FYI my research paper: Cryptocurrency in China: Light-Touch Regulation in Demand

*Misha Yang


On January 20, 2016, Governor of the People’s Bank of China (“PBoC”) Zhou Xiaochuan announced that China would issue its own digital currency “as soon as possible.”[1] A notice declaring this decision was issued on the official website of the PBoC shortly afterwards.[2] Digital currency can help the central bank reduce costs and risks of counterfeits in issuing cash, accelerate the speed in money transfers and afford individual user anonymity and privacy.[3]

Digital currency is by no means an invention by the PBoC. There have been various types of digital currencies introduced by private actors, and there have been a broad range of applications of those digital currencies in various contexts. However, a major distinction between the digital currency proposed by the PBoC and existing ones is that a central bank is now interested in becoming the issuer. All the existing digital currencies are created by private entities and not backed by any sovereign government; therefore, they are not freely circulated as a fiat currency.

So, what motivates central bankers to implement the digital currency idea now rather than at an earlier time? What is the technology breakthrough that rekindles the idea of a digitization world?[4] This Note tries to explain the transformative value of a decentralized, encrypted, publicly distributed and protocol-based network — cryptocurrency — that has garnered attention from central bankers to investors. It has the potential to function as a mechanism to move value across the Internet. Taking the classic cryptocurrency Bitcoin as an example, this Note calls for regulators in China to act proactively in a non-intrusive and timely manner in the area of cryptocurrency, in order to secure an ordered and stable social environment while ensure a healthy development of the revolutionary technology and maximize the potential of cryptocurrency to benefit the society as a whole.

I. A primer on cryptocurrency


Cryptocurrency is a type of virtual currency that is protected by cryptography.[5] Although sometimes people use the term “cryptocurrency,” “virtual currency” and “digital currency” interchangeably, there are differences between these terms. Digital currency entails a broader coverage than virtual currency does. Both virtual currency and cryptocurrency are subcategories of digital currency.[6] Based on their convertibility, virtual currencies can be categorized as convertible and non-convertible. Convertible virtual currency has real-world value: their holders can freely exchange them for real currency.[7] Currencies that can be traded for fiat currencies for equivalent value, such as bitcoin, Second Life Linden Dollars and WebMoney,[8] are considered as convertible.[9] Non-convertible (or closed) virtual currency, on the other hand, is designed for a specific domain world.[10] All non-convertible virtual currencies are centralized, whereas in the case of convertible virtual currencies, they may be either centralized or decentralized.[11]

Centralized virtual currencies have their roots in Internet games and are usually designed for recreation only: they are not based in physical reality, and their primary use has been in online entertainment.[12] Some prominent examples include Second Life “Linden dollars”, PerfectMoney, WebMoney “WM units” and World of Warcraft gold.[13] A virtual currency scheme can also be for non-profit purposes.[14]

Not until very recently, most of the payments made by digital currencies are denominated in centralized virtual currencies.[15] Despite the relatively rich history of centralized virtual currency, it is the decentralized virtual currency, also known as cryptocurrency that has attracted worldwide attention lately. As clarified by the Financial Action Task Force, cryptocurrency is based on a consensus network; every participant in the network retains the same version of the leger recording transactions confirmed by all participants.[16] The World Economic Forum held in January this year observed an extensive discussion on issues revolving around cryptocurrency.[17] Once considered as “Internet money,” cryptocurrencies have increasingly emulated “real” money in that some of them can be used for paying “real assets” costs.[18] Decentralized virtual currencies are “distributed, open-source, math-based peer-to-peer virtual currencies that have no central administrating authority, and no central monitoring or oversight.”[19]

An economy implemented by cryptocurrency is different from a fiat currency or commodity money world. The purchasing power of a fiat currency derives from its status as a legal tender declared by the sovereign country that backs them. [20] Assuming all parties in a transaction accept them, cryptocurrencies do have monetary characteristics embedded in them, such as the ability to function as a means of payment. Similarly, the balance of supply and demand determines the value of cryptocurrencies in the same way as the valuation of commodities, although as programmable money, cryptocurrency comprises of lines of codes that carry no value intrinsically.[21]

In addition, cryptocurrency is distinct from fiat currency: the issuer is not the government. Instead, a predetermined supply algorithm performs the task of creating cryptocurrencies. [22] No central authority underwrites the issuance of cryptocurrencies; nor do cryptocurrencies owe liability to any other entity. Essentially, the value attaches to cryptocurrencies can be attributable to a belief in these cryptocurrencies’ ability to “cash out” — they might be exchanged for other goods or services, or a certain amount of sovereign currency at some point.[23] A classic example is Bitcoin.


Bitcoin is the first cryptocurrency and a well-known representative of it.[24] Bitcoin is also the largest cryptocurrency in terms of market capitalization, volume and acceptance.[25] Although typically associated with criminal minds and has been surrounded by scandals since its birth, Bitcoin has manifested its strong resilience. In January this year, the International Monetary Fund made a comment on virtual currencies, which marked a new era to Bitcoin.[26] The statement recognized the power of virtual currencies and the technology underlying them to bring faster and cheaper financial services and achieve greater financial inclusion.[27]

In the past, transferring money in a physical format was the only way if parties to a transaction want to exchange money without the assistance of a trusted intermediary.[28] Now, if parties conduct their transaction in Bitcoin, or other similarly programmed cryptocurrencies, they could move value in a non-physical format even without the assistance of a trusted intermediary — the same goal can be achieved by the publicly distributed protocol-based system.[29]

Satoshi Nakamoto, whose identity has remained to be a mystery, invented the idea, and distributed a whitepaper explaining how the system operates to the cryptography online community in November 2008.[30] Bitcoin is essentially “a peer-to-peer electronic cash system.”[31] Unlike gold or other commodities with intrinsic value, a bitcoin unit does not carry value itself — a block consists of a set of numbers computed by the participant.[32] It is not pegged against a sovereign currency.[33] Their value derives from participants’ belief in the units’ exchangeability for real life assets or services.[34] It resolves the double-spending problem when using digital currencies and enables transfer of funds from one party to another without the assistance of a trusted third-party intermediary.[35]

There had been available methods for parties to transfer value digitally before the existence of Bitcoin, but they would require intermediaries that parties had entrusted with to complete the transaction. This is due to the “double spending” risk inherent in a digital cash system. In the absence of a third-party intermediary, a transferor could simply use a single digital token twice.[36] The double spending problem remains unsolved until the advent of Bitcoin.

Bitcoin replaces the middleman with an encrypted and publicly distributed ledger system. In the Bitcoin world, there is no central authority in charge of coin issuance. Its issuance is not initiated by any government nor is there any physical commodity backed bitcoins.

A payer could start a bitcoin transaction, and the network would “timestamp transactions” by generating a hash code that would be part of a later block. Only transactions that have undergone the verification process and that have been confirmed by participants in the network would then be recorded on the public ledger (Bitcoin blockchain). The job of a “miner” is to find the closest answer to a hash code, which is generated based on an algorithm that takes into account of the hash code of a prior block. Participants in the Bitcoin network have incentives to “mine” new coins and add them to the existing circulation — just as a gold miner is motivated to spend resources to mine gold, except for the fact that it is CPU time and electricity disbursed that count as “mining cost.”[37] In addition to being compensated for newly minted coins, participants in the Bitcoin network are incentivized to verify a transaction and support the network by transaction fees.[38] The incentives of participants will affect the supply of bitcoins.[39] The validating process for whether a transaction could be recorded on the Bitcoin blockchain resembles a lottery: the first participant that comes up with the closest answer wins the right to add the block to the existing Bitcoin blockchain and gets the bitcoin unit. A new bitcoin unit is minted every time a participant adds a block to the existing Bitcoin blockchain. Because all participants in the network retain a record of the time stamped transactions, the participants collaboratively assume the responsibility for preventing double spending.

In a trustless environment, if A wants to send one dollar worth of value to B, A and B would need a third party C to verify that A indeed has sent the money when A claims to have done so and that B actually receives the one dollar even if B claims otherwise. Now assume that A owns one bitcoin unit and decides to send B that unit. Being a digital file, Bitcoin could have been easier to duplicate than actual money and could have created more opportunities for people to manipulate their way to “double spend” their bitcoin units. When A sends her one bitcoin unit to B, the A-to-B transaction will be in an unconfirmed transaction pool. When A wants to double spend her bitcoin unit and sends the only bitcoin unit she owns to C, the A-to-C transaction will also be in the unconfirmed transaction pool. Due to the consensus-based model of Bitcoin network, only transactions verified and confirmed by the rest of the participants in the network will be recognized and recorded. In this case, both B and C will be “miners” for that bitcoin unit. The consequence is that either B or C would be able to claim the ownership of that one bitcoin unit at the end of the verification process, but not both of them.[40]

II. The revolutionary impact of cryptocurrency

Moving value through the on-chain type of transaction[41] described above is a real world application of using cryptocurrency as means of payments, albeit such uses are sill of limited number compared with rivals in fiat currency realm like PayPal or Visa.[42] If the use of cryptocurrencies have reached certain scalability, the decentralized network can be effective in achieving real time value transfer at a low cost.

Currently, there are days of delay in money remittances, especially for cross-border transfers. International transfers of money have also been traditionally more costly than domestic transfers.[43] International wire transfer fees make account-to-account transfer expensive. Fees for foreign outgoing transfers range from forty to sixty-five dollars, with an average of 47.5 dollars per transaction; incoming cross-border wire transfers are cheaper compared with outgoing ones, but banks on average charge eighteen dollars for each transfer, with the highest charge of thirty dollars.[44]

The above A-to-B transaction could be prohibitive if A is in Washington and B is in Beijing. When A intends to send one U.S. dollar to B, it will not be economically rational for A to choose wire transfer considering the fees banks charge. A may therefore opt for a cheaper but slower option. The real world example is migrant workers who intend to send small amount of money back to their home countries. The tradeoff between costs and speed places heavy burden on people who want to have immediate access to money.

With the help of cryptocurrency network, A will have an affordable and efficient way to send money. If A decides to use Bitcoin, A can link his or her bank account to an account of a Bitcoin service provider.[45] The Bitcoin service provider would verify the identity of the account owner before they offer the service of making funds immediately available to a user upon the user’s request. If A already has a linked account set-up, A can initiate a U.S. dollar transfer through this linked account so that the funds made immediately available to A by the Bitcoin service provider can be exchanged into bitcoin units, which can be transmitted in real time to B. Upon receiving the bitcoin units, B has the discretion to keep those bitcoin units or exchange them to RMB. Either way, A will achieve the goal of moving value internationally in a short period of time. Effectively, the cryptocurrency network allows A to send B money in a more efficient manner bypassing the intermediary banks that rely on SWIFT, a network that banks are now using to transfer funds between each other, and thus reduce remittance costs.[46]

According to data from the World Bank, the total remittances in 2014 across the world is $583 billion, which is more than double the global official development assistance.[47] Remittance fees are being paid by some of the world’s most vulnerable people, migrant workers who work long hours only to send money back to their families in their home countries. For example, data from 2014 indicate that remittances to Haiti count for over one fifth of the country’s gross domestic product.[48] An estimate made in a special analysis by World Bank pointed that “as much as $100 billion” could be spared had the remittance and migrant recruitment costs in developing countries been reduced.[49]

The delays may create onerous burden to families of those migrant workers on the receiving end, as they are unlikely to have the capital buffer to weather unforeseen emergencies arise during the processing days of the remittance. Thus, cryptocurrency has offered a superior solution to money transfer in real time at a reduced cost. Additionally, a cryptocurrency system allows the receiver to have access to value even without holding a traditional bank account. Consequently, the system further integrates the previously unbanked group to the financial system and makes the financial system more inclusive.

The existing clearing and settlement system could also benefit from the cryptocurrency system. Delay in the post-trade reconciliation and settlement process is a source of risk, which requires more capital buffer of clearinghouses and accounts for the high costs of the settlement process. The elimination of delay will significantly reduce risk exposures and cut the costs for settlement. In fact, the revolutionary effect that cryptocurrency can bring is not limited to payments or trade finance. Given that most financial assets have already been digitized, structuring the whole financial system in a decentralized way is no longer impossible.[50]

III. Risks associated with cryptocurrency

Cryptocurrency as an investment option has been popular in China.[51] In early November 2013, BTC China overtook Mt. Gox and became the largest bitcoin exchange site across the world.[52] Some attribute the rise of Bitcoin in China to an insatiable appetite for investment caused by the poor performance in China’s financial market;[53] others connect the fad in Bitcoin with capital controls — there are no limits in the amount of bitcoins that a Chinese can transfer, and bitcoins are borderless.[54] Another reason often cited in explaining the Bitcoin boom in China is the low electricity fees, which would reduce the considerable cost for mining bitcoins.[55] Regardless of what the drivers are for the vigorousness of Bitcoin, or cryptocurrencies in general, in China, the reality is that there is a sizeable group of Chinese people involved in the cryptocurrency world, in the capacity of investors, consumers and technology developers.[56] Regulators need to engage early on and identify concerning issues before they escalate into unmanageable problems that provoke turbulences.[57]

Volatility in value is an inherent risk of cryptocurrencies. Given that the value of cryptocurrencies derives from people’s faith in a currency’s ability to exchange for goods, services or fiat currencies, the cryptocurrency market is comparatively illiquid and is more volatile.[58] For example, the value of bitcoin fell dramatically at the start of 2015 and then spiked after that.[59] It is counterintuitive to hold asset whose value fluctuates; but the intrinsic nature of cryptocurrencies has made it impossible to project an accurate estimate of their value. Other factors are also contributing to the high volatility. In the case of Bitcoin, there are high-frequency, automated trading “bots” used in exchanges, margin trading facilities that allow customers to buy bitcoins with loans, facilities that create bitcoin derivatives to hedge the price decline.[60] Holders of cryptocurrencies are thus bearing a greater risk of loss.[61]


In addition to the vulnerabilities that are genes of cryptocurrencies, users of cryptocurrencies are also exposed to greater risks in exchanging and storing their cryptocurrency units. Regulators may not be in a position to regulate the volatility if it stems from an inherent feature of cryptocurrencies. However, besides volatility, there are also serious concerns for cryptocurrency-related fraud and theft, which demands more attention from regulators.

The decentralized nature of the cryptocurrency system distinguishes itself from other types of digital currency ecosystems where there are issuers, network operators, requisite hardware and software vendors and central clearing entities.[62] Nevertheless, there are parties in addition to the transacting parties in a cryptocurrency system that will provide facilitating technical services. Existing examples include “wallet” services and exchange services. The digital wallets and cryptocurrency exchanges have become easy targets of malicious actors.[63]

Cryptocurrencies are programmable money; a cryptocurrency system is a math-based digital file rather than a tangible good. Users cannot just hold their cryptocurrency units in the same way that cash is being stored. This is where digital wallets come on the scene. To guard against theft, these platforms have built in specific security mechanisms that require a private access code to unlock the units of value in a digital wallet.[64]

Likewise, exchanges are the product to meet the increasing needs from holders of Bitcoin and other cryptocurrencies to “cash out” their digital units. Users can buy and sell their cryptocurrency units for fiat currency on an exchange; they may also pay for goods or other services using cryptocurrency units on an exchange.[65] Some exchanges also facilitate the transparency in digital currency market by posting trading books and facilitating price check.[66] The profits these exchanges are able to generate from providing these services have drawn them a lot of attention.[67]

No one can dismiss the propelling role exchanges play in the increasing awareness and acceptance of cryptocurrencies among the general public. However, the operation as a centralized intermediary in an otherwise purely decentralized system undermines the mutuality feature of the cryptocurrency system. In the particular, what would happen when these exchanges, entrusted by users, failed to live up that expectation? Mt. Gox is an illustration and offers another reason for regulators to step in.

Mt. Gox was the first and for a long time, the largest bitcoin exchange. Mt. Gox was both practically the only place where bitcoin holders could trade with each other and a validation for bitcoin’s ability to function as a currency in those early days.[68] On the first day of trading, there were only twenty bitcoins exchanged. By November 2011, however, Mt. Gox had an average trading volume of 27,541 bitcoins a day.[69] There was a tremendous increase in the number of Mt. Gox’s customers when the value of bitcoin experienced a spike.[70] In July 2011, Mt. Gox was responsible for eighty percent of all bitcoin trading.[71] To everyone’s surprise, it filed for bankruptcy in February 2014, following the loss of over 500 million dollar worth of bitcoins. Despite of the competition from other rivals, it had accounted for close to seventy percent of all bitcoins ever traded by the time the bankruptcy was filed.[72]

Mt. Gox claimed that transaction malleability, a problem in the Bitcoin protocol, caused the loss.[73] When a user requests a withdrawal from the exchange to a bitcoin address, exchanges would undertake that transaction and posted to the Bitcoin ledger. The method adopted by Mt. Gox to track the confirmed transactions left open the possibility for manipulation: the system could be tricked into believing that the intended transaction had failed, even if it was later confirmed and recorded on the Bitcoin ledger. Because of the system’s misconception that the transaction has failed, the scheduled withdrawal would be credited back to the user’s account. Thus, the actual withdrawing amount would effectively be doubled — a withdrawal without debiting the account.[74]

Irrespective of the reliability of this attribution,[75] Mt. Gox demonstrates the necessity for a robust consumer protection regime to prevent unsophisticated consumers from unintentionally exposing their finance to greater risks. Although the legal framework cannot resolve the technical difficulties in guarding against cyber attack or fixing a problem in the Bitcoin protocol, it can implement registration and compliance requirements to guard against fraudsters that are trying to take advantage of the vulnerabilities in these exchanges.


If people were asked for their opinions on cryptocurrencies nowadays, a common response would be money used on dark webs. These perceptions are formulated for a reason. Bitcoin eliminates the intermediaries and makes peer-to-peer transfer of funds possible. The system keeps record of every transaction; however, each transaction can only be associated with a public key, a 64-digit number that works like a username in the email system.[76] Anonymity is another feature of cryptocurrencies.

In contrast, under the traditional model with the participation of intermediaries, there are applicable anti-money laundering (AML) and know-your-customer (KYC) due diligence requirements for account opening or money transfers.[77] Intermediaries not only serve as gate keepers for money laundering, they also keep the customer records necessary for law enforcement in tracing perpetuators of illicit transfers.

Cryptocurrency networks make it no longer possible to identify a money transfer scheme operator because the system itself functions in a way that eliminates the role charged with this obligation.[78] In the A-to-B international money transfer example, unless the parties choose to link their bank accounts to their bitcoin wallets, at no time in transferring bitcoins on the bitcoin network does the network requires a verification of the identity of the parties. That means there are no checks for the legality of the money being transferred or proofs to connect the value transferred to an identifiable individual or entity — because the transactions are linked only to a set of numbers.[79]

Users of cryptocurrencies for legitimate purposes, such as migrant workers who decide to use bitcoins to remit money to their families, often have their bank accounts linked to the wallet or exchange providers at the outset. In this way, they will have easy access to their bitcoin units and maximize the efficiency in sending money through Bitcoin.[80] For them, they receive the same level of anonymity on the Bitcoin network as they do in traditional banking. To the extent that the 64-digit number can always be connected to a bank account, whose ownership is identifiable in banks’ records pursuant to existing legal requirements, this type of operation does not create greater money-laundering risks than the traditional intermediary model does. However, for people who are trying to circumvent the existing regulations, they will not expose their identity by linking their bank accounts to service providers. Instead of exchanging fiat currency for bitcoin units, they can receive on-chain transfer of bitcoin units by rendering service or trading goods in the off-chain real world or “mine” new bitcoin units by themselves. Neither the Bitcoin network nor any entities in the real world keeps records of these activities. In this way, money launders and other criminals engaging in illicit transfer of funds take advantage of the anonymity feature of Bitcoin and use it as a shield against law enforcement investigation. The notorious website Silk Road, shut down twice by the Federal Bureau of Investigation, is an example of the abuse and also partially explains the infamy of cryptocurrencies.[81]

Silk Road was an online market that allowed the buying and selling of products using bitcoins pseudonymously by disguising their identities. It used the Tor network, an untraceable web browser through encryption.[82] Over the course of its operation, it had turned into a drug dealing market place. Bitcoin became the culprit because it was the medium of exchange on that website. Sellers and buyers used bitcoin units to pay each other and complete transactions.[83] Silk Road operated with encryption for more than two years after having attracted attention from law enforcement, during which time sales involving 9.5 million bitcoins were generated.[84] Transactions in bitcoins of such a volume on a website dominated by drug dealers tarnished the reputation of cryptocurrencies in an irreparable way. Unfortunately, the abuse did not stop with the shutdown of Silk Road. Openbazzar, a recent attempt to apply the decentralized cryptocurrency system to marketplace, discovered a drug listing less than two hours after its operation.[85]

IV. Demands for light touch regulation


While there are more than 600 digital currencies in circulation at this moment, the cryptocurrency schemes have yet been widely adopted or accepted. [86] It is possible that in the foreseeable future, the number of cryptocurrency users will remain small, and their impact on the economy and the society as a whole will continue to be marginal.

Predetermined supply algorithms could limit the development of cryptocurrencies: of the over 600 digital currencies, each of them adopts a somewhat different algorithm to calculate the supply.[87] The fragmented picture poses barriers for cryptocurrencies to reach the scalability to truly function as real money.[88] Additionally, computing and hardware costs that predetermined supply algorithms require further burden the scalability process.[89]

People also doubt the sustainability of the business model of cryptocurrency in the long run. The faith in the potential of cryptocurrency to function as real money in the future is probably the fundamental driver for a continuous support for the network. Being math-based, cryptocurrencies have finite number of units.[90] As the supply of new currency units shrinks, participants may gradually become less motivated to maintain the system.[91] The cost in obtaining a new unit might be high enough to supersede the value of the unit and thus deters participation.[92]

For Bitcoin or other cryptocurrencies that adopt the same proof-of-work mechanism to validate a transaction,[93] another issue is whether the concentration of mining power would defeat the fundamental goal of the cryptocurrency system being a decentralized one. As for the consensus-based network, on one hand, it allows for more flexibility in governance, but on the other hand, it also provides fertile ground for concentration of powers.[94] Reports have shown that a majority of bitcoin transactions and services have come to be initiated and facilitated by the same group of entities; the industry is being institutionalized.[95]

The democratic governance structure may likely slow the process when it comes to upgrading the system as well.[96] For example, an ongoing debate in the Bitcoin community is what the appropriate size of a block should be, the answer to which will have profound impact on incentives of participants and future application scenes of Bitcoin. In a nutshell, the entire cryptocurrency scheme is still in its nascence.[97]


The scalability of Internet has demonstrated the abundance and the complexity of the issues that need to be addressed when data is transferred on the Internet. A cryptocurrency system makes it possible to move value, which entails more sensitivity, across the Internet; there are greater interests at stake. The openness of a decentralized network invites inclusiveness, but at the same time, it leaves open the possibility for hackers to introduce fraudulent transactions and induce verifications of those fake transactions.

In addition to the risk concerns discussed above, prevalent use of cryptocurrencies would also affect macroeconomics.[98] This yet materialized concern to central bankers is the impact on the implementation of monetary policy when cryptocurrencies are adopted on a large scale.[99] Cryptocurrencies may be disruptive not only in the sense that they eliminate the financial intermediaries and impacts financial stability, but also in the sense that their adoption would affect the use of fiat currency and impact a sovereignty’s monetary policy.[100]

Considering the risks presented and the interests implicated, regulators need to monitor closely the development of cryptocurrencies and to equip themselves with the requisite technical knowledge to make informed regulatory decisions.

Japan undeniably stands ahead among the world’s regulators in the area of cryptocurrency. In March this year, Japan’s Cabinet passed a set of bills recognizing digital currency as similar to real money — “asset-like-values that can be used to make payments as well as be transferred digitally.” [101] The digital currency exchanges will serve as gatekeepers against money laundering — there are both registration and reporting requirements on exchanges.[102] This move has been perceived as an attempt to facilitate the development of information technology in banks and enable large banks, as well as other innovative firms, to have a competitive advantage in the fast growing FinTech world.[103]

Admittedly, too much regulatory involvement at a technology’s nascence stage would stifle innovation; certain level of clarity from regulators, nonetheless, could be the catalyst for the growth of the technology.[104] Imagine a world without any guidance on what regulators expect to see from market participants, people may refrain from supporting innovations due to the fear that later unfavorable regulations may retroactively apply to them.[105] Without the support from an ecosystem, it is hard for innovations to sustain.

Considering the consequences of leaving cryptocurrency unattended, regulators should adopt a light-touch approach to strike the delicate balance between achieving regulatory goals and creating a regulatory environment friendly to innovations. Proper regulatory engagement will reduce regulatory ambiguities and ensure the healthy development of innovation; it will also introduce to the public the valuable applications of cryptocurrencies and nurture a positive public opinion to embrace their legitimate uses.

V. Challenges and efforts


A cryptocurrency system enables different parties to transact in a trustless environment without a third-party middleman; at the same time, its adoption also discharges the obligations previously assumed by those intermediaries, such as the AML/KYC due diligence requirements imposed on banks. The decentralized nature of a cryptocurrency system can be a challenging issue to regulators when formulating their decisions. Without a central party in charge of the network, how to control the economy in a decentralized ecosystem and predict the behavior of thousands or millions of participants in the network? If there is no longer such a role responsible for executing regulations, are the associated obligations eliminated from the system while the targeted activities remain?[106] Existing laws only address issues where there is an identifiable party accountable for the situations, and they are unlikely to render reasonable results in a decentralized system without adjustments.[107]

For example, Bitcoin Foundation, an organization whose mission is to “promote bitcoin adoption, liaise with governments on regulatory matters, and fund development work to safeguard the cryptocurrency’s open-source protocol,” received a cease-and-desist letter from the California Division of Financial Institutions, requiring a money-transmission license for the organization to continue its operation.[108] However, the organization does not carry a money transfer business. The organization is not a platform to move money between parties; it only engages in the conduct of advocacy, education and supporting core adoption of bitcoin and its technology. The unique decentralized feature of a cryptocurrency system makes the issue of who is being regulated perplexing and poses a special challenge to regulators.

Notwithstanding the challenge, the Chinese government has already devoted efforts investigating pertinent issues of cryptocurrency and studying the underlying technology of cryptocurrency. Cases include building platforms that integrate discrete resources in the industry and incubating new business applications.[109] On February 3, Zhongguancun Blockchain Industrial Alliance debuted in Beijing.[110] The coalition has members including the most prestigious research institutions, universities and enterprises, and is backed by a government agency deeply rooted in administering technology innovation matters. The People’s Bank of China, Ministry of Industry and Information Technology and the State Administration for Industry and Commerce in China also jointly published a list of unlicensed companies that were likely engaging in bitcoin Ponzi schemes.[111] Given the complexities of the issues cryptocurrency and its wide adoption present or will present, there are many other questions awaiting answers or clarifications from the government in spite of these efforts. [112]


When Trendon Shavers, the defendant in a bitcoin Ponzi scheme, argued that bitcoin is not money and thus is not regulated, the judge of a U.S. court rejected his argument and stated that “it is clear that Bitcoin can be used as money.”[113] However, the ability to function as money does not necessarily translate directly to the legal status of money. If regulators intend to fit cryptocurrency within the existing regulatory framework, a fundamental question for any subsequent regulations is the issue of classification.[114] Regulatory responses in other jurisdictions across the world may be helpful to Chinese regulators in producing an effective regulatory framework for various types of cryptocurrencies,[115] even if those responses could only serve a reference purpose.

Just within the U.S., regulators have divergent opinions on the answer to the classification question. Last year, the U.S. Commodity Futures Trading Commission (“CFTC”), the agency regulating derivatives and other products subject to the Commodity Exchange Act, has asserted jurisdiction over a bitcoin trading platform in an enforcement action.[116] The ruling confirmed CFTC’s intention to regulate cryptocurrencies as commodities.[117] Meanwhile, the U.S. Securities and Exchange Commission (“SEC”), in the complaint for a recent charge by it against bitcoin mining companies for conducting Ponzi schemes,[118] classified mining contracts as securities.[119] In the guidelines issued after the bust of Silk Road by the Financial Crime Enforcement Network (“FinCEN”),[120] which is tasked to combat money-laundering, bitcoin payment processers and exchanges were required to register with FinCEN and to comply with state rules on money-transmitter licenses;[121] FinCEN considers bitcoin as a currency. Regulating Bitcoin under the same rules covering dollar-based remittance providers, payment processors and foreign exchange services, the guidance focused on the ability of cryptocurrencies to act as “a substitute for real currency.”[122]

Regulators have also opined on the classification question in their decisions on the taxation of cryptocurrencies.[123]

According to the Internal Revenue Service in the United States, cryptocurrencies are not fungible and thus unworkable as currency; cryptocurrencies will be taxed as property.[124]

Canada released its first official opinion on digital currency in November 2013. In the fact sheet named “What you should know about digital currency,”[125] Canada Revenue Agency (“CRA”) asserted two bases for taxing bitcoin transactions: one is based on barter dealings, and the other is securities transaction. The former associated tax rules will apply when bitcoin units are used to pay for goods and services while a resulting gain from transaction of bitcoins will be taxable income or capital under the latter tax rules.[126]

There are also movements across the Atlantic in the European Union.[127] In October 2015, the European Court of Justice (“ECJ”) ruled that bitcoin is exempt from Value Added Tax (“VAT”), a type of sales tax.[128] The issue appeared in front of the ECJ was whether the purchases and sales of bitcoin units would be subject to VAT. In that case, a Swedish national who intended to open a bitcoin exchange requested a preliminary decision from the Revenue Law Commission to establish whether VAT must be paid on the purchase and sale of bitcoin units.[129] The court reasoned that the proposed service of a bitcoin exchange did not constitute “supply of goods,” but constituted providing of services because it was operating as a way to transfer money.[130] Bitcoin should be viewed as “a contractual means of payment,” rather than a deposit account or a negotiable instrument covered by VAT.[131] Considering the difficulty in determining the taxable amount, the ECJ ruled that bitcoin (or other cryptocurrencies) exchange services are exempt from VAT[132] — the same treatment as traditional cash.[133]

China has designated Bitcoin as virtual commodity.[134] In 2013, People’s Bank of China, the Ministry of Industry and Information Technology, China Banking Regulatory Commission, China Securities Regulatory Commission, and China Insurance Regulatory Commission issued a Notice on Precautions against the Risks of Bitcoin (“Notice”). The Notice points out that Bitcoin does not have features of a currency and will not have the same legal status as a currency. Although the public is free to use bitcoin as a media for exchange, financial institutions are not allowed to do so. The Notice forbids financial institutions to price their product or services in bitcoin, trade bitcoin directly or as central counterparty, providing insurance for bitcoin and its related services, offer services related to bitcoin either directly or indirectly, providing bitcoin registration, trading, clearing and settlement services, providing exchange services for bitcoin, engaging in bitcoin storage, mortgage or warranty services, issuing any financial products in bitcoin or setting up trusts or funds managing bitcoin. Therefore, users of bitcoin knowingly and voluntarily assume the risks associated with the cryptocurrency.[135]

One thing to note is that the first paragraph of the Notice stresses the treatment of bitcoin as commodity, rather than currency.[136] There are prior notices issued on the treatment of centralized virtual currency, whereas the aforementioned Notice attempts to clarify issues associated with decentralized virtual currency, such as Bitcoin. In 2009, The Ministry of Commerce in China banned the use of virtual currency for trading in real goods or services. In that rule, “virtual currency” was defined to include “prepaid cards of cyber-games.”[137] By distinguishing bitcoin from centralized virtual currency, the more recent Notice expressed a regulatory intent that the use of bitcoin would not be bound by those regulations. The distinction made here highlights the differences in issues presented by centralized digital currency and decentralized digital currency and reflects efforts to tailor regulatory responses in respective systems and create effective solutions.[138]

VI. An outline for future regulations

The upsides of cryptocurrencies would come at a compromise with ambiguities in regulations. Clarifications and guidelines from regulators are necessary for innovations to flourish; no action from regulators may imply the notion to entrench the existing system, a less advantageous on in certain aspects.[139]

Regulators should consider the financial inclusion value of cryptocurrencies. Statistics show that China has the second largest unbanked population in terms of size.[140] The efficiency and lower costs in transmission, combined with the increasing Internet penetration in China,[141] makes cryptocurrency a good candidate to lower transaction costs and have financial services expand to reach the unbanked. Therefore, in crafting the regulatory framework, regulators need to consider and weigh the inclusiveness of cryptocurrencies.[142]

At the same time, regulators should try to avoid imposing redundant obligations on innovators. Although a rules-based regulatory framework would provide regulatory certainty and streamlining regulatory decision-making process, such a framework would require the pre-determinative legal outcomes of a comprehensive list of triggering events, which would be extremely difficult when the subject of regulation is an innovative technology.[143] Given the dynamics of the development in cryptocurrency, a principle-based regulatory approach would afford regulators more flexibility and enable more nimble regulatory responses.

Based on the potential risks posed by cryptocurrencies, in addition to casting a robust regulatory net to protect the public against abuses, regulators should focus on educating the public on cryptocurrency knowledge so that they are empowered to defend their own interests. In cases where fraud or thefts occur, venues for the public to seek redress should be available. Specifying the AML/KYC duties of service providers, such as cryptocurrency exchanges and digital wallets,[144] and implementing registration check of those firms will reduce the risk of fraud and increase protection against internal thefts. Furthermore, the procedures in place will also capture capital flights to a certain degree and better enforce the capital control requirement in China.

Depending on the scalability of cryptocurrency, another regulatory tool is self-regulatory organizations. Australia has launched a digital currency industry code of conduct, the detailed version of which is expected to complete in May 2016.[145] At the current stage, the Securities Association of China may be interested in issuing guidelines clarifying uncertainties in questions like whether certain cryptocurrencies can be treated as securities.[146]

Born on the Internet, cryptocurrencies are truly borderless. Chinese regulators should proactively engage with regulators in other jurisdictions and with international organizations in this process of creating a regulatory regime. Communication and cooperation not only help combating risks but also incubate platforms to integrate domestic innovative use cases to the global context — a supportive move for technology innovation.

When looking to strike the delicate balance, regulators should factor in the role that media has played in shaping the public opinion and affecting their judgment.[147] From a reporter’s perspective, compared with stories like terrorists receive funding through cryptocurrencies, an average person using a bitcoin unit to buy coffee has significantly less news value.[148] Thus, policy makers should conduct their own investigations and use non-biased information to achieve a more accurate assessment of the pros and cons of cryptocurrencies.

One other twist of regulating cryptocurrency is its dynamics. Because of the fast development on the technology side, a reality is by the time a law eventually passed by the legislature, it probably is no longer applicable to the upgraded technology or the technology’s upgrades have made the issues the law tries to resolve moot.[149] Mastering the latest advances in cryptocurrencies, therefore, is critical to an efficient regulatory regime.


Cryptocurrency can bring revolutionary benefits to the society, but at the same time, it presents new risks to the society and unprecedented challenges for regulators to contain those risks. Not everything left to regulators are impediments though. Regulators can strategically use cryptocurrency to build a more transparent government[150] and explore techniques to deploy the technology as an effective enforcement tool.[151] Now, it is time to engage.

* J.D., Georgetown University Law Center (May 2016) © 2016, Misha Yang. The paper was completed in May, 2016, so it fails to consider many major events in the cryptocurrency world happened over the summer. The author is still working on other writings to incorporate those updates to the best of her ability! Also, the paper is downloadable at

[1] See Wang Yongli, The Far-reaching Impact of the Introduction of Digital Currency by PBoC, Sina (Jan. 22, 2016, 11:02AM),

[2] PBoC Held Meeting on Digital Currency in Beijing (Jan. 20, 2016, 19:26),

[3] See Deloitte, State-Sponsored Cryptocurrency: Adapting the best of Bitcoin’s Innovation to the Payments Ecosystem 1,

[4] Reports indicate that PBoC has devoted to the study of distributed ledger technology since 2014. See supra note 2.

[5] Financial Action Task Force, Virtual Currencies: Key Definitions and Potential AML/CTF Risks 5 (June 2014),

[6] See Andrew Wagner, Digital vs. Virtual Currencies, Bitcoin Mag., (Aug. 22, 2014, 7:25 PM),

[7] Financial Action Task Force, supra note 5, at 4.

[8] For example, WebMoney is a virtual currency because “valuables” (assets) are transferred and stored in the form of a non-fiat currency. The units of measurement of the valuables’ property rights stored by the guarantor are WebMoney Title Units (WM) of the corresponding type. See WebMoney,

[9] Financial Action Task Force, supra note 7.

[10] Id.

[11] Id. at 5,

[12] Wagner, supra note 6.

[13] Financial Action Task Force, supra note 11. In these examples, an administrator, usually the company itself, controls the currency system: it issues the currency, sets forth the rules governing the currency’s usage and maintains the central payment ledger; it may also be empowered to withdraw the amount of currencies circulating in the system. See, e.g., Linden Dollar, Wikia, (last visited May 1, 2016).

[14] Bank of Int’l Settlements, Comm. on Payments and Mkt. Infrastructures, Digital Currencies 7 (Nov. 2015),

[15] Financial Action Task Force, supra note 11.

[16] Id.

[17] Izabella Kaminska, Blockchain Hype Storms Davos, FT (Jan. 20, 2016, 15:15),

[18] Wagner, supra note 6.

[19] Financial Action Task Force, supra note 11.

[20] Chris Brummer, Minilateralism: How Trade Alliances, Soft Law and Financial Engineering are Redefining Economic Statecraft loc. 2482–83 (2014)(ebook).

[21] Bank of Int’l Settlements, supra note 14, at 4–5.

[22] Id.

[23] Id.

[24] Eli Dourado & Jerry Brito, Cryptocurrency, in The New Palgrave Dictionary of Economics (Steven N. Durlauf & Lawrence E. Blume eds., 2014) For purpose of this paper, bitcoin(s) refers to the digital tokens issued on Bitcoin, the software network.

[25] Crypto-Currency Market Capitalizations, (last visited May 1, 2016).

[26] BBVA Innovation Center, Blockchain Technology (Fintech Series by Innovation Edge) loc.38–70 (2016)(ebook).

[27] Dong He et al., Virtual Currencies and Beyond: Initial Considerations 18–19 (IMF Staff Discussion Note, Jan. 2016),

[28] Bank of Int’l Settlements, supra note 14, at 8.

[29] Id.

[30] Satoshi Nakamoto, Wikipedia, (last visited May 1, 2016)

[31] Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System 1, (last visited May 1, 2016).

[32] Bank of Int’l Settlements, supra note 21.

[33] Id.

[34] Id.

[35] Nakamoto, supra note 31, at 1. Double spending has been the main hurdle for the digitization of cash. For a more in-depth explanation for “double spending,” see Dourado & Brito, supra note 24, at 2.

[36] Bank of Int’l Settlements, supra note 28.

[37] Nakamoto, supra note 31, at 4.

[38] “If the output value of a transaction is less than its input value, the difference is a transaction fee.” Id. For a more detailed explanation of “transaction fee”, see

[39] Nakamoto, supra note 37. Profits can come not only from issuance of new units but also from fees generated from facilitating transactions executed in cryptocurrency and revenues created through the sale of items or services related to cryptocurrency business. See Bank of Int’l Settlements, supra note 14, at 7.

[40] Mining requires high computing power and is used as a way to solve the double spending problem in Bitcoin. There are other ways to solve the double spending problem that demands less power.

[41] Bank of Int’l Settlements, supra note 14, at 14–15.

In comparison, there is also off-chain bitcoin transactions, in which the value transfer does not modify the blockchain and instead depends on other methods to verify the transactions. See Off-Chain Transactions, bitcoinwiki, (last visited May 1, 2016).

 Gerald P. Dwyer & Norbert J. Michel, Bits and Pieces: The Digital World of Bitcoin Currency, The Heritage Foundation, (last visited May 1, 2016).

[43] Id.

[44] Theresa Kim, Comparing Wire Transfer Fees at the Top 10 U.S. Banks, mybanktracker (Feb. 12, 2016)

[45] Coinbase is the most famous service provider for cryptocurrencies; it includes an exchange service that allows users to buy and sell. Coinbase, Wikipedia, (last visited May 1, 2016).

[46] SWIFT, (last visited May 1, 2016).

[47] World Bank, Remittances Growth To Slow Sharply In 2015, As Europe And Russia Stay Weak; Pick Up Expected Next Year (Apr. 13, 2015),

[48] Haiti Economy Profile 2014, indexmundi, (last visited May 1, 2016).

[49] World Bank, supra note 47.

[50] See He et al., supra note 27, at 21–23.

[51]Michael J. Casey & Paul Vigna, The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic 194 (2016)(ebook).

[52] Adam Century, Bitcoin Scandal Reflects Popularity of Virtual Currency in China, N.Y.Times (Nov. 17, 2013, 5:05 PM),

[53] Lulu Yilun Chen, Why the Chinese Love Bitcoins, Bloomberg (Aug. 22, 2013, 4:36 PM),

[54] See, e.g., Casey & Vigna, supra note 51; Jon Southurst, Bitcoin Exchanges Reveal ‘Real’ USD/CNY Rates, Says Bobby Lee, (Apr. 16, 2016)

[55] See Jon Southurst, Why China is Leading the Global Rise of Bitcoin, CoinDesk (Nov. 18, 2013, 17:15), See also supra note 37 & accompanying text.

[56] See Casey & Vigna, supra note 51.

[57] Id. at 195–97.

[58] Dwyer & Michel, supra note 42.

[59] See BBVA Innovation Center, supra note 26.

[60] Casey & Vigna, supra note 51, at 118. As a matter of fact, because the lack of a legal framework that addresses these questions, some of these exotic financial products are born in China.

[61] Bank of Int’l Settlements, supra note 14, at 14.

[62] Bank of Int’l Settlements, supra note 14, at 8.

[63] See, e.g., Stan Higgins, Crypto Exchange Service ShapeShift Offline After Hack, ConiDesk (Apr.8, 2016, 21:55); Stan Higgins, Bitcoin Exchange Cointrader Shuts Down After Alleged Hack, CoinDesk (Mar.30, 2016, 17:05)

[64] Financial Action Task Force, supra note 5, at 8.

[65] Id. at 7.

[66] A list of cryptocurrency exchanges is available at

[67] Christian Decker & Roger Wattenhofer, Bitcoin Transaction Malleability and MtGox 313 (last visited May 1, 2016).

[68] Casey & Vigna, supra note 51, at 82.

[69] Id.

[70] Id. at 83.

[71] Id.

[72] Decker & Wattenhofer, supra note 67, at 314.

[73] Transaction malleability refers to “a feature of the supplementary wallet software that was created along with the original core protocol code and which within a short window after a transaction allowed someone to alter a transaction ID so as to batch more than one together.” See Casey & Vigna, supra note 51, at 247.

[74] Decker & Wattenhofer, supra note 67, at 314.

[75] One of the core developers of bitcoin Andreseen found the Mt Gox’s “transaction malleability” defense suspicious. He thinks it is the result of deliberate human efforts rather than an unfixed bug in the system. See Casey & Vigna, supra note 51, at 247. See also, Contrary to Mt. Gox’s Statement, Bitcoin is not at fault, Bitcoin Foundation, (last visited May 1, 2016).

[76] Nakamoto, supra note 31, at 6.

[77] See generally, Financial Action Task Force, FATF International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation (Feb. 2012),

[78] Bank of Int’l Settlements, supra note 14, at 8.

[79] But see, Adam Ludwin, How Anonymous is Bitcoin?, Coin Center (Jan. 20, 2015), Bitcoin is by no means private: every transaction is recorded in the distributed ledger. In addition to trace back to IP address, there has been technical proposal, transaction graphic analysis, to leverage the transparency feature to resolve the AML/CTF problems associated with private acquisition of bitcoins.

[80] See supra note 45–46 & accompanying text. In the remittance example, owning a pre-set account allows A to initiate transaction regardless of the availability of a separate exchange service; it also reduces the exposure to volatility risk because of the time saved in exchanging bitcoin to fiat currency at a later date.

[81] See Ludwin, supra note 79.

[82] Casey & Vigna, supra note 51, at 85.

[83] Id.

[84] Id. at 86.

[85] See Stan Higgins, Hours After Launch, OpenBazaar Sees First Drug Listings, CoinDesk (Apr. 6, 2016, 15:45), However, it is unclear whether the drug listing was a prank or not.

[86] Bank of Int’l Settlements, supra note 14, at 8.

[87] Id. at 6, 8.

[88] Id. at 8.

[89] Id.

[90] The conclusion is based on author’s knowledge to the existing cryptocurrencies. For example, bitcoin has a finite supply of 21 million. Some argue that the controlled supply has no negative impact on incentives of the participants because the value of each unit will increase as supply decreases, and it is possible to subdivide the unit. The smallest fraction of a bitcoin, Satoshi, is one hundredth of a millionth bitcoin. Controlled Supply, bitcoinwiki, (last visited May 1, 2016).

[91] Bank of Int’l Settlements, supra note 14, at 8.

[92] Miners are rewarded by transaction fees, which will only generate if the transaction produces more output value than the value input. See supra note 38.

[93] Nakamoto, supra note 31, at 3.

[94] Dwyer & Michel, supra note 42.

[95] Daniel Palmer, European Parliament Holds Hearing on Digital Currency Regulation, CoinDesk (Jan.25, 2016, 20:00),

[96] Brian Armstrong, Scaling Bitcoin: The Great Block Size Debate, medium (Jan. 2, 2016),

[97] Block Size Limit Controversy, bitcoinwiki, (last visited May 1, 2016).

[98] See generally,

Jesús Fernández-Villaverde & Daniel Sanches, Can Currency Competition Work?, (NBER Working Paper No. 22157, Apr. 2016),

[99] Bank of Int’l Settlements, supra note 14, at 16.

[100] Id.

[101] James Moreau, Japan’s Cabinet Passes Bills to Offiically Recognize Digital Currencies As Real Money, CCN.LA (Apr. 3, 2016),

[102] Id. In the draft stage, proposed regulations also included capital requirements, separating customer and corporate assets and outside auditing. See Stan Higgins, Report: Japanese Officials Draft Regulation for Bitcoin Exchanges, CoinDesk (Dec. 16, 2015, 20:02), It is unclear whether the passed bill incorporated these requirements.

[103] Moreau, supra note 101.

[104] Hon. Mick Mulvaney, Remarks at Cato Institute: Cryptocurrency: The Policy Challenges of a Decentralized Revolution (Apr. 1, 2016).

[105] For example, because of the regulatory uncertainties, many start-ups in the U.S. engaging in cryptocurrency business are unbanked. Banks are concerned about tarnishing their reputation by associating themselves with cryptocurrencies and are wary of incurring unintended regulatory costs, such as extra AML/KYC obligations.

[106] See Jerry Brito et. al., Bitcoin Financial Regulation: Securities, Derivatives, Prediction Markets, and Gambling, 16 Colum. Sci. & Tech. L. Rev. 144, 218 (2014).

[107] See generally, Kevin V. Tu, Michael W. Meredith, Rethinking Virtual Currency Regulation in the Bitcoin Age, 90 Wash. L. Rev. 271 (2015).

[108] Casey & Vigna, supra note 51, at 254.

[109] On April 19th, 2016 China announced the establishment of a consortium — ChinaLedger at the Third Internet Financial Global Summit of Peking University. The consortium will study distributed ledger technology and its applications and will build a blockchain amenable to the development of China’s financial industry. It is unclear whether the government sponsors the consortium. Richard Kastelein, Chinese form Blockchain Group ChinaLedger Union — Plan to Standardise and Open Source Chinese Blockchain Technology, Blockchain News (Apr. 20, 2016),

[110] Qi Liuming, Formation of Zhongguancun Blockchain Consortium, Xinhua News (Feb. 6, 2016, 16:00),

[111] Wu Hongyuan & Wu Yujian, Gov’t Warns Public about Websites Running ‘Ponzi Schemes’, CaixinOnline (Jan.19, 2016, 19:38),

[112] There are existing regulations on centralized virtual currency, but the problems they solve are different from ones presented by cryptocurrency — a decentralized system. See infra note 136–38 & accompanying text.

[113] See Paul Anning et al., Law of Bitcoin xv (Stuart Hoegner ed., 2015).

[114] There are decentralized cryptocurrencies, such as bitcoin, and distributed computing platforms, such as Ethereum. There are also pegged cryptocurrenies, such as side chains, which vary slightly from a complete public and decentralized cryptocurrency system: the publicity is not on the main blockchain but is limited to a side chain of it. An example is Blockstream. See Blockstream, (last visited May 1, 2016); Blockstream, CrunchBase (last visited May 1, 2016).

[115] Bitcoin has been classified as commodity. Infra note 134. However, it is unclear whether this classification will be extended to other types of cryptocurrencies.

[116] See Press Release, CFTC Orders Bitcoin Options Trading Platform Operator and its CEO to Cease Illegally Offering Bitcoin Options and to Cease Operating a Facility for Trading or Processing of Swaps without RegisteringI, U.S. Commodity Futures Trading Comm’n (Sept. 17, 2015),

[117] See Pete Rizzo, CFTC Ruling Defines Bitcoin and Digital Currencies as Commodities, CoinDesk (Sept. 17, 2015, 22:06),

[118] See Press Release, SEC Charges Bitcoin Mining Companies, U.S Sec. and Exch. Comm’n (last visited May 1, 2016).

[119] See Ian Demartino, Bitcoin Regulation: SEC Calls Mining Contracts ‘Securities’, COINJOURNAL (Feb. 19, 2016),

[120] FinCEN stands for Financial Crimes Enforcement Network. It is a bureau of the U.S. Department of Treasury.

[121] FinCEN, Guidance: Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (Mar.18, 2013),

[122] Sidley, CFTC Asserts Jurisdiction Over Bitcoin Derivatives, SIDLEY (Oct. 15, 2015),

[123] Like all other activities involved in the economy, cryptocurrencies are subject to tax regulation. See Bob Derber, How is Bitcoin Taxed?, Coin Center (Apr. 14, 2015),

[124] IRS, IRS Virtual Currency Guidance: Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply (Mar. 25, 2014), IR-2014–36; for details of the Guidance, see

[125]Canada Revenue Agency, What You Should Know About Digital Currency, Gov’t of Canada (last visited May 1, 2016)

[126] Anning et al., supra note 113, at 78. CRA has also examined other tax issues revolving around bitcoin: how bitcoin mining is to be taxed, whether the Goods and Services Tax or Harmonized Sales Tax would apply to bitcoin transactions and the tax consequences in the case of a loss in bitcoin inventory. Id. at 79–80. There are also attempts from CRA to clarify gift and charitable donation issues. Id. at 81.

[127] The European Central Bank is also experimenting on applications of the underlying technology of Bitcoin. See e.g., Distributed Ledger Technology, IN FOCUS 1 (2016); Andrea Pinna,& Wiebe Ruttenberg, Distributed Ledger Technologies in Securities Post-trading, Occasional Paper Series No. 172, (Apr. 2016)

[128] Skatteverket v David Hedqvist, ECLI:EU:C:2015:718 (Oct. 2015);jsessionid=9ea7d0f130d50d34084ec5004bd0bc29a5647789709c.e34KaxiLc3eQc40LaxqMbN4Oc30Se0?text=&docid=170305&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=648426

[129] Id. at ¶15.

[130] Id. at ¶26.

[131] Id. at ¶42.

[132] Id. at ¶57.

[133] Stephanie Bodoni & Amy Thomson, EU’s Top Court Rules That Bitcoin Exchange Is Tax-Free, Bloomberg (Oct. 22, 2015, 9:29 AM),

[134] 关于防范比特币风险的通知Notice on Precautions Against the Risks of Bitcoins (Dec. 6, 2013),

[135] Id.

[136] Id.

[137] China Bars Use Of Virtual Money For Trading In Real Goods, Ministry of Commerce People’s Republic of China (June 29, 2009),

[138] Considering the commodity nature of bitcoin and tax law in China, one could come to a preliminary conclusion on the tax treatment of Bitcoin. If used as a means for payment, Bitcoin will not be taxed. Bitcoins held by individuals will only be taxed if there is a sale or exchange event realizing the gain in value of bitcoins. However, if a corporation owns the same amount of bitcoins, it will be taxed for the gain in value even if there is no realization event. When exchanged for services, bitcoins received by the service provider will not be taxed because the commodity nature of bitcoins precludes the tax treatment for cash, property or securities.

[139] See supra Part II.

[140] See Financial Inclusion Data/Global Findex, The World Bank, (last visited May 1, 2016); Eric Duflos & Li Ren, Financial Inclusion in China: Will Innovation Bridge the Gap?, CCAP (Apr.21, 2014),

[141] There are 667 million Internet users in China by the end of June 2015. Of all the Internet users in China, 27.9% are in rural areas. China Internet Statistics Whitepaper, China Internet Watch, (last visited May 1, 2016); Paul Carsten, China’s Internet Population Hits 649 Million, 86 Percent On Phones, Reuters (Feb. 3, 2015, 11:58 AM),

[142] See Casey & Vigna, supra note 51, at 188–218.

[143] See Cristie Ford, Financial Innovation and Flexible Regulation: Destabilizing the Regulatory State, 18 N.C. Banking Inst. 27, 29–30 (2013)

[144] The UK Treasury intends to limit AML Rules to exchange service providers and decides not to extend those rules to wallet service providers without the function of fiat-to-digital. See HM Treasury, Action Plan For Anti-Money Laundering And Counter-Terrorist Finance 19 (Apr. 2016),

[145] Launch of Australian Digital Currency Industry Code of Conduct, CoinDesk (last visited May 1, 2016). The detailed document is available at (last visited May 1, 2016)

[146] A report by Coin Center examined the likely treatment of different types of cryptocurrencies under the U.S. securities law. The conclusion is that decentralized cryptocurrencies such as bitcoin, pegged cryptocurrenies and distributed computing platforms are unlikely captured by the definition of a “security” under U.S. law. See Peter Van Valkenburgh, Is Bitcoin a Security?, Coin Center (Jan. 25, 2016),

[147] See generally, Catherine Happer & Greg Philo, The Role of the Media in the Construction of Public Belief and Social Change, 1 J. of Soc. and Pol. Psychol. 1 (2013)

[148] “… media reports have focused not only on virtual currency’s potential promise, but also on very real abuses and criminal activity associated with it.” What You Should Know about Bitcoin, FINRA (last visited May 1, 2016).

[149] For example, it took two years for BitLicense, New York State’s first comprehensive regulatory framework for digital currency firms, to pass, and there had been two revisions prior to the final issuance of the BitLicense on June 3, 2015. The final issuance made several changes to the July 2014 Proposal and February 2015 Re-proposal. See Matt Anderson, Speech: NYDFS Announces Final Bitlicense Framework for Regulating Digital Currency Firms, New York State (June 3. 2015),; NYDFS, Final BitLicense Regulatory Framework, New York State, (last visited May 1, 2016).

[150] The feature of being decentralized also makes the cryptocurrency network an ideal candidate for government benefits programs because of the publicity and traceability. If implemented in charity donations, such a network will help rebuild people’s confidence in China’s charity organizations. The UK government is currently considering such application. See Joon Ian Wong, The British Government Is Considering Paying Out Research Grants With Bitcoin, QUARTZ (Apr. 26, 2016),

[151] See Ludwin, supra note 79. Graphic analysis is one potential way to trace money launders on Bitcoin.

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