Expert: Seven Reasons Why Chinese Regulators Shut Down Bitcoin Exchanges

Professor Yang Dong is Deputy Dean of Renmin University’s Law School and Director of Renmin’s Centre for Fintech and Internet Security. He has spoken at many workshops that were well attended by regulators such as the Bank of China and the China Securities Regulatory Commission, as well as academic researchers, think tanks and lawyers.

In an interview on CCTV, he offered a series of explanations why the regulators are closing down Chinese bitcoin exchanges, China Finance Online reported on Friday.

Professor Yang Dong on CCTV.

Lack of Licensing
The first point he made concerns licensing. He said that financial institutions are required to obtain licenses to carry out business such as by the China Banking Regulatory Commission and the China Insurance Regulatory Commission (CIRC). However, he noted that:

"At present, China’s domestic virtual currency trading platforms lack the relevant legal license, which leads to the virtual currency trading platforms free from the existing regulatory system. In fact, there is a huge business risk."

      The Nature of Bitcoin

His second point was regarding the nature of bitcoin itself. “The mechanism of limiting the amount of encrypted money by specific code is controversial,” Professor Yang claimed, citing how a “new encryption system may be invented, the existing algorithm can also be tampered with, the issuance of encrypted money may also increase.”

In addition, he pointed to bitcoin’s high price volatility. According to the professor, digital currencies lack “a clear value base.” He explained that “because there are no economic fundamentals to assess the supply and demand of bitcoins and intrinsic value, the market speculative atmosphere results in sharp fluctuations in prices.” Investors following the trend blindly could suffer significant losses, he added.

Moreover, he said cryptocurrencies are “not affected by the driving force of inflation and the exchange rate difference as well as other issues.”

     Money Laundering & Pyramid Schemes

The professor’s third point focused on how digital currency transactions can be used for money laundering and financial fraud, as well as to avoid foreign exchange controls. According to him:

"Because virtual currency has no borders, cross-border payments through virtual currency can avoid foreign exchange controls, and there is a greater need to guard against such anonymous transactions for countries and economies where capital projects are not fully open."

He then followed up with his next point, stating that some pyramid schemes and fraudulent activities leverage digital currencies.

           Market Manipulation & Security 

Professor Yang’s fifth point concerns market manipulation. Anyone investing tens of millions of dollars will be able to easily manipulate the price, sending it skyrocketing, he explained. Any losses are passed onto ordinary investors with less information and a disadvantaged position, he detailed.

His sixth point involves security risks. “Data risk and information security risks are intertwined,” he elaborated. If the security system is not strong enough, hackers can access bitcoins which will lead to a large amount of data loss at the bitcoin exchange and irreparable damage, he added.

                     Darknet Transactions

The Professor’s final point was about bitcoin being used in darknet markets, which have not been effectively regulated, he described before adding that:

"The darknet transactions are without strict protective measures, and will not strictly enforce anti-money laundering, KYC and other effective measures, and are even intended to allow anonymous transactions. The government can not effectively monitor the shortcomings of the darknet."

What do you think of Professor Yang’s explanations of why Chinese bitcoin exchanges are being shut down? Let us know in the comments section below.

Images courtesy of Shutterstock and China Finance Online

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