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China Releases First Regulatory Report on Bitcoin Businesses

After months of regulatory uncertainty in the Chinese Bitcoin community, the People’s Bank of China has announced their first major report regarding the legal and regulatory status of Bitcoin. The document, which can be seen as a parallel of the similar report drafted by FINCEN in March this year, is the first to officially classify Bitcoin in the eyes of the Chinese government, and lays out the restrictions on what Bitcoin-related services various categories of businesses and institutions in China are allowed to provide.

bitcoin-ruling

The document, translated into English on Reddit, has five sections, of which the first two are most interesting:

Correct understanding of the properties of Bitcoin. Bitcoin has four main features: lack of geographical restrictions, anonymity, no central issuer and a limited supply. Although Bitcoin is referred to as a “currency”, it is not issued by a monetary authority and does not have the legal tender status of a currency, so it is not at all money in the true sense. Bitcoin should be a specific virtual commodity, and does not have the legal status of a monetary equivalent.

Financial institutions and payment institutions cannot develop Bitcoin-related services. At the present stage, financial institutions and payment institutions may not set a fixed price in Bitcoin for products or services, act as a central counterparty for trading Bitcoin, underwrite insurance related to Bitcoin, directly or indirectly provide other services related to bitcoin, including registration, transaction, clearing and settlement services, issuing Bitcoin-related financial services, or using Bitcoin in investment trusts and funds.

The next three sections are also important, but more mundane. The third section requires Bitcoin sites to register with the telecommunications regulatory authorities, the fourth section clarifies that Bitcoin sites are expected to have anti-money-laundering policies similar to those demanded of US and European exchanges, and finally the last section emphasizes that Bitcoin businesses should help promote the “correct understanding of virtual commodities and currencies, rational investment, control of investment risk and protection of financial safety” and “guide the public to establish a correct conception of money and investment”.

So Is This Good or Bad?

The second section appears to be by far the most damning at first glance; if interpreted incorrectly, it may seem to essentially state that Bitcoin trading and offering products and services in exchange for Bitcoin is illegal entirely. However, in reality the restriction is much weaker than it seems; although the restriction does prohibit nearly all Bitcoin-related activity except perhaps trivial services like offering a Bitcoin price chart, it only applies to “financial institutions and payment institutions” – essentially, Chinese banks and perhaps also services like Alipay, the Chinese equivalent of Paypal.

Thus, investment funds like the SecondMarket fund in the United States, or the proposed Winklevoss offering, which have been seeing significant attention and interest on the part of US-based Bitcoin investors, are most likely out. Direct banking integration similar to the deal between bitcoin.de and Fidor Bank will also be impossible, at least for the time being. Bitcoin exchanges, on the other hand, will be able to continue operating, since Bitcoin exchanges are not “financial institutions” or “payment institutions”, and most of them will not need to make any substantial changes to the way that their businesses operate. The fact that exchanges are not included as financial or payment institutions has been confirmed as the most probable interpretation by several Chinese Bitcoin users, and is the arguably the only interpretation that makes sense – otherwise, why would the People’s Bank write that Chinese Bitcoin exchanges are not allowed to operate in one section and then state that they are required to register with telecommunication authorities in another section? Whether or not a Chinese Bitcoin exchange will be able to offer a payment service like BitPay, however, is still an open question, and one which Chinese Bitcoin users are actively researching.

The first section, clarifying the regulatory status of Bitcoin, is even more favorable. Because Bitcoin is now officially classified as a virtual commodity, and not money, a large class of financial regulation now simply does not apply to Bitcoin businesses. “If Btc is considered money at current stage, all exchanges [would have to] gain their license to continue,” 8BTC’s James Choi explains. “The financial license is very hard to get.” But since Bitcoin is not classified as money, “they don’t need the license.” Bitcoin exchanges will still be regulated as telecommunications services, but they will not need to endure anything close to the sort of heavy financial regulatory burden borne by exchanges in the US.

On the other hand, being classified as a virtual commodity does leave open one potential worry: are Bitcoin trades covered by China’s 17% sales tax? Fortunately, there are several considerations in the Chinese Bitcoin community’s favor. First of all, China’s sales tax is a value added tax, so in theory, if someone can show that they bought bitcoins at one price and then sold at another price, they would only be required to pay tax on the difference. Second, the tax affects only those individuals and institutions that are actually directly engaged in buying and selling bitcoins, and if Chinese Bitcoin exchanges only act as intermediaries and do not buy and sell bitcoins themselves they will likely be in the clear – although, of course, they will be required to pay corporate tax on the profits. The situation is similar in the Chinese stock markets – although, in theory, investors are required to pay capital gains tax on their earnings, in practice many do not, and tax enforcement generally focuses on making sure that exchanges and brokers pay their dues.

The Bitcoin price dropped by over 20% when the news first broke, but has since quickly recovered over half of the drop. For many people, this report has certainly been a reality shock, as a significant number of Bitcoin users perhaps naively saw China’s initial acceptance of Bitcoin as a sign that the Chinese government was positioning itself as a progressive bastion of freedom that would not try to impose any regulation on Bitcoin exchanges at all. From a more realistic standpoint, however, the news is nothing but positive. The regulatory uncertainty that existed earlier has been substituted with a definite regulatory framework, and one which imposes a regulatory burden on Bitcoin exchanges themselves much lighter than that in the United States, and perhaps comparable to that in Europe.

Direct integration with Chinese banks will not happen yet, but in practice this may well simply mean that the Chinese Bitcoin community will have more time to evolve on its own without being rapidly taken over by the professional banking sector. Bitcoin exchanges can now move forward without fear that Bitcoin or even Bitcoin exchange will be banned outright. Finally, the Chinese Bitcoin community may see a glimmer of hope for Bitcoin in the opening words of the second section of the regulatory report: “at the present stage”. We can only wait and see what the next stages of Bitcoin’s growth will bring.

COMMENTS(10)

  • parameta
    9 months ago parameta

    My honest thought is that this is a really bad move for China. If my readings of these articles are correct, Chinese investors can still trade in the Bitcoins for dollars, which is only going to lessen demand for the Yuan at a time when China is trying to get their currency recognized as the new intermediate currency. Not allowing mainland Bitcoin users to cash in their coins for Yuan does nothing in the long run but make the Yuan less relevant as a world currency. It artificially drives demand for dollars and euros which are both spendable in China, and it does little for consumers or investors. If they were smart, they would do the opposite of what they’re doing right now. They would ban use of all currencies but Yuan for Bitcoin, but I don’t think holding your breath would be wise.

  • itsnotlupus
    9 months ago itsnotlupus

    I think the ban caused all of the damage it was going to cause, in a very short period of time. Because this is all electronic, the reaction was swift and painful…but the reaction of the rest of the world was, “We’ll take them off your hands, thanks.” Overnight, Bitcoin gained $100 – while the US was sleeping. That wasn’t coming from China.

    Most of the western world doesn’t really know how China operates, but it’s all backroom and under the table. They say one thing to “save face” in public and do something very different in private, which is what they REALLY mean. So although the government has said publicly that the people are free to have and trade Bitcoin, the “back room” meetings with payment processors and “in no uncertain terms” comments to banks are what they’re hoping will make it less convenient for its citizens to circumvent its capital controls.

    The bottom line is, China had aspirations for the Renminbi to become the world’s new reserve currency, in favor of the US Dollar. They’ve been actively campaigning for the world to adopt a new one. When China’s own people favor a new digital currency and were also using it to expatriate their money to foreign countries, that weakens the RMB. They couldn’t have that.

    It’s like the grey/black market, in China. It exists, it’s practically right out in the open in most major cities…but it doesn’t get shut down. Therefore, it thrives. The Chinese people will find a way to continue using and supporting Bitcoin/Litecoin, undoubtedly.

  • hicaribou
    9 months ago hicaribou

    if it can drop to $200 or less, I will be vey happy indeed.

    • AfourtechIngame
      9 months ago btce

      you will be happy because::

      a. you didn’t bought them when they were cheap

      b. you sold them when there price was low

      c. you didn’t bought at all and now whining.

      • JMorris
        9 months ago JMorris

        honestly, I didn’t buy them when they were cheap. Not whining, though, Even if it hits $1000 I would still like to have at least one.

  • JMorris
    9 months ago JMorris

    I wonder if a bitcoin black market is going to start growing in China now.

    It is like in Argentina or Venezuela where the ‘official’ USD is cheap, but almost no one is allowed to buy it, so people resort to an informal black market where they can trade, even at a much higher price.

  • RonFinberg
    9 months ago RonFinberg

    But a ban is less powerful. By having the PBOC ban payment processors and financial institutions from handling it they basically are showing that they have total control without having to look silly by banning something that is a bit difficult to enforce. Realistically, what are Chinese citizens to do with their bitcoins now? They are limited to purchasing of digital goods and services but any physical purchases from abroad would be liable to inspections. Domestically, companies can recieve them but are limited to only exchanging them to CNY and withdrawing. So the supply would be finite.

    • L.M. Goodman
      9 months ago L.M. Goodman

      What are Chinese going to do with their bitcoin? Answer: convert them into USD and cash them out at any of the many exchanges worldwide – thus circumventing currency controls by the Chinese government that exactly do not let them do that. That’s it.

      • RonFinberg
        9 months ago RonFinberg

        at this point it was purely speculative. The moves didn’t reflect that deposits were being made in BTC China and then being transferred around the world. Also, in terms of selling, there would be little rationale to do so on BTC China if the end-goal was to move it elsewhere.
        Personally, I am interested in other direction where BTC China provided a way for non-Chinese to take positions in the yuan.

  • RonFinberg
    9 months ago RonFinberg

    at this point it was purely speculative. The moves didn’t reflect that deposits were being made in BTC China and then being transferred around the world. Also, in terms of selling, there would be little rationale to do so on BTC China if the end-goal was to move it elsewhere.

    Personally, I am interested in other direction where BTC China provided a way for non-Chinese to take positions in the yuan.

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