Skip to main content

China Releases First Regulatory Report on Bitcoin Businesses

Op-ed - 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.

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

  1. 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.
  2. 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 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.