The utopia created by algorithms ultimately cannot withstand the iron fist of sovereign nations.
I have been in the crypto industry for at least seven or eight years, witnessing the frenzy of getting rich overnight and countless instances of disastrous liquidation. Recently, when chatting with friends in the industry, we all shared a common confusion: clearly the technology is so strong, why can't it thrive domestically?
On the surface, the regulation seems to target the issues of extreme price volatility and lack of consumer protection. But upon deeper reflection, the situation is far from simple.
01 Surface-level issues: Financial stability and consumer protection
The price trend of virtual currencies is simply more thrilling than a roller coaster. In 2017, the price of Litecoin increased by 476%, Ripple rose by 54 times, and Ethereum also surged by 13 times. Such market conditions lure a large number of people to speculate.
But the problem is that the ‘credit’ basis of virtual currency is mathematical algorithms, and its price depends on factors such as the reliability of the algorithms and market confidence. There are technical flaws and vulnerabilities, making the value foundation very fragile.
I have seen too many people blindly follow trends and speculate, ultimately losing everything. The establishment of various trading venues has neither been approved nor regulated; they are willing to provide financing and leveraged trading to increase transaction volume, which exacerbates price fluctuations and bubbles. The public participates in trading without any legal protection, posing immense financial risks.
What’s more troublesome is that virtual currency is increasingly becoming the ‘accomplice’ of various illegal criminal activities. Bitcoin is widely used as a payment tool in the so-called ‘dark web’, which is rife with various serious illegal activities.
02 Deep Logic: Monetary Sovereignty and Financial Security
But to be honest, the above reasons are just superficial. The real issue is that virtual currency touches upon the foundation of the financial system — monetary sovereignty.
Any virtual currency that does not have government endorsement can only be called a ‘virtual token’, not a ‘virtual currency’. The authority to issue currency and collect seigniorage is the most important economic power of a sovereign state and cannot be challenged.
The anonymity and decentralization of virtual currency make it a new means of cross-border money laundering. Leveraging these characteristics, holders of virtual currency can evade domestic regulation and achieve the free exchange of virtual currency and fiat currency through overseas exchanges and service providers.
If virtual currency is allowed to run rampant, anyone can issue tokens, which will inevitably lead to severe inflation. The pursuit of profit will create a capital absorption effect, and driven by high profits, if investors withdraw all funds from the securities market and invest them in the token market, the collapse of the financial system is inevitable.
03 Real Threats: Foreign Exchange Control and Tax Regulation
The foreign exchange control issue you mentioned is indeed a key focus of regulatory authorities. Virtual currency transactions do not require credit card and bank account information, nor can they be traced through traditional fund transaction records, rendering traditional regulatory methods ineffective.
Users can easily buy Bitcoin with renminbi and then sell it in dollars or other currencies, moving between different trading venues to profit from price differences. Some people register both renminbi and dollar accounts to easily circumvent the $50,000 annual foreign exchange limit per person.
Virtual currency-related business activities are considered illegal financial activities. In recent years, regulatory authorities have continuously strengthened their crackdown on virtual currency, expanding the scope and resolutely combating illegal financial activities related to virtual currency.
Speaking of the fourth phase of the Golden Tax, this is indeed the case. The anonymity and decentralization of virtual currency make transactions difficult to trace, greatly increasing the difficulty of tax supervision. In a system that values tax compliance, the existence of virtual currency is undoubtedly an anomaly.
04 Technical Myths: Distinguishing Between True and False Innovation
People often say that virtual currency is ‘financial innovation’, but how do we distinguish between true and false innovation? The criteria are actually very simple: is it beneficial to the real economy? If it can promote the development of the real economy, it is true innovation; otherwise, it is a scam.
All financial scams have one characteristic — they can only profit from price differences, which is also the biggest feature of Ponzi schemes; they can only maintain the game through continuous inflow of funds, and once the subsequent funding breaks, the system will be difficult to sustain.
Blockchain technology is not the same as Bitcoin. The concept of blockchain as a technological innovation was proposed as a ‘distributed ledger’ system as early as 1991. However, Bitcoin is merely an application of blockchain technology and has not achieved the creation and production of wealth.
True financial innovation can enlarge the pie and promote healthy development of the real economy. In contrast, virtual currency is more about speculative trading with limited contributions to the real economy.
05 Future Outlook: Balancing Regulation and Innovation
Globally, the regulatory attitudes of various governments towards virtual currency are gradually diverging, with varying degrees of support and suppression. However, China's position has always been very clear: virtual currency should not and cannot circulate as currency in the market.
Recently, regulatory authorities have defined stablecoins for the first time, clarifying that stablecoins are a form of virtual currency, pointing out that they cannot effectively meet customer identification, anti-money laundering, and other requirements. This means that speculation on stablecoins will be severely punished.
In the future, the regulatory mechanism for virtual currency-related activities will be deeply advanced towards collaboration, precision, and efficiency. By breaking the problem of decentralized regulation through inter-departmental cooperation, relying on technological upgrades to address hidden transactions and chaotic fund transfers.
For ordinary investors, staying away from speculative trading in virtual currency and choosing legal and compliant investment channels and products is key to protecting their financial security.
As someone within the industry, I must admit that the regulatory environment for virtual currency will only become stricter. The dream of decentralization constructed by algorithms will ultimately face real constraints in the face of sovereign currency systems. Whether for financial security or social stability, the era of the wild growth of virtual currency has ended.
Perhaps, true blockchain innovation should focus on the technology itself, rather than creating financial tools that evade regulation. Only in this way can a balance be found between innovation and regulation.
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