China Financial Conference Provides Outlook for Regulatory Environment of Cryptocurrency
The financial regulatory system in China remains to be sub-industry supervision with “ one bank and three commissions” structure, which refers to the People’s Bank of China(PBOC), the China Banking Regulatory Commission(CBRC), the China Securities Commission (CSRC) and the China Insurance Regulatory Commission(CIRC). Such regulatory design leads to two difficult situations. First is the overlapping of regulation: if a bank gets involved in securities business, the bank must follow guidance and regulation from two authorities. Second is the opposite: the absence of regulation. Some new financial business model (like some internet “Wealth Management Company”) that intersects into various sectors requires coordination of two or more authorities, which often results in a grey or vacuum area of regulation.
This is about to change after the two-day National Financial Work Conference that ended Saturday. A “National Financial Stability Development Committee” will be established to coordinate all financial regulations across the country. The regulatory environment of cryptocurrency ecosystem is expected to be in line with these latest policy changes.
Liu Shengjun, the director of the China Financial Reform Institute, outlined the upcoming financial regulatory reform with the emergence the National Financial Stability Development Committee, which is set to be of superior authority over the incumbent “one bank and three committees”. However, the latest establishment of regulatory authority lacks a legal standing. Liu pointed out the change from the following 5 aspects:
1. The key purpose of establishing the State Financial Stability Development Committee is to “strengthen the financial supervision and coordination, make up the short plank of regulation”. The new Committee clearly states that “PBOC’s macro prudential management and prevention responsibilities of systemic risk will be strengthened”, which means that the importance of PBOC in the regulatory structure will be lifted.
2. Division of central government regulation and local government regulation. In view of China’s vastness, local government is an indispensable part in the country’s governance. Judging from the financial fraud like Pan Asia Exchange and Ezhubao, local government must undertake greater responsibility in handing prevention or post-disposal of financial cases. The Financial Conference proposed that “Under the premise that the financial management is mainly the routine power of central government, local government need to strengthen the risk disposal liability following the unified rules of central authorities.”
3. The professionalism of the regulatory authorities. Li Keqiang said in the fifth State Council anti-corruption conference that “individual supervisors and corporate executives who have committed illegal acts with collusion must be severely punished according to law.” Later Xiang Junbo, the Chairman of the China Insurance Regulatory Commission, and Yang Jiacai, Assistant to the Chairman of the CBRC and other senior officials were arrested. Therefore it’s proposed in the Financial Work Conference that: “financial management authorities should strive to stick to their duty requirements, to form a regulatory spirit of strict accountability. Failure to prompt or dispose risk timely is regarded as dereliction of duty. ”
4. Information sharing. The mastering and analysis of information is the premise of effective supervision. In the “business-based supervision” system, information is blocked by industry barriers, which is incompatible with the reality of financial mixing and shadow banking. Therefore, the meeting also required “to strengthen the co-ordination and inter-connection of financial infrastructure, and promote the comprehensive financial industry statistics and regulatory information sharing.”
5. Full coverage: the deviation of mixed financial sectors from the reality of business-based regulation means that the “regulatory vacuum” is inevitable. Not only that, some financial institutions creates complicated products for “cross arbitrage” or to evade regulations. In this regard, Premier Li Keqiang proposed, “to strengthen the professionalism, unity and penetration of financial regulatory, all financial business should be included in the regulation system.”
The financial attributes of Bitcoin and other cryptocurrencies are amplified by the borderless connection of internet. Regulation of such virtual commodities is in heavy backlog in most countries, China is no exception. ICO, the most innovative financing tool based on cryptography and internet, has caught attention from the top authorities as indicated by Yao Qian’s most recent work on ICO regulation and research. Relevant regulations and guidelines for Bitcoin and ICO is around the corner and the transparency of regulatory attitudes could be interpreted both ways.
The National Financial Conference has been convened every five years since 1997 and is widely considered to set the tone for financial reforms.