The Rules of Crypto: A Comparison of U.S. and Chinese Regulatory Policies

On both sides of the Pacific, regulators are keeping a close eye on cryptocurrency developments. Earlier this month, a White House National Security Council spokeswoman said that “the White House is considering a wide ranging oversight of the cryptocurrency market to combat the growing threat of ransomware and other cybercrime.”  In China, the People’s Bank of China (PBOC) announced that all crypto-related transactions were illegal which greatly influenced cryptocurrency’s price. While both countries are scrutinizing cryptocurrencies to suit their policy goals, they adopt different approaches for balancing financial innovation and risk prevention within their existing financial regulatory regimes.

Blockchain-based crypto assets are technology-driven financial innovations that include digital currencies and digital tokens in the payment and financing areas. Financial regulators face the problem of how to supervise risks involved in the issuance and trading of crypto assets.  Although financial regulation goals are quite similar worldwide, (i.e. market efficiency and integrity, consumer and investor protections, capital formation or access to credit, taxpayer protection, illicit activity prevention, and financial stability) regulators take divergent approaches to counter the various financial risks.

Both United States and China have a fragmented financial regulatory system. In each country, multiple regulators supervise the cryptocurrency market based on their jurisdictions to target specific risks. For instance, in U.S., the Commodity Futures Trading Commission regulates cryptocurrencies as commodities, including cryptocurrencies derivatives markets. The Securities and Exchange Commission treats some cryptocurrencies as securities if they satisfy the Investment Contract Test and aims to protect investors. The Internal Revenue Service treats cryptocurrencies as property to fight against taxation evasion through cryptocurrencies transactions. Finally, the Financial Crimes Enforcement Network (FinCEN) treats cryptocurrencies as “currencies” and imposes anti-money laundering obligations to virtual currency exchanges.

Similarly, China also has multiple authorities in charge of different aspects of the financial markets, institutions, and related risks. For instance, PBOC, China Securities Regulatory Commission (CSRC), China Banking and Insurance Regulatory Commission (CBIRC) are responsible for supervising macroprudential risks, micro-prudential risks in banking, securities and the insurance industry, respectively. In addition, private virtual currency is a subsection of Fintech where its technological characteristics subject it to the domain of the Chinese Ministry of Industry and Information Technology (CMIIT), Central Cyberspace Administration (CCA). Private virtual currencytransactions fall within the scope of the State Administration for Market Regulation (SAMR) and, if crimes are involved, the Ministry of Public Security (MPS). Therefore, it is not abnormal to see several authorities jointly release regulations on private virtual currency.

Since 2013, the regulations jointly released by the former mentioned regulators include:

Date Tittle of Regulations Authorities
Dec 3, 2013. Notice on preventing Bitcoin risks PBOC; CMIIT; CSRC; CBIRC
Sep 4, 2017 Announcement on Preventing Token Issuance Financing Risks PBOC;CCA;CMIIT; SAMR;CSRC; CBIRC
Aug 24, 2018 Risk Warnings about Preventing Illegal Fund-raising in the name of “Virtual Currency” and “Blockchain” CBIRC; CCA; MPS; PBOC; SAMR;

These regulations stem from China’s view that Initial Coin Offerings are considered illegal activity, and the government is seeking to “annihilate and destroy” blockchain-based pyramid schemes. As a result, financial institutions and third-party payment providers are banned from accepting, using, or selling virtual currencies. The recent PBOC’s announcement that all crypto-related transactions were illegal is consistent with the Chinese long-lasting policies upon cryptocurrencies.

The institutional structure of crypto regulation is not the only difference between the United States and China—the underlying regulatory perspective on cryptocurrencies is different too. The United States treats all kinds of cryptocurrencies, whether they are used as payment instruments or belong to financing products, as financial innovations with potential risks, and utilizes the existing regulatory mechanisms to deal with risks based on financial regulators’ jurisdictions. In other words, when cryptocurrencies are utilized by people as payment instruments, banking regulators would be involved, and when cryptocurrencies are treated as investment tools, securities regulatory authorities would have authority. By contrast, Chinese cryptocurrency regulation policies are dichotomous. Regulations on cryptocurrencies in the financing area (also called “private virtual currency”) are very strict —nearly a complete prohibition, as former mentioned. Nonetheless, policies for the public digital currency are quite lenient and supportive. For instance, PBOC launched central bank digital currency (CBDC) in 2020. China’s approach reflects Beijing’s desire to encourage Blockchain innovation and revolutionize the existing payment system within government’s control and supervision. This in turn will improve transaction efficiency, transparency and save costs, and could also prevent potential financial risks. However, due to the current Chinese securities regulation regime’s limitations, Beijing is unwilling to allow cryptocurrency investment without a proficient risk prevention mechanism.

In summary, the United States and China have multiple financial regulators to supervise cryptocurrencies based on the financial risks within their jurisdictions. In the United States, the determinants for who regulates which potential cryptocurrency risks are closely related to their usages and functions. By contrast, China’s financial regulation policies for cryptocurrencies are split between private and public cryptocurrency. The former is totally prohibited, while the latter is encouraged and even supported by the government. The different approaches between two countries mirror their own perspectives on how to balance financial innovation protection and risk prevention effectively.