Wednesday, December 20, 2017

China Needs to Embrace Cryptocurrencies Trend
By Yang Wang
Global Times
2017/12/20 23:53:40

On December 17, bitcoin futures started trading on Chicago Mercantile Exchange (CME), the world's largest derivatives exchange. Since the 0.1 bitcoin test version was released in 2009, the price has been on a roller coaster ride. But it's soared 22 million-fold since the first trade in 2010.

Bitcoin is one type of cryptocurrency based on blockchain technology, which has the hash algorithm and digital signature as supporting technologies.

Most developed countries maintain a welcoming attitude toward bitcoin. Members of the EU, Germany in particular, have taken the lead in legalizing bitcoin. In return, these nations levy small taxes on transactions. In October 2011, bitcoin was pegged to the US dollar at a one-to-one ratio, which means there are exchange-rate movements.

Despite the open attitude, there are regulatory mechanisms to safeguard the emerging cryptocurrency. The UK's Financial Conduct Authority (FCA) has been developing a regulatory framework since 2014 for innovative projects like blockchain.

A so-called regulatory sandbox creates a relative safe space that allows both the innovative entities and regulators to evolve without shouldering severe consequences if the project fails. Sharing a similar legal system with the UK, the US also accommodates innovative experiments. But there is no unanimous regulatory standard among governments.

Even in the US, controversy still exists on whether to regulate bitcoin as securities or a derivative. The US Securities and Exchange Commission (SEC) believes it is more suitable to regulate it as securities because of its liquidity, while the US Commodity Futures Trading Commission (CFTC) considers it as a futures contract, since it fluctuates even less smoothly than futures and hedge funds.

Governments in developed countries have not only engaged in building a regulatory system, they are also trying to create their own cryptocurrencies with blockchain technology. The Netherlands and UK are two countries that have taken such initiatives. The Netherlands issued its test version of a cryptocurrency in 2014, while the Bank of England moved its RScoin to the testing stage in 2015.

Many developing countries have adopted more stringent policies on bitcoin, partly due to the lack of technology to create useful regulations. Regulators in the UK and US, on the contrary, have more expertise in blockchain technology. Moreover, bitcoin itself bears certain risks, especially the initial coin offering (ICO) model.

China tolerated the cryptocurrency at first, and regulators drew upon researchers to deal with contingencies. Earlier this year, however, bitcoin trading was banned because the overall environment requires financial stability. Preventing financial risks is the top priority for the Chinese government.

The ICO blowout in China this June was also an incentive to ban bitcoin. ICOs create tokens based on cryptocurrencies, which in turn are pegged to a commodity such as rice, liquor or tea. Since the tokens fluctuated with the cryptocurrencies, the risk was easily disseminated upstream and downstream. If financial institutions, including banks, participate in ICOs, the risk picture becomes even more complex.

At the same time, China is considering generating its own cryptocurrency. Early in 2014, the People's Bank of China (PBC) assembled a team of experts to discuss the regulatory framework and the possibility of a national cryptocurrency.

No matter what cryptocurrency is involved, risks are inevitable. The low-end risks can be eliminated with technologies such as iris recognition and fingerprint verification. But the high-end risks, like underground banks, are hard to combat. In terms of the laws and regulations on cryptocurrencies, China still has a long way to go.

Policies change often in response to market conditions. Given that cryptocurrencies are becoming mature, those issued by central banks will  promote financial market development. To ensure it has a place in the new global financial order, China should not abandon this opportunity.

The author is research director of the Hande Fintech Research Institute.

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