PBOC official: 6 red lines that bitcoin exchanges must not breach
note: Zhou Xuedong is the representative of NPC and the Director of PBOC Operation Management Department. During the two sessions, he submit 10 proposals, one of which is about the management of bitcoin. Below is the transcript of his speech on the meeting of two sessions.
The second issue is on the supervision of Bitcoin. In these two years, Bitcoin and other so-called network virtual currency are quite popular among young people. Most of the investors are younger generations. Therefore, my proposal on strengthening the regulation of virtual goods such as Bitcoin may be of concern to young people. There was news this morning saying that the SEC rejected the application of listing Bitcoin ETF on a public exchange.
Following the instruction from the People’s Bank of China head office, we conducted a continuous on-site inspection to Bitcoin exchanges in January this year. Lots of problems were discovered in the past two months. There are two major issues: first of all, some entities are suspected of engaging in illegal financial business, including loaning of bitccoin and fiat, actual purchases, matched trading etc. Secondly, these institutions have not established internal control regulation and system for anti-money laundering. In fact, there are some cases that bitcoin are used to launder money and circumvent foreign exchange control, but the number is not large. It is noteworthy that bubbles in Bitcoin are very large. In January this year, Bitcoin price soared from 4,000 yuan at end of last year to more than 8,800 yuan. The trading volume in China used to account for 99% of the world. In fact, the real trading volume is not that much. Some institutions and investors created huge volume through high-frequency trading, that is, to create false transaction. The reason behind this conduct is that some PE, venture capitalists want to utilize this tool to take more market share, and also attract investors’ attention. Therefore, I think it is necessary to carry out inspection and supervision.
Obviously, there are two different opinions on Bitcoin from an international perspective. One voice is that Bitcoin is good, and the other saying it’s bad. Supporters claim that Bitcoin is a great innovation in the development of Internet technology and the best showcase of blockchain technology. Therefore the promotion and development of blockchain technology could be observed via Bitcoin. However opponents said that bitcoin is an outright financial pyramid schemes or a bubble that will pop sooner or later. Mainstream economists like Stiglitz and Krugman, are opponents of Bitcoin. Same situation also applies in China.
From the perspective of being responsible for public interest, exchanges of virtual goods like Bitcoin must be regulated. Without proper regulation, bubble will be driven to a massive scale by pure speculation. Therefore I proposed some “red lines” in the short term.
1. Exchanges are not allowed to pump trading volume via leveraged trading, Bitcoin and fiat loaning and 0 transaction fee.
2. Exchanges must not violate AML regulations to engage in money laundry.
3. Exchanges must not violate foreign exchange regulations to use bitcoin as payment and settlement.
4. Exchanges must not evade tax.
5. Exchanges shall not carry out false propaganda or illegal pyramid schemes
6. Exchanges shall not operate financial business like securities and futures
These are the regulatory “red lines” that must not be crossed. Those who breach these red lines must be punished.
In the long run, bitcoin exchanges will be placed under the regulation of local commodities exchanges. Local financial institutions will be in charge of the matter. PBOC will implement functional regulation in terms of payment and settlement, account management, anti money laundry and foreign exchange management. We shall take an open attitude towards innovation and observe discreetly for bitcoin and exchanges alike. However, considering the actual conditions of China, a proper regulation must be applied.