must also obtain a local crypto asset industry license. In September 2015, Circle, the issuer of USDC, became the first company to obtain a New York State digital currency license (BitLicense). Circle also currently has payment licenses in the United States, the United Kingdom and the European Union. It is the company with the largest number of licenses in the crypto asset industry in the world, and has a compliant channel for the exchange of U.S. dollars, British pounds, and euros to crypto assets. Compared with USDC, the custodian of other stablecoins is a trust company, but the trust company itself has certain risks and needs to obtain a license to prove its compliance. The assets of USDC are managed by banks. Since the custodian bank of USDC is regulated by the government and plays a regulatory role in other financial businesses, the security of USDC assets is higher.

At the federal level, the U.S. legislature has made many attempts to regulate stablecoins. In December 2020, Democratic Representatives Jesús García and Stephen Lynch jointly proposed the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) ). In his statement, Tlaib pointed out that stablecoins pegged to traditional currencies such as the U.S. dollar pose new regulatory challenges and pose growing risks to markets, liquidity and credit. Therefore, the Stablecoin Hooking and Banking License Enforcement Act aims to protect consumers and help them identify and defend against risks by regulating the issuance and related commercial activities of emerging digital payment instruments such as Facebook’s Diem. From the content of the draft, the “Stablecoin Linking and Banking License Enforcement Act” will impose a series of requirements on stablecoins, including stipulating that practitioners must obtain a banking license, obtain approval from banking regulators before issuing, submit a systemic risk report, and Doing continuous tracking, getting FDIC insurance to keep adequate reserves at hand, is pretty much the same as a national commercial bank. Therefore, the stablecoin industry immediately criticized the bill, which has not yet been put to a vote in Congress.

Existing federal financial regulators have also voiced their oversight of stablecoins. The U.S. Securities and Exchange Commission (SEC) has basically taken a regulatory path similar to that of other cryptocurrencies. Although global central banks have been racing to develop central bank digital currencies (CBDC) in recent years, Brian Brooks, acting director of the Office of the Comptroller of Currency, said that the United States has established a scale of tens of billions of dollars. In the private stablecoin market, the private encrypted digital currency field should be the focus of development, and the role of the government is to supervise stablecoins, not to participate in the research and development of central bank digital currencies. In this way, private stablecoins have become financial products that are the focus of U.S. financial governance and regulators. In January 2021, Brian Brooks said that banks can use blockchain and stablecoins for payments, which means that U.S. regulation recognizes and encourages the promotion of stablecoins. In fact, the above-mentioned policy on stablecoins is not only the position of the Office of the Comptroller of the Currency, but also the position of the U.S. President’s Working Group on Financial Markets (consisting of the Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the Securities and Exchange Commission and the Chairman of the U.S. Commodity Futures Trading Commission and their designees) composition). Therefore, the stablecoin policy promulgated by the U.S. Office of the Comptroller of the Currency is actually the basic stance of U.S. financial regulators, including the Federal Reserve, on stablecoins. This statement shows that they are encouraging the innovative use of stablecoins in U.S. financial markets.

(2) EU regulatory paradigm: functional regulation based on risk control

First, stablecoins may be placed under different regulatory frameworks, or may be in a regulatory framework vacuum, due to the complexity of stablecoin technical foundations and the diversity of specific function implementations. Although the EU’s regulation of stablecoins has many similarities with the United States, on the basis of the EU’s macro policies and legal traditions, the EU’s regulatory path for stablecoins has formed the following distinctive features. In the absence of a specific regulatory law for stablecoins, the EU comprehensively applies existing regulatory laws such as payment systems, solutions, financial instruments, and anti-money laundering. According to the technical construction and implementation functions of stablecoins, types of stablecoins are regulated in EU members. issuance, circulation, storage and exchange in the country. At the EU legal level, the regulation of stablecoins is mainly divided into three levels: regulated investment and financial instrument regulation; electronic currency regulation; anti-money laundering regulation.

First, according to the EU Markets in Financial In-struments Directive II (MiFID II), which came into effect on January 3, 2018, certain stablecoins will be regulated if they are identified as financial instruments that need to be regulated. Transferable securities, in particular, need to be regulated by relevant financial market rules. MiFID II defines “transferable securities” as a type of financial instrument, which is also the financial instrument that is most similar in nature to stablecoins. Stablecoins that are characterized as “transferable securities” should meet the following two characteristics: First, the essence of the stablecoins is securities. Similar to the U.S. securities law, the meaning of securities here is very broad, including not only corporate stocks and bonds, but also other financial instruments other than payment instruments and derivative financial instruments in the capital market. Second, the stablecoin can be used in capital markets. market circulation. In general, if stablecoins are characterized as negotiable equity/debt securities, shares in collective investment schemes, or derivative investments (such as futures, options, and swap contracts), stablecoins will be identified as financial instruments and subject to Supervision.

Secondly, according to the European Union Electronic Money Directive (Electronic Money Directive, Directive 2009/110/EC) that came into effect on October 30, 2009, if the stablecoin is recognized as electronic money, the issuer of the stablecoin is obliged to register or apply for Concession to be an issuer of electronic money under the EU Electronic Money Directive. According to the “EU Electronic Currency Directive”, electronic currency refers to the monetary value stored electronically or magnetically, representing the holder’s right to claim the currency value of the issuer; the issuance of electronic currency is subject to the delivery of “funds” by the intended holder. ; it is intended for payment transactions and is accepted by a natural or legal person other than the issuer. Many stablecoins will meet the above conditions and be classified as electronic money. However, there are indeed some stablecoin holders who have no claim to the issuer, or their issuance does not involve “funds” and therefore does not belong to the category of electronic money. According to the EU Electronic Money Directive, once recognized as electronic money, the proceeds from the issuance of stablecoins must be deposited with custodian banks. Conversely, if the stablecoin design mechanism guarantees that the issuer can redeem the stablecoin at face value while also providing credit services, the issuer of this stablecoin will be considered a depository institution and thus need to obtain a banking license from the ECB. It should be pointed out that under the EU legal framework, electronic money as a payment instrument and transferable securities as a financial market instrument are two mutually exclusive financial instruments, and the two can only occupy one of them. In addition, the Payments Services Directive II (2015/2366/EU) (PSD II) regulates activities involving the payment of “money”. “Funds” include bank instruments, tangible money, intangible money, or electronic money. Therefore, stablecoins characterized as electronic money are likely to be regulated by the EU Payment Services Directive – 2nd Edition. Other stablecoins that do not belong to the category of electronic money, as long as they involve payment of “funds”, such as international exchange business, will also be regulated by the “EU Payment Services Directive-Version 2”, and the issuer of stablecoins must also obtain corresponding licenses.

Finally, The Alternative Investment Fund Managers Directive 2011/61/EU (“AIFMD”), which came into effect on July 21, 2011, defines “alternative investment funds” as: interest, raise funds from investors, invest in accordance with an established investment strategy, and the collective investment scheme is not subject to approval under the EU Directive on Collective Investment in Transferable Securities (Undertakings for Collective Investment in Transferable Securities – UCITS) . Therefore, stablecoins may also be seen as a share of alternative investment funds in the EU. In this way, if the redemption price of stablecoins is linked to the value performance of the underlying assets (including those that use fiat as collateral, such as Demo), such stablecoins may be classified as alternatives, provided other conditions are met investment funds.

Fourth, stablecoins may also be regarded as virtual currencies (Virtual Currencies). According to the 5th Anti-Money Laundering Directive of the EU – AMLD5, which came into effect on July 9, 2018, virtual currency refers to the issuance of non-central banks or non-official issuers, and it is not It must be linked to legal tender, does not have the legal status of currency or banknotes, but is accepted by users as a medium of exchange, a digital representation of value that can be transferred, stored and traded electronically. It can be seen that the definition of virtual currency covers a very wide range. The digital form of value that is not issued or guaranteed by the central bank or the official, neither linked to legal currency nor has the legal status of currency, all belong to virtual currency. The relationship between electronic currency and virtual currency is very similar to the relationship between electronic currency and negotiable securities. Because once a stable currency is identified as electronic currency, it will inevitably be linked to legal currency, so the stable currency identified as electronic currency cannot be characterized as virtual currency according to AMLD5.

Second, in line with the two-tier application structure of EU directives, EU countries’ regulation of stablecoins shows country differences under the unified supervision principle. Because the EU directives are binding on the member states that accept the directives, the member states targeted by the directives need to convert the directives into national laws or decrees through domestic procedures. For example, the UK has transformed the EU Markets in Financial Instruments Directive-Order II into the Financial Services and Markets Act 2000 through the Regulated Activities Order-the RAO. ) this domestic law. In Germany, the Second Financial Markets Amendment Act (Zweites Finanzmarktnovellierungsgesetz, 2. FiMaNoG) has transformed the EU Directive on Markets in Financial Instruments – Order No. 2 into domestic law. Since the member states “take the form and method to achieve the results required by the directive, the jurisdiction of the member state institution that accepts the directive shall be exercised”, so even if the EU directives followed by the United Kingdom and Germany are the same, but in stablecoin regulation At the operational level, it is possible to bring about different interpretations and implementation schemes of EU directives. In fact, Germany does follow the principle of strict interpretation of various EU directives, while countries represented by France tend to prefer liberal interpretations.

Third, the EU’s regulation of stablecoins has begun to adopt a regulatory strategy characterized by centralized, active, gradual, and shared benefits/risks. The EU’s current regulatory framework for stablecoins is characterized by decentralization, non-specialization, and duality. This may be a stopgap measure in the early stage of stablecoin development, but as stablecoins quickly enter the mainstream payment and financial system, their technical design and implementation functions are becoming increasingly complex, and stablecoins have increasingly overflowed the existing European Union. Trends outside the regulatory framework, which means there may be regulatory loopholes for some stablecoins. European regulators are also very much aware of this. On May 5, 2020, the European Central Bank (European Central Bank) released a research report on global stablecoins – “A Regulatory and Financial Stability Perspective on Global Stablecoins” (A Regulatory and Financial Stability Perspective on Global Stablecoins) . The European Central Bank believes that “in order to reap the potential benefits of global stablecoins, a robust regulatory framework needs to be built to address the associated risks before allowing stablecoins to officially operate.” First, the research report considers whether stablecoin holders have any concerns over issuers. Or assets backing stablecoins have claim rights, which is an important criterion for the characterization of stablecoins. Second, the European Central Bank believes that it is necessary to tap the potential of stablecoins, while also controlling the associated risks. The European Central Bank listed several advantages of global stablecoins in the report, such as transaction speed, convenience, etc., which have also been recognized by the public. On the other hand, the European Central Bank has not shied away from the various risks and difficulties that stablecoins may bring. The European Central Bank points out that stablecoins have the potential to be viewed by holders as safe bank deposits (albeit without interest), but since a stablecoin’s value is actually determined by its “governance and risk management and the value of the underlying asset or fund’s portfolio” decided. Once the stablecoin underlying asset or investment portfolio loses its fixed value, or the value of the asset backed by the anchor deviates from the expected level, users will not be able to cash out with the exact “stable value”. In addition, the possible systemic failures of stablecoins are also inherent risks of stablecoins. Therefore, stablecoins are not completely “stable” and secure.

The EU is keenly aware that the regulation and guidance of stablecoins and other encrypted digital currencies has special significance for maintaining the independence and competitiveness of the EU. EU policymakers believe that the global public health crisis that began in 2020 has exposed the knock-on effects of over-reliance on non-European suppliers, and therefore propose that special attention should be paid to information technology, cloud service providers, payment systems and operators Cultivating indigenous European power. Globally, Europe is already well-positioned in the fintech and crypto-asset industries. European fintechs are the biggest beneficiaries of venture capital: 20% of all VC funding in Europe is invested in fintechs, a higher percentage than in Asia and the US. The EU also has a good regulatory foundation. The EU’s proud EU Payment Services Directive – Second Edition aims to strengthen competition and is recognised as a global leader in regulating and promoting innovation in open payments.

4. my country’s choice of the regulatory paradigm of stablecoins

The macro supervision of stablecoins in various countries in the world mainly includes two aspects: financial policy supervision and legal compliance supervision. Strengthening stablecoin project audits, improving transparency, and enhancing compliance are critical to the development of stablecoins. At present, more and more stablecoin projects are actively embracing regulation. Although freedom and convenience are sacrificed to a certain extent, it can prevent credit collapse and legal problems directly caused by stablecoin projects due to insufficient risk control or lack of compliance. Litigation, in exchange for the endorsement of the regulatory authorities and a broader space for development. This also creates important practical conditions for my country’s legislation and law enforcement agencies to supervise stablecoins to a certain extent, which in turn provides my country with a principled framework and basic path for stablecoin supervision.

(1) The internal and external environment of my country’s stablecoin supervision

From the perspective of the use of stablecoins in my country, stablecoins have obvious advantages in foreign trade, international trade settlement, cross-border investment, international payments, and cross-border capital flows. On the one hand, the peer-to-peer transaction mode transfer of stablecoins saves the high costs, cumbersome steps and slow processes of cross-border payment and settlement of traditional banks, which greatly improves settlement efficiency and efficiency, and greatly reduces payment costs; on the other hand, stablecoin exchange rate. Relatively stable, and the value is basically the same in the world, it can provide a safe and guaranteed unit of account and settlement medium, which is conducive to reducing bilateral exchange rate risks and avoiding risks and uncertainties caused by exchange rate fluctuations. In addition, stable coins can also achieve seamless connection with my country’s central bank digital currency (Digital Currency Electronic Payment-DC/EP), which can expand and enrich the application scenarios of central bank digital currency, and further strengthen the two-way circulation of encrypted digital currency ecosystem and legal currency. And mutual recognition has far-reaching significance in maintaining and realizing my country’s financial stability.

From the perspective of the international financial situation, stablecoins may give China a chance to break through and even gain a good opportunity for development under the complex international financial situation. In early 2020, the Federal Reserve established a temporary dollar swap mechanism with the central banks of Australia, Brazil, Denmark, South Korea, Mexico, Norway, New Zealand, Singapore, Sweden and other countries, but excluded China. This dollar swap mechanism, which aims to ensure the liquidity of the US dollar but excludes the world’s second largest economy, is actually an extension of geopolitics, and it also brings considerable uncertainty to the internationalization of the RMB. The pace of RMB internationalization is also relatively slow. Although on July 23, 2020, according to the data released by the Society for Worldwide Interbank Financial Telecommunication (SWIFT), in June 2020, in the global payment currency ranking based on amount statistics, the RMB rose to the fifth place with a market share of 1.76%. , but the US dollar, the euro, and the pound still firmly occupy an important position in the global payment system, with a market share of 40.33%, 34.10%, and 7.08%, respectively. In particular, it is worth mentioning that the weight of the US dollar has risen from 39.35% in June 2018 to 40.33% in June 2020, and its global payment currency dominance has been further consolidated. Therefore, RMB internationalization has a long way to go. The emergence of stablecoins not only provides a good opportunity for my country to break the closed dollar exchange mechanism for China, but also greatly contributes to the internationalization of the RMB.

my country can also attract more market-oriented institutions to carry out cross-border payment and business ecosystem innovations based on the issuance of RMB-based stablecoins, and enhance the international status of the RMB while maintaining its own financial sovereignty. At the third session of the 13th National Committee of the Chinese People’s Political Consultative Conference on May 22, 2020, a member of the Chinese People’s Political Consultative Conference put forward the “Proposal on the Development of Cross-border Digital Stablecoins in Hong Kong”, suggesting that RMB, Japanese yen, Korean won and Hong Kong dollars should be formed into a basket The digital stable currency is firstly applied to cross-border trade payment in controllable scenarios, and it also prepares for the connection with the central bank’s digital currency that my country’s central bank is about to implement. The digital stablecoin in the proposal is a regional stablecoin composed of the currencies of the four economies of China, Japan, South Korea and Hong Kong. In the context of favorable policies, my country can rely on and reform the current asset management system and trust system in Hong Kong and Macau, and first explore the regional stablecoin custody system to ensure the safety of funds. At the same time, the stablecoin can also seamlessly connect with my country’s central bank digital currency, making an attempt for the central bank’s digital currency to be implemented in Hong Kong and even internationalized, and to discover and solve the problems and risks that may arise in the cross-border payment application of the central bank’s digital currency in advance. It is foreseeable that the implementation of digital stablecoins in China, Japan, South Korea and Hong Kong will improve the anti-risk capability of regional trade under the influence of the international environment, and Hong Kong can also make new contributions to the development of the country’s digital economy.

From the perspective of the Libra/Diem project and the Chinese central bank’s legal digital currency (DC/EP), the existence and development of stablecoins in my country still has its special significance, and can be combined with projects such as Libra/Diem and the Chinese central bank’s legal digital currency. Leverage each other and develop together. In May 2019, the Facebook-led Libra/Diem project aimed to “create a simple, borderless monetary system and financial infrastructure that serves hundreds of millions of people.” As an alternative to M0, the legal digital currency of the central bank, which is still under research and testing in my country, is a legal digital currency issued by the state and a digital legal currency endorsed by national credit. Therefore, in this sense, the central bank’s legal digital currency is not the “private” stable currency that is discussed in this article, and does not have legal compensation and legality. The central bank’s legal digital currency adopts a two-tier operation structure to support “dual offline payment” for both income and expenditure parties. However, the operation and issuance of the central bank’s legal digital currency is not entirely based on blockchain technology, because “the decentralized nature of the blockchain conflicts with the central bank’s centralized management requirements.” However, the central bank’s legal digital currency draws on the application of part of the blockchain technology, for example, the use of smart contracts to realize the directional circulation of funds, and the use of asymmetric encryption to authenticate identities. Stablecoins can almost naturally achieve mutual integration and common development with the central bank’s legal digital currency, which can not only lay a key foundation for the deep integration of the digital economy and the real economy, but also provide a rich imagination for the emerging decentralized finance.

(2) Reasonably plan regulatory agencies according to the nature of stablecoins

The characterization and classification of stablecoins are of great significance to the choice of legal supervision paths. Due to different understandings of the nature of stablecoins, such as identifying stablecoins as currencies, securities or electronic money, regulators will regulate stablecoins with different properties according to different regulatory frameworks. Fiat-backed stablecoins and crypto-assets-backed stablecoins are often characterized as money market funds because they invest in principle in low-risk, short-term assets denominated in the currencies they back with the goal of maintaining a stable value. Stablecoins that are attributed to money market funds require that each issued unit can be assimilated into money market fund units even when a basket of fiat currencies or encrypted digital assets is used as collateral. It is worth noting that encrypted digital asset-backed stablecoins are sometimes classified as securities, which are regulated by securities laws. Central bank stablecoins are often viewed as electronic money. Because such stablecoins are intended to be used as payment instruments, and issuers of central bank-type stablecoins promise to redeem these stablecoins at face value at any time. Compared with money market funds, electronic money has much stricter regulatory restrictions on issuers. For example, according to the 2009 European Union Electronic Money Directive (Electronic Money Directive, Directive 2009/110/EC), issuers of stablecoins need to meet the Capital adequacy requirements, and the issuer is obligated to redeem the holder’s stablecoin at face value at any time.

In line with the reform of the financial supervision system, my country should amend the law to clarify the functions of the supervision department, improve the independence and professionalism of the supervision department, and gradually realize the implementation of stable currency supervision under the supervision of financial mixed industry. At present, there is a lack of de facto regulatory bodies in my country’s stablecoin regulatory agencies. Unlike the aforementioned European and American regulatory agencies for stablecoins, which have gradually formed and performed their own duties, my country’s stablecoins are in the blind spot of financial supervision. The “one committee, one bank, two committees, and one bureau” led by the Financial Stability and Development Committee of the State Council has been a progress and breakthrough for a period of time. However, in the face of stablecoins of different natures, the division of functions and coordination costs among the People’s Bank of China, the China Securities Regulatory Commission, the China Banking and Insurance Regulatory Commission and the State Administration of Foreign Exchange under separate supervision are high, resulting in chaotic and efficient supervision of financial technology products such as stablecoins. decline, and a regulatory vacuum emerges. As a financial technology phenomenon that spans monetary policy, securities, banking and foreign exchange management, stablecoins may not be able to achieve effective supervision by the power of “one committee, one bank, two committees and one bureau” alone.

The absence of regulatory authorities has also led to a large number of stablecoins in my country’s economic life and judicial practice falling into a regulatory vacuum. As the world’s second largest economy and the location of an international financial center, China is also a region where the encrypted digital ecology and stablecoins are developing rapidly. International Competitiveness of Fintech. At present, with the rapid development of my country’s financial hybrid business, my country’s financial supervision mode is gradually transitioning to a supervision mode that takes into account the stability of the financial system and the standardization of market behavior. In response to this, my country should gradually establish a special stable currency regulatory agency on this basis. At present, the People’s Bank of China and the China Banking and Insurance Regulatory Commission should play their role as front-line regulatory agencies to strengthen the research, supervision and guidance of stablecoins in the issuance and circulation links, jointly undertake the supervision of stablecoins, and provide stablecoin supervision in the next stage. Experience accumulation and theoretical support.

(3) Sublation and reference of European and American regulatory models: a preliminary study on the regulatory path of my country’s stablecoins

First of all, drawing on the global governance experience of stablecoins in the United States and Europe, my country needs to do the following aspects to reform and strengthen the legal regulation and supervision of stablecoins. my country needs to establish and improve the legal and regulatory framework and system for stablecoins. Although stablecoins have emerged in my country’s social and economic life and even become popular, and stablecoins are often involved in judicial practice and court judgments, my country has not yet established a legal regulation system for stablecoins, and the phenomenon of separate governance in judicial practice is more prominent. In terms of civil law, my country should further clarify the virtual property status of stablecoins on the basis of the Civil Code. In terms of administrative law, on the basis of learning from the experience of Europe and the United States, my country can take advantage of the late-mover advantage to formulate a comprehensive financial system for stablecoins across currencies, securities, banking, insurance, trust, trade finance, foreign exchange management and risk management Regulatory regulations. In terms of criminal law, with anti-money laundering as the starting point, it is clearly required that the cross-border issuance, exchange, use and redemption of stablecoins must comply with relevant financial laws and regulations such as anti-money laundering, foreign exchange management and payment settlement in my country. Issuers and exchanges should strictly perform the obligation of prudential verification of digital asset transactions, and do a good job in anti-money laundering and terrorist financing compliance review and risk prevention.

Secondly, my country should flexibly use various regulatory methods such as regulatory research reports, window guidance, industry regulatory dialogues, regulatory sandboxes, and regional pilots to achieve gradual, prudent and diversified supervision of stablecoins. At present, although the keynote of my country’s regulatory policy is to strictly prohibit the exchange of encrypted digital currency and fiat currency, but due to the inherent borderless nature of stable currency, the stable currency ecology has in fact been continuously developing in my country’s financial system. Therefore, my country’s overly simple and crude regulatory paradigm for stablecoins actually ignores the fact that stablecoins exist objectively in my country’s economic life. To improve the supervision of stablecoins, first of all, the research on stablecoin supervision should be changed from “hidden” to “explicit”, and vigorously support and develop stablecoins in monetary, financial, technological and legal research. On this basis, the stablecoin centralized supervision guidance will be started step by step and planned, and the stablecoin issuers, distributors, transaction matchmakers, technical solution providers and users will not lose the opportunity to have a dialogue, so as to enhance the relationship between the regulatory layer and the stablecoin participants. Communicate understanding and enhance mutual trust. In addition, regulators should consider implementing sandbox supervision or in areas with relatively good infrastructure and active and healthy financial ecology, such as the Guangdong-Hong Kong-Macao Greater Bay Area, to test the stablecoin ecological operation system and summarize the effects of supervision in a timely manner. The Guangdong-Hong Kong-Macao Greater Bay Area presents the characteristics of “one country, two systems and three currencies”. It is not only under the unified jurisdiction of the central government, but also includes cross-border and autonomous areas; it not only provides real application scenarios for new cross-border payments, but also provides safe, Effectively avoiding the interference of international forces is the most ideal pilot area for my country’s stablecoin ecosystem.

Finally, my country should actively lead the industry standards and regulatory policies of stablecoins and participate in global cooperation in stablecoin supervision. At present, the digital economy is ushering in a new development opportunity. Through the new crown epidemic, countries around the world have fully realized the importance and urgency of developing the digital economy, and have increased investment in technology, capital and research. In the future, the competition of digital economy and digital finance is bound to be more intense. In the financial field, my country has always had a fine tradition of making good use of late-mover advantages. The paperless construction of China’s securities market has completed the paperless process that took decades for mature markets to complete within a few years. In the rapid formation of the world’s encrypted digital currency ecology, my country is also one of the important markets for stable currency in the world. Therefore, my country has the technical conditions and market foundation to participate in the formulation of industry standards and regulatory frameworks for world stablecoins.

The enforcement actions and regulatory frameworks for stablecoins in the United States and Europe are no longer limited to financial regulation. The deeper motivation behind it is that many countries have realized that stable currency will affect the international monetary and financial order, and the supervision of stable currency is related to the country’s monetary policy and financial stability. At this stage, the issuance of stablecoins anchored to the U.S. dollar mainly borrows the dominant position of the U.S. dollar as the world currency, and in turn, the stablecoins pegged to the U.S. dollar further enhance the U.S. dollar’s ​​global influence, which means that residents of different countries around the world can U.S. dollars are indirectly held by holding stablecoins. As this situation continues to spread, the status of the dollar in the global monetary system will be further enhanced, and the United States will further increase its control over the global economic system. In response and countermeasures, my country should encourage private enterprises to participate in the stablecoin market competition, and approve stablecoins issued by anchoring RMB in accordance with regulatory requirements, so as to actively participate in the stablecoin market competition and enhance the position of RMB in the international payment market.

We must also fully recognize that the competition, development and regulation of stablecoins are taking place on a global level. The emergence of stablecoins was born to solve the problem of cross-border payment and cross-legal currency and digital currency payment, and the liquidity of stablecoins is also on a global scale. “Same business, same risk, same rules” and a consistent regulatory approach across countries make up the regulatory guidance proposed by the G7 Global Stablecoin Working Group. Facing the natural cross-border liquidity of stablecoins and the subsequent huge impact on world financial stability, the Group of Twenty (G20) authorized the Financial Stability Board (FSB) in June 2019 to review the global response to stablecoins legal and regulatory framework, and advise on multilateral responses. Therefore, my country should actively participate in international cooperation on stablecoin regulation to avoid regulatory arbitrage.

in conclusion

China should continue to promote digital asset innovation while safeguarding my country’s national interests in the field of financial security. In order to maintain the security of the financial system, my country’s legislature and regulatory agencies should continue to improve regulatory provisions. Although it is a long-term goal to establish a complete regulatory framework for encrypted digital assets and stablecoins, considering the development trend of stablecoins and the international regulatory situation, my country may not be able to fully regulate stablecoins in the short term. For the more urgent risks, regulatory measures have been introduced to promote the orderly development of financial innovation activities. In order to maintain financial sovereignty and security, China should step up its participation in the establishment of a comprehensive regulatory framework for global stablecoins, and promote stablecoin regulatory solutions that are controllable in my country. In addition, my country should revise and adjust the policy of comprehensive prohibition of encrypted digital currency and stable currency in a timely manner, establish a professional, systematic and complete regulatory framework, and place global stable currency activities within the scope of supervision. my country should continue to promote the central bank’s digital currency project and constantly sum up experience. At the same time, the state should encourage non-state-owned enterprises to actively participate in the practice of stablecoins, strengthen the stablecoin “global payment system” of cooperation between state-owned financial departments and non-state-owned financial innovation enterprises, and unite countries around the world to vigorously promote stablecoins under the premise of enhancing payment autonomy. Fintech exploration. Under other security dimensions related to financial means, the People’s Bank of China, the China Banking and Insurance Regulatory Commission, and financial and legal think tanks should continue to pay attention to the latest research progress of financial regulators around the world, and submit continuous improvement of stablecoin legislation to the legislature suggestion.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/zhao-binghao-extraterritorial-experience-and-chinese-solution-to-the-challenge-of-encrypted-digital-currency-regulation/
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