Cointelegraph By Max Yakubowski
This is part one of a multipart series on blockchain and crypto in China.
China has been discussing the possibilities of national digital currency for half a decade, and the Chinese digital yuan project — referred to as the Digital Currency Electronic Payment, or DCEP — has years of history. Back in 2014, the People’s Bank of China set up a research group “to study digital currencies and application scenarios.” The research team was conducting a digital currency study and reportedly considering issuing its own digital currency. In 2016, the PBoC announced plans to develop a digital currency of its own and started to hire blockchain experts. The same year, China’s State Council included blockchain technology in its 13th Five-Year Plan.
In 2017, the PBoC launched the Digital Currency Research Institute, which focused on the development and research of digital currencies. According to China’s National Intellectual Property Administration (formally known as the State Intellectual Property Office), the institute filed more than 63 patent applications related to blockchain and crypto during its first year of existence alone. In 2018, a report — released by the Chinese Institute of International Finance, operated under the People’s Bank of China — indicated that the central bank would institute a regulatory crackdown on all types of digital currencies.
Back in July 2019, Wang Xin, director of the PBoC’s research bureau, stated that Facebook’s plan to launch its own stablecoin, Libra (now known as Diem), had influenced China’s plans to launch a digital form of the Chinese yuan. Back then, some experts predicted that the Chinese government-backed digital currency aimed to be rolled out earlier than the official launch of Libra.
Related: China’s central bank developing own digital currency in response to Libra
Last year, the DCEP project made significant progress; meanwhile, the details of the project remained limited. While the question of whether being the first in launching a CBDC will be enough to win global reserve currency status remains open, China is clearly moving toward leading the charge into the digital economy.
Related: China’s CBDC is about domestic dominance, not beating the dollar
This year alone, China started testing infrastructure for the digital yuan prior to its official launch and the Chinese city of Shenzhen provided a chance for its citizens to participate in a lottery event that aimed to encourage the adoption of the country’s new central bank digital currency. Also this year, China completed the development of hardware wallets for the digital yuan project; the first one was produced by the Xiong’an branch of the Agricultural Bank of China in Hebei and the second by the Postal Savings Bank of China. And earlier in March, the Bank of Communications and China Construction Bank conducted digital yuan trials at two major department stores in Shanghai.
Digital yuan vs. cryptocurrency
A major concern among experts is that China’s CBDC is unlikely to be a cryptocurrency. As was underlined by Bloomberg in 2019: “The PBOC will, of course, back the digital yuan, making it the opposite of decentralized.” China’s new digital currency will most likely be a centralized digital currency rather than a true cryptocurrency. As Shao Fujun, chairman of China UnionPay and a former PBoC official, said back in August 2019, China’s state-owned digital currency “will have lots of positive impacts, including tracking the money flow in economic activities and supporting making monetary policy.”
Mu Changchun, deputy director of the Chinese central bank’s payments department, said back in 2019 that the forthcoming digital yuan would strike the balance between facilitating anonymous payments and preventing money laundering. He repeated the statement earlier this month, saying that a completely anonymous CBDC “is not feasible” because a national digital currency must meet requirements related to Anti-Money Laundering, Counter-Terrorist Financing and anti-tax evasion. Meanwhile, Chinese authorities are willing to ensure maximum user privacy for the country’s central bank digital currency, according to Mu’s recent statement.
The question of whether the PBoC’s currency will be like decentralized blockchain-based cryptocurrencies or if it will give Beijing more control over its financial system is an important one. Nonetheless, the development of the digital yuan has undoubtedly influenced the development of the digital economy both within and outside of China. Cointelegraph reached out to experts in the blockchain and crypto space from China for their opinions on the following questions: How has the development of the digital yuan affected the entire crypto and blockchain industry in China? Will the Chinese CBDC stay centralized or gradually become decentralized over time?
Chang Jia, founder of Bytom and 8btc:
“The Chinese digital yuan is designed and launched by the PBoC (China’s central bank). It is based on the construction of China’s basic financial network for decades, and it is endorsed by state credit. Therefore, its birth undoubtedly encourages China’s whole blockchain industry, especially those corporations that have been persisting in the underlying technology of blockchain, digital currency infrastructure construction, and industrial blockchain solutions for several years to see their future use, and even realize the great vision of listing on the STAR Market.
At the beginning, the Chinese digital yuan DCEP focused on a trial operation in the CCB (China Construction Bank). After proving its basic operation, it will also get basic feedback from all walks of life and urban people’s livelihood in China. With the gradual clarification and strengthening of DCEP in the national economy and the people’s livelihood, such a huge digital currency system like DCEP certainly needs the joint construction of the state and the people in many aspects to create a new digital yuan network and to actively explore internationalization.”
Daniel Lv, co-founder of Nervos:
“The fact that China is working on a digital yuan is proof that there’s value in digital assets and the underlying blockchain technology. The primary purpose of introducing a central bank digital currency is to protect monetary sovereignty out of concern that Bitcoin and other cryptocurrencies will have an impact. The DCEP will also improve the efficiency of payment systems and enhance the convenience of yuan payments.
Blockchain itself is a combination of many existing mature technologies, such as asymmetric cryptography, consensus algorithm, time-stamping, etc. As seen from its latest disclosed patent, DCEP is integrated with asymmetric cryptography, unspent transaction output (UTXO), and smart contracts.
The digital yuan adopts a two-layered system for issuance and distribution — the central bank issues DCEP to banks or other financial institutions, and then these institutions further distribute the digital currency to the public. While the issuance of DCEP is centralized, the circulation could be based on traditional financial account systems or blockchains.
If DCEP transactions happen on a public blockchain, I assume it will probably help the yuan to internationalize. China’s central bank had previously announced that the DCEP pilot scenario included Winter Olympics venues. Foreign entities can simply open a DCEP wallet to conduct the cross-border transaction, as the requirements to open a DCEP wallet are much lower than those to open a yuan deposit account. Peer-to-peer transactions can be initiated between any two DCEP wallets.”
Discus Fish, co-founder of F2Pool and Cobo:
“Essentially, the central bank digital currency is completely different from Bitcoin and other cryptocurrencies because it is still the centralized fiat currency in essence. However, the CBDC may strengthen the public’s perception of blockchain and cryptocurrency. In the long run, under the education of the central bank, the blockchain industry will attract a large number of new users, especially the young people growing up in the mobile Internet environment, thus leading to the rapid development of the industry. It has a long-term positive impact on the industry.
The essence of CBDC is the centralized fiat currency, which is still the central bank’s debt to the public. Therefore, the central bank will adhere to the centralized management mode. This relationship between creditor’s rights and debt will not change with the change of monetary form. Therefore, I think no matter how the form develops, it is impossible for the central bank’s digital currency to be decentralized.”
Kevin Shao, co-founder of Bitrise Capital:
“The development of the Internet has brought the popularization of electronic payments, especially the applications of Alipay and WeChat payment, which have changed the habits of many people around using cash. Such changes are profoundly affecting China’s financial development. The central bank is also following the trend of digital economic development, starting from the top-level design of the country, and building a complete set of electronic payment infrastructure.
At present, the central bank has not made a final decision on which technical means will be used for the digital currency. However, we have seen that some cities have experimented with digital currencies. But overall, China’s digital currency still serves the central bank’s monetary policy and monetary functions.”
All interviewees were featured in Cointelegraph China’s Top 100 Notable People in Blockchain of 2020. Cointelegraph China contributed to the interviews.
The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
The quotes have been edited and condensed.
Trial of former BitMEX executives set for next March
Cointelegraph By Martin Young
The money laundering trial for the former executives of U.S. cryptocurrency exchange BitMEX has been scheduled for March 28, 2022.
On May 11, New York District Judge John Koeltl set the trial date for former BitMEX executives CEO Arthur Hayes, co-founder Benjamin Delo, and chief technology officer Samuel Reed.
The trio are accused of violating the Bank Secrecy Act and anti-money laundering laws. Additionally, BitMEX’s head of business development, Gregory Dwyer, is also facing charges but has yet to appear in the case.
The U.S. Department of Justice originally filed the criminal charges against the four executives on October 1, 2020, for illegally operating a derivatives exchange. Hayes, Delo, and Reed founded BitMEX in 2014 but failed to register with the U.S. Commodity Futures Trading Commission which has also filed a civil enforcement action against the company.
DoJ prosecutors have accused BitMEX executives of failing to implement AML procedures while doing business with U.S.-based traders, despite the company being based in the Seychelles.
According to the indictment, Hayes allegedly said in July 2019 that the Seychelles was a friendlier jurisdiction since it cost less to bribe authorities there than it would in the U.S. FBI Assistant Director William Sweeney claimed to the press that Hayes bragged about bribing regulators in that jurisdiction costing just “a coconut.”
According to John Jefferies, chief financial analyst at blockchain intelligence firm CipherTrace, BitMEX had been under CFTC investigation since early 2019 for allowing Americans to trade on the platform. Speaking to Cointelegraph, he added that they were given time to improve their Customer Identification Program to effectively exclude U.S. clients.
Any defense motions are due to be filed in June while other potential pretrial motions are scheduled to be lodged by September, a Law360 report noted. If convicted, the executives could face a maximum of five years in prison and a $250,000 fine.
In mid-January, BitMEX announced that it was working with blockchain analytics firm Chainalysis with the aim of identifying, investigating, and preventing illicit transactions.
Powers On… Why Bernie Madoff should be a powerful lesson to stock and crypto memecoin investors
Cointelegraph By Marc Powers
Powers On… is a monthly opinion column from Marc Powers, who spent much of his 40-year legal career working with complex securities-related cases in the United States after a stint with the SEC. He is now an Adjunct Professor at Florida International University School of Law, where he teaches a course on ‘Blockchain, Crypto and Regulatory Considerations.’
I was downstairs at a bar on the Upper East Side of Manhattan that Thursday evening, December 11, 2008, playing a friendly game of Texas Hold ‘em when the calls began.
One after the other they came, and they continued at the office the next day. The theme was consistent. I was being asked to represent various victims of a fraud by this guy, Bernie Madoff.
At this point I had never heard of him, but in a matter of days, the whole world would come to learn of this evil misanthrope and his fictitious transactions, which would become the world’s largest individual financial fraud and Ponzi scheme. Some calls came directly from the victims themselves; others came from their accountants and non-securities lawyers who, from time to time, referred matters and clients to me.
What I heard was ugly. Many of the callers appeared to have lost millions. For some, it represented their life savings. Others had relied on the monies entrusted to Madoff to pay for their children’s upcoming college education expenses. Many victims had plowed almost all their disposable funds into this man’s“investment fund”, where they had been receiving high investment returns periodically or quarterly for their living expenses.
Madoff’s infinity fraud involving many Jewish communities and charities in New York, Los Angeles, Palm Beach and parts of Minnesota and Michigan, was pernicious. He presented an air of secrecy and exclusivity in his activities, insinuating himself into a circle of “friends and family”. He had obtained prominent positions with exchanges such as NASDAQ and the Cincinnati stock exchanges. His apparent position as a reputable financier caused many victims to fall for this façade of credibility and trustworthiness.
As the national leader of my law firm’s Securities Litigation & SEC Regulatory Enforcement practice, and one with experience in representing victims of Ponzi schemes and internal investigations, I would be invited to participate with a small group of lawyers to meet with Irving Picard, who would become the SIPA court appointed Trustee overseeing the recovery efforts by the SIPC for those who had lost monies through the failed broker-dealer Madoff ran, Bernard L. Madoff Investment Securities, Inc.
Once Irving came on board to Baker Hostetler and was selected by the court to be the SIPA Trustee, our efforts expanded at times to over 250 attorneys throughout the law firm.
For over four years, I was a core member of the Trustee’s effort, and would lead our national efforts to investigate, develop theories of liability, and bring litigation against hedge funds here in the United States to recover the reported $65 billion lost. As it turns out, the number was actually less than $20 billion; still a huge number.
My small team was personally responsible for obtaining the largest settlement to this day against a hedge fund, Tremont, and the second largest cash settlement against anyone, during my firm’s twelve years of recoveries — over $1 billion in cash.
Lessons still to learn from the Madoff scandal
With the death of Madoff on April 14th, I have been thinking about his fraud and how the saga provides some interesting and helpful lessons for those now in and thinking of entering crypto space as investors — particularly with regard to “memecoins” in the age of social media and the rapid dissemination of viral information.
Among these observations is the continuing appeal of the “follow the crowd” mentality and the lack of financial and investment acumen of those investing in the stock and crypto market. The same can be said of a large number of Madoff’s individual victims, and even institutions, which failed to understand and question his trading strategies which purportedly (and astonishingly, on reflection) provided “profits” in both up and down markets. Red flags were prevalent. Especially to the supposedly sophisticated hedge funds that invested in Madoff’s purported investment fund.
Nowadays, we have groups of individuals buying stocks like GameStop, pushing its market cap from under a billion dollars to over $12 billion since the beginning of this year. Many are just following the crowd, which is what some in the Madoff days did. But what do these Reddit pirates really know about the business? Its prospects? Or for that matter, how to analyze a company’s stock price?
I suspect many who followed the crowd that pushed the stock price over $400 and briefly drove GameStop to a market cap of over $20 billion lost a great deal of money, as evidenced by the significant margin calls and liquidity issues the Robinhood exchange experienced during the most frenetic trading periods.
Dogecoin should scare you right now
Let’s also look at Dogecoin, It was created in 2013 as a joke to lampoon all the various altcoins. Until January 26th of this year, it had a value of less than one cent — rightfully so, since at best it had been used as a way to tip others on social media sites.
Yet now it’s one of the largest cryptocurrencies in the world, trading at a high of over 70 cents this week before plunging as its chief booster, Elon Musk, apparently failed to impress the so-called Doge Army with an appearance on Saturday Night Live.
Will this end well for TikTok fans and Musk’s astronomical Twitter following? Social phenomena are often short-lived, and it’s hard to imagine that there’s a sustainable use-case for Dogecoin, no matter how much we may love Shiba Inus.
What about NFTs? For me, I am presently ambivalent on this use case of blockchain technology. On the one hand, I see the appeal of owning a unique digital piece of art, like a physical artist’s proof. On the other, I just don’t quite get the great value here. At least you can hang art on a wall, in a gallery, or donate it to a museum for the public to view. What does one do with a $69 million Beeple? Pull out a 6 inch smartphone or laptop to show off the art you own?
All of the above is a way of saying, there are a lot of trends out there in the crypto space, and like any technically-challenging new financial technology it is full of con artists and fraudsters all trying to separate you from your money.
So, know what you are investing in, do your own research, and don’t always follow the crowd.
Updates from Powers On…
In my last column, I railed against the SEC for what seemed to be overreaching in the SEC v. Ripple litigation. The SEC had subpoenaed a half dozen financial institutions and a local Federal Reserve for eight years of personal records of the two Ripple executives named in the lawsuit. Well, I am pleased to report that Magistrate Judge Sarah Netburn agreed with me. She found the requests an improper overreach, and ordered the SEC to withdraw its subpoenas. Let’s hear it for our judiciary!
In my first monthly column back in February, I raised concern about the possible decline of the U.S. dollar dominance worldwide if we did not move faster to accept Central Bank Digital Currencies. I worried about China already developing and embracing a digital yuan, which I saw as a threat to the dollar. Well, I am pleased to report that others, too, are now concerned, including Congress. Last month, GOP House Minority leader Kevin McCarthy sounded a similar alarm.
Marc Powers is currently an adjunct professor at Florida International University School of Law, where he is teaching “Blockchain, Crypto and Regulatory Considerations.” He recently retired from practicing at an Am Law 100 law firm, where he built both its national securities litigation and regulatory enforcement practice team and its hedge fund industry practice. Marc started his legal career in the SEC’s Enforcement Division. During his 40 years in law, he was involved in representations including the Bernie Madoff Ponzi scheme, a recent presidential pardon and the Martha Stewart insider trading trial.
The opinions expressed are the author’s alone and do not necessarily reflect the views of Cointelegraph, nor Florida International University School of Law or its affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
Stablecoins present new dilemmas for regulators as mass adoption looms
Cointelegraph By Agata Ferreira
Stablecoins present peculiar challenges to regulators. Although there is no single, agreed-upon definition of a stablecoin, the common denominator of the commonly used definitions is that stablecoins are designed to maintain a stable value in relation to a specified currency, asset or pool of such currencies/assets. They are contrasted with regular cryptocurrencies, which have no such stability mechanism and whose values tend to fluctuate, sometimes even substantially.
Related: All risk, no gain? The vague definition of stablecoins is causing problems
Stablecoins do not denote a uniform category but represent a variety of crypto instruments that can vary significantly in legal, technical, functional and economic terms. Despite its name, it is important to stress that this asset does not guarantee stability, which depends on the specific design features and governance mechanisms.
Related: Algorithmic stablecoins aren’t really stable, but can the concept redeem itself?
Regulatory attention to stablecoins
Stablecoins have been on the rise since 2014, when the first stablecoin, Tether (USDT), was launched, and even though they have become an important digital asset in the blockchain ecosystem within a few years, they have not attracted much regulatory attention. This abruptly changed with the announcement of the Libra project in June 2019 by the Libra Association, of which Facebook is one of the founding companies.
Related: The way of the stablecoin: A journey toward stability, trust and decentralization
Almost immediately, many financial authorities around the world — including the Financial Stability Board, European Central Bank, Bank of England, United States Federal Reserve as well as the U.S. House of Representatives Committee on Financial Services — issued strong statements on Libra, where the collective sentiment was caution and concern, highlighting the serious potential risks.
Related: How Facebook Libra is seeking compliance, but may not launch by 2020
Libra’s potential to become global and access billions of users through a user-centric social network platform revealed an entirely new dimension to stablecoins. The potential impact of a global yet fast, cheap, easy, seamless payment solution through a platform that is already seamlessly integrated within the lives of the global population would be very far reaching indeed. The authorities have come to realize that this crypto asset warrants special attention, due to its potential scale, borderlessness and impact on economies and financial systems.
In the following months, many official reports and documents analyzing stablecoins were produced by bodies like the ECB, G7, FSB, Financial Action Task Force and International Organization of Securities Commissions. They mostly highlighted risks and challenges, including risks to financial stability and concerns over consumer and investor protection, Anti-Money Laundering, Combating the Financing of Terrorism, data protection, market integrity and monetary sovereignty, as well as issues of competition, monetary policy, cybersecurity, operational resilience and regulatory uncertainties.
Among the plethora of official statements and reports, the Libra Association announced a redesigned project Libra 2.0 in April 2020, and soon afterward, the coin was rebranded Diem, in an effort to distance it from the controversies surrounding Libra.
Related: New name, old problems? Libra’s rebrand to Diem still faces challenges
Stablecoins and the United States
In the United States, the Office of the Comptroller of the Currency was actively contributing to the debate, publishing three interpretive letters related to digital assets. The first letter in July 2020 concluded that national banks can hold digital assets in custody on behalf of their clients. The second letter in September 2020 concluded that national banks can hold stablecoin reserve accounts on behalf of their clients. Finally, the latest letter issued in January 2021 effectively granted permission to national banks and federal savings associations to participate as nodes in the independent node verification networks (a common form of which is a distributed ledger) and use stablecoins to facilitate payment activities and other functions.
The OCC acknowledges that, like other electronically stored value systems, stablecoins are electronic representations of currency. Instead of value being stored in a more traditional way, it is represented in a stablecoin, but this constitutes only a technological distinction and does not affect the underlying activity or its permissibility. To address potential risks, banks should act in accordance with existing regulatory and compliance requirements, while staying consistent with applicable laws and safe-and-sound banking practices.
On the other hand, in December 2020, just before the end of the U.S. Congress tenure, a draft of the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act was introduced, which proposed significant increases in the regulatory oversight of stablecoins, requiring all stablecoin issuers to have a banking charter, be licensed by multiple federal agencies and follow banking regulations. The bill is at the early stages of the legislative process and has not been introduced to the House of Representatives yet.
Related: A nightmare on Stable Street: Centralized stablecoins may be doomed
Stablecoins and the European Union
In the meantime, the EU Commission issued a comprehensive regulatory proposal on Markets in Crypto-Assets, or MiCA, in September 2020, which aims to address potential risks to financial stability and orderly monetary policy from stablecoins, particularly those that have the potential to become widely accepted and systemic. MiCA provides a bespoke regulatory framework and establishes a uniform set of rules for crypto-asset service providers and issuers.
Related: Europe awaits implementation of regulatory framework for crypto assets
For stablecoins of significant potential, MiCA introduces more stringent compliance obligations, including stronger capital, investor and supervisory requirements. They will cover governance, conflicts of interest, reserve assets, custody, investment and the white paper, as well as provisions on authorization and operating conditions of service providers, who will need to be specifically authorized. Requirements include prudential safeguards, organizational requirements and rules on the safekeeping of funds. Additionally, more specific requirements will apply to certain services, including crypto-asset custody; trading platforms; exchange of crypto assets; reception, transmission and execution of orders; and advice on crypto assets.
MiCA is one of the most comprehensive attempts at regulating stablecoins and targets stablecoins not governed by financial regulation. The EU regulators want to leave no stablecoin outside of the regulatory framework. The offering and trading of any stablecoins that do not fall within MiCA definitions (e.g., Tether), and do not fulfill regulatory requirements will not be permitted within the EU. Denial of regulatory approval to certain stablecoin products that thrive in other jurisdictions may give rise to regulatory arbitrage.
Current regulatory scrutiny around the world is heavily oriented toward investigating and emphasizing potential risks. The benefits of stablecoins and the advantages of cheaper, faster and seamless payments (including cross-border remittances) are less accentuated, mostly just acknowledged.
A major regulatory challenge relating to global stablecoins is international coordination of regulatory efforts across diverse economies, jurisdictions, legal systems, and different levels of economic development and needs. Calls for the harmonization of legal and regulatory frameworks include areas such as governing data use and sharing, competition policy, consumer protection, digital identity and other important policy issues. Regulatory difficulties are compounded by a remarkable diversity in structure, economic function, technological design and governance models of stablecoins.
Stablecoins are an important piece of the puzzle for a future DLT-based digital economy, and the challenge for regulators is to ensure adequate regulatory treatment, supportive of innovation and mindful of potential risks. The potential global outreach of stablecoins magnifies regulatory tasks but also reinforces the urgency and importance of adequate regulatory considerations.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article is for general information purposes and is not intended to be and should not be taken as legal advice.
Agata Ferreira is an assistant professor at the Warsaw University of Technology and a guest professor at a number of other academic institutions. She studied law in four different jurisdictions, under common and civil law systems. Agata practiced law in the U.K. financial sector for over a decade in a leading law firm and in an investment bank. She is a member of a panel of experts at the EU Blockchain Observatory and Forum and a member of an advisory council for Blockchain for Europe.
The opinions expressed are the author’s alone and do not necessarily reflect the views of the University or its affiliates.
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