introduction
Digital currency is a new form of currency brought about by technological innovation. Because it has the characteristics of decentralization and anonymity, it can reduce costs and improve efficiency in the transaction process, so it is sought after by people. The introduction of digital currency has subverted people's understanding of currency to a certain extent, changed people's traditional payment methods, and overcome many defects of traditional currency, such as high transaction costs, limited international circulation, non anonymous payment, low payment efficiency, non traceability, easy to forge, easy to tamper, etc. It is precisely because of these characteristics that the digital currency transaction has attracted the attention of the majority of investors, and its influence has been expanding all over the world. According to the data released by the blockchain company linktower think tank, there were more than 1200 types of digital currencies at the end of the first quarter of 2018, with a single day transaction volume of about 160billion yuan. As of april9,2019, there are more than 2100 types of digital currencies, with a single day transaction volume of more than 350 billion yuan. It can be seen that the digital money market is developing rapidly as a whole, and digital money is still favored by many investors.
However, at present, the legal status of digital currency is not perfect, and the general public does not have a clear and comprehensive understanding of it. With the rapid development of digital currency, many risks contained in it are gradually highlighted, such as digital currency theft, extortion, money laundering, tax evasion, illegal transactions, etc. These risks not only bring huge economic losses to investors, but also add many unstable factors to the society. In order to overcome the potential risks and challenges in the development of digital currency, promote the more standardized and healthy development of the digital currency market, and reduce the uncertainties in the market, governments have implemented various means to supervise digital currency. For example, the United States brings digital currency into the scope of anti money laundering supervision; In Britain, laws and regulations are used to supervise the relevant subjects of digital currency transactions; Japan and South Korea levy taxes on capital gains obtained by trading institutions through digital currency; Russia prohibits private digital currency transactions; China has issued regulatory documents to regulate the risk of digital currency; wait. However, there is no precedent for governments to regulate digital currency. These regulatory measures for digital currency are still in the primary and exploratory stage, and whether they can achieve the established effect is still uncertain.
Therefore, on the basis of defining the concept and characteristics of digital currency, this study intends to further sort out the current development status of digital currency, analyze the risks in the development process of digital currency, as well as the regulatory measures that governments have implemented for the risks of digital currency, find out the defects, and then put forward corresponding improvement measures according to these defects. This study systematically analyzes the current situation, risk issues, regulatory measures, etc. of digital currency within an integrated framework, and puts forward targeted policy recommendations. It is hoped that the research conclusions can help financial innovation similar to digital currency reduce uncertainty, promote its more healthy and steady development, and then give full play to its positive role in economic growth, At the same time, it provides reference for the follow-up research on financial innovation similar to digital currency, as well as some references for the government departments that make regulatory policies.
1、 The concept and characteristics of digital currency
At present, the academic definition of digital currency has not been unified. Sheng Songcheng and Zhang Xuan, from the perspective of the source of money, believe that digital money is an unreal currency represented by virtual data and a derivative of the continuous development and development of Internet technology. Both the bank for International Settlements (BIS) and the International Monetary Fund (IMF) point out that digital currency is the digital expression of value from the perspective of currency functions, and its functions are realized through data exchange, such as transaction, circulation, bookkeeping and storage; Similarly, EBA also defines digital currency from this perspective as the digitization of value, which can be paid, transferred, stored or traded, but is different from legal tender. Mashijun defines digital currency from the perspective of currency form, and believes that digital currency is different from physical currency, does not take physical media as the carrier, and does not exist in the real world. In short, this paper holds that digital currency is a new form of currency, which is issued and circulated on the Internet and plays the basic functions of currency through information exchange, such as media, account book recording and storage. Since the development of digital currency, there are thousands of types. The main digital currencies are bitcoin, Ethereum and ripo coin, among which bitcoin is the most famous type of digital currency.
Digital currency is characterized by decentralization, anonymity, security, low transaction cost, convenience, deflation, etc.
(1) Decentralization: digital currency has the characteristics of decentralization, mainly because the digital currency transaction relies on the blockchain technology with the characteristics of decentralization, which allows the transaction subject to conduct point-to-point transactions, global payments, without regional obstacles, and without the participation of any financial intermediary. At the same time, this feature can also improve the transaction efficiency, and greatly reduce the transaction cost compared with the traditional transactions involving banks and other financial institutions.
(2) Anonymity: in the process of digital currency transaction, the completely anonymous method is maintained. This method increases the intensity of user privacy protection, reduces information leakage, and effectively prevents other individuals or groups from obtaining other information that can reveal the identity of digital currency users.
(3) Security: the distributed general ledger mode is a digital currency transaction mode. This transaction mode is an algorithm adopted by the encryption mechanism and cannot be cracked, which makes it impossible for anyone to forge or tamper with currency in the transaction process, and there can be no digital counterfeit money or false transactions. Therefore, digital currency avoids the defect that traditional currency is prone to counterfeit currency, which makes digital currency transactions have a certain degree of security.
(4) Low transaction cost and convenience: the production cost of digital currency is low, and the cost in the transaction transmission process is low and convenient. This is mainly because the digital currency is non physical circulation, its transaction is not limited by time and space, and can quickly and effectively achieve low-cost and convenient capital transfer. Compared with traditional currency transactions, a series of complex cross-border transfer procedures need to be completed through the assistance of banking institutions, and the transaction process is time-consuming and requires high handling fees. Digital currency transactions have obvious advantages. Cross-border transfer can realize point-to-point transfer of funds only by knowing the other party's account address. The whole transaction process is time-consuming and low handling fees.
(5) Deflation: the total amount of digital money will not be increased, and its supply speed will gradually slow down over time. Compared with the traditional legal tender, the state has the right to issue additional currency, which may lead to currency devaluation and inflation crisis. However, the never issuing of digital currency makes it naturally have the characteristics of deflation and will not cause inflation.
2、 Development status of digital currency
At present, the growth trend of global digital currency shows a low growth trend. According to the data from 2013 to 2019, the total market value and daily trading volume of global digital currencies fluctuate greatly. Specifically, from 2013 to 2017, the market value of the global digital currency grew slightly and remained at about US $500million. The peak of market value growth of digital currency occurred in the first half of 2018, with a maximum of more than US $81.3 billion and a daily trading volume of US $7.5 billion. By the end of the second half of 2018, the global digital currency market value showed a negative growth trend. However, at the beginning of 2019, the global digital currency market value showed a slow growth trend, and its daily trading volume was still high, with a maximum of more than $8.2 billion a day ago. As of april9,2019, the types of global digital currencies have reached 2157, with 17414 trading markets, a total market value of more than $18billion and a daily trading volume of more than $5.4 billion. Among them, the total market value of the world's top ten digital currencies is US $14.927 billion, accounting for 82.6% of the total market value of digital currencies. The market value of bitcoin ranks first, accounting for 50.9% of the total market value of digital currency. The market value of ether coin and Rayleigh coin is far from that of bitcoin, accounting for 10.42% and 8.15% respectively. However, more than half of these digital currencies have negative price changes.
3、 Risks in the development of digital currency
（1） Security risks caused by the de centrality of digital currency
The decentralization of digital currency causes great security risks. Although the digital currency adopts a strict cryptology system, which is not easy to be broken or tampered with, and can provide a certain security guarantee for the digital currency transaction, due to the short development time of the digital currency, there are problems such as the transaction platform is not tight, the operation facilities are not perfect or the technology leaks, and the transaction website is prone to account theft and other events. The theft of consumers' digital currency will cause huge economic losses. For example, mt.gox and coincheck are the two major digital currency exchanges in Japan. They were attacked by hackers and lost nearly 100 billion yen of digital currency. More importantly, consumers have not been able to recover such losses. Because digital currency has the characteristics of decentralization, hackers can steal users' digital currency through a variety of ways, such as Trojan horse programs, operating system or trading platform vulnerabilities, which makes it difficult for the police to lock users even if they can find the trend of stolen digital currency. It is also a challenge to judge this kind of lawsuit, because the hacker has owned the private key, and it is difficult for the original digital currency holder to verify its ownership. If such cases involve a large number of people and a large amount of money, they will have a serious adverse impact on the society.
（2） The deflation characteristics of digital currency cause speculative risk
The value of digital currency fluctuates greatly, which is easy to trigger speculation. This speculative risk mainly comes from two aspects, one is the expectation of investors, the other is the manipulation of speculators. The former is mainly because the digital currency algorithm is strict, and the digital currency generated in a specific period of time is limited. When the total scale of digital currency supply remains unchanged at a certain time, investors expect that the value of digital currency will increase in the future, and they will store more digital currency, resulting in the decrease of digital currency used for trading in the market and the increase of value. With the rise of the value of digital currency, investors are more inclined to store more digital currency, resulting in a vicious circle of digital currency storage, leading to deflation, which may eventually lead to its withdrawal from the market and bring huge losses to investors. For example, the value of bitcoin in the first transaction is only $0.0025, but as of april9,2019, the price of 1 bitcoin is $35094.38. This is mainly because the price of digital currency is affected by many uncertain factors, fluctuates violently, and is easy to be manipulated by speculators. The reasons for the price fluctuation of digital currency come from its short development time, vague legal definition, low recognition and transparency, limited application scope, but high attention and many participants. Speculators use these characteristics to maliciously hype digital currency and manipulate its price by human intervention.
（3） Legal risk caused by anonymity of digital currency
The anonymity of digital currency provides convenience for criminals. The transaction of digital currency has high confidentiality, and the transaction mode is point-to-point transaction, which is not limited by time and region. This advantage of digital currency not only brings convenience to users, but also attracts criminals. Because when criminals engage in money laundering, drug trading, gambling, tax evasion and other criminal activities, transaction anonymity can help them escape the monitoring of regulatory authorities. Moreover, anonymity makes it impossible for law enforcement agencies to trace their true identity, which increases the difficulty for law enforcement agencies to track the activities and behaviors of criminals. Alphabay, the world's largest black market trading website, is a typical example. In two years, criminals conducted digital currency transactions with a market value of more than $1billion, such as drugs, weapons, hackers, etc. In order to control the activities of criminals, the United States and Britain had to jointly shut down alphabay digital currency trading website.
（4） Credit risk caused by digital currency without credit guarantee
Digital currency lacks the support of legal institutions and national government policies, and is prone to credit risk problems. The traditional currency has fixed institutions and units to issue currency, with the state credit as guarantee, and the value of currency is stable. However, there is no issuer involved in the process of obtaining digital currency, so the digital currency is not guaranteed by national credit, and the currency value is prone to fluctuations. In the whole process of digital currency transaction, each entity can only rely on the credit of both parties, the third-party transaction platform and technology to complete the digital currency transaction. Once any party or the third party or technology does not support the transaction, the transaction will be hindered.
（5） No international restrictions on digital currency cause world currency risk
Existing risks of digital currency
Figure 1 existing risks of digital currency
The transaction and circulation of digital currency are worldwide without international restrictions. In the process of obtaining digital currency, a large amount of power is consumed. The development of countries around the world is uneven. Developed countries have advanced hardware equipment and electricity, and can obtain a large amount of digital currency, while developing countries have relatively weak national strength, and their access to digital currency is limited. Therefore, a large amount of wealth is concentrated in a small number of developed countries, which can control the value of global digital currency. If an event occurs in developed countries that affects the value of digital currency, it will bring huge economic losses to investors. For example, the collapse of mt.gox, Japan's largest digital currency trading platform, led to the depreciation of digital currencies in many developing countries. In addition, the global circulation of digital currency has also intensified criminal activities such as money laundering and tax evasion. The security risk, speculation risk, legal risk, credit risk and world currency risk in the trading process caused by the characteristics of digital currency (as shown in Figure 1) not only bring huge economic losses to investors directly involved in trading activities, but also add many uncertain factors to various countries. It is pointed out that Isis will carry out financing activities with the help of digital currency.
4、 Existing risk supervision measures for digital currency
In view of the risks in the process of digital currency trading, governments all over the world have implemented regulatory measures in order to improve the digital currency trading system and reduce risks and uncertainties. Summarize the measures taken by many countries in digital currency supervision, mainly including the following aspects:
（1） Develop digital currency into legal tender
After the emergence of digital currency, it has attracted the attention of various countries. Central banks are also considering whether to develop digital currency into legal tender. The United States, in particular, maintains a positive attitude in developing non digital currencies into legal digital currencies. Although Russia banned digital currency related transactions in China in 2014 and shut down many digital currency trading platforms, websites and communities, with the development of digital currency, its role in national economic growth has become more and more important. The Russian government has also actively changed its attitude towards digital currency after 2017. In the face of issuing legal digital currency, the attitude of our government is also quite positive. As early as 2014, China set up a special research group to demonstrate the feasibility of issuing legal digital currency. Subsequently, it carried out research on the key technologies of digital currency and the operation framework of digital currency, and achieved phased results. In 2016, China will issue legal digital currency as a strategic goal, and conduct in-depth research and Discussion on the multi scenario application of digital currency. In 2017, in order to explore the issue, operation framework, key technologies and other issues of the central bank's digital currency, the Central Bank of China set up a digital currency Research Institute, and also carried out research on digital currency related fields.
（2） Avoiding speculation in digital currency trading
In order to avoid the speculation brought about by digital currency, some countries have taken measures to ban digital currency in a certain range and for a period of time. In 2014, the Central Bank of Russia issued a statement, pointing out that the digital currency transaction is a virtual transaction without the support of state entities, which is highly speculative and risky in the transaction process; Within the scope of its supervision, no one shall use digital currency, prohibit relevant financial activities and services, and impose criminal penalties on the subjects who violate relevant provisions. In 2015, the Russian Ministry of Finance pointed out that those who engage in digital currency related transactions and activities will be subject to criminal punishment, because digital currency related transactions are classified as illegal activities. In 2016, Russia banned all private individuals from engaging in digital currency related transactions and activities in the country. In 2017, China issued the first announcement to completely prohibit the trading of virtual currency, and then restricted or even required to completely stop the trading of digital currency. Recently, the Guiding Catalogue for industrial restructuring (2019 version, exposure draft) released by the national development and Reform Commission included the "mining" activities of virtual currency in the eliminated industries.
（3） Standardize the trading platforms and institutions of numerical currency
The countries that regulate the supervision of digital currency trading platforms and financial institutions that open relevant accounts mainly include Japan, the United States and South Korea. The main way of supervision is to issue business licenses to institutions that provide digital currency services and levy taxes on capital gains obtained through digital currency. Japan mainly supervises digital currency exchanges through the implementation of license management. So far, 16 digital currency exchanges in Japan have held business licenses issued by the financial services authority. Japan's National Taxation Bureau ruled that the capital gains obtained by exchanges through digital currency need to be taxed, and the tax rate is between 15% and 55%. Some autonomous states in the United States, such as New York State, require the digital currency exchange to apply for an operating license during its operation in the state. The US tax bureau also said that digital currency is an asset, and long-term capital gains obtained through digital currency should be taxed. The Korean government also supervises the account services provided by the exchange. In order to regulate digital currency transactions and improve their transparency, the Korean government also requires the implementation of real name management of digital currency. In addition, South Korea also imposes a 24.2% tax on the capital gains obtained by the exchange through digital currency transactions.
（4） Clarify and improve the legal status of digital currency
Various countries gradually set rules for digital currency transactions. For example, the US national tax administration has issued relevant guidance on digital currency, which is regarded as a special asset and needs to pay federal tax to the federal government. In 2013, the United States incorporated digital currency supervision into the Bank Secrecy Act, focusing on combating and supervising financial crimes such as money laundering; The New York State Financial Services Bureau supervised the provision of digital currency services by supervising financial institutions, and passed the virtual currency bill and the virtual currency supervision act during 2014-2015. Japan implemented the capital settlement law in 2017 to clarify the legal status of digital currency as a means of payment, but it is also different from legal currency and is regarded as an asset. In 2018, France formulated laws and regulations on digital currency supervision to prevent criminals from using digital currency for tax evasion, money laundering and other criminal activities. In addition, the French financial market supervision authority regulates digital currency and its derivatives. In 2016, China passed the general provisions of the civil law of the people's Republic of China (Draft), which stipulates the civil rights of online virtual property. However, in 2013 and 2017, the central bank successively issued the notice on preventing bitcoin risks and the notice on preventing the financing risks of token issuance to regulate digital currency transactions.
（5） Strengthen regulatory cooperation and coordination among governments
As there are no country specific restrictions on digital currency transactions, many countries have expressed the need to strengthen cooperation and coordination among governments to jointly overcome difficulties and challenges in digital currency supervision. Especially at the G20 summit in 2018, the G20 said that on the issue of digital currency risk, governments of all countries should have a sense of international cooperation and maintain good cooperative relations, and formulate globally unified national regulatory rules; The digital currency is managed according to the standards of the financial action task force on money laundering (FATF), and it is hoped that FATF will develop review standards. Under the call of FATF, improve the regulatory awareness of digital currency in various countries around the world, and implement the standard globally. FATF also stressed that in the future development of similar digital currency financial assets, we should focus on how to promote countries to take more consistent measures to jointly reduce their potential risks, reduce criminal activities, and support and develop such financial innovations.
It can be seen that various countries have taken regulatory measures in response to the risks existing in digital currency transactions. From the perspective of regulatory objects and contents, it mainly involves the following aspects: first, starting from the nature of digital currency itself, the government has issued policies to clarify its legal status as far as possible and support its development into legal currency. Second, starting from the institutions that provide digital currency services, the government issues business licenses and taxes the income obtained through digital currency. Third, starting from the implementation of regulators, various countries should strengthen cooperation and coordination, or directly ban digital currency, so as to avoid the potential risks of digital currency. However, these digital currency regulatory measures still have shortcomings and can not comprehensively overcome the potential risks and challenges of digital currency. Regulation does not directly prohibit people from using digital currency to avoid their risks, nor does it allow digital currency to disappear from the market. Instead, it should develop strengths and circumvent weaknesses. Financial innovation similar to digital currency plays an important role in the development of the whole social economy. Governments of all countries should actively guide, promote its healthy development and make corresponding contributions to social and economic growth.
5、 Measures to improve the existing risk supervision of digital currency
This paper holds that, in order to better regulate and develop the digital currency trading market, reduce the uncertainty in its development process, guide investors to make rational investment and reduce blindness and speculative behavior, in addition to the above regulatory measures already implemented, governments of all countries need to improve the existing regulatory measures from the aspects of supporting the development of digital currency technology, investors, government and market, as follows:
（1） Improve the ability to utilize and supervise new technologies
Digital currency is the product of the continuous development of network technology, especially the blockchain technology plays a decisive role in the formation of digital currency. The distributed ledger technology adopted by blockchain technology provides a certain scientific and technological guarantee for the transaction of encrypted digital currency. This distributed ledger technology can disclose the list of all transactions of digital currency according to the time order. Therefore, the effective use of the distributed ledger technology can reduce the information asymmetry and uncertainty among market participants, trading institutions and regulators, and realize the sharing of transaction information, Market participants can make better use of data to make investment decisions, and regulators can effectively reduce money laundering, tax evasion and other criminal activities based on data. Therefore, it is particularly important to further improve the blockchain technology, provide a robust platform for the blocks of digital currency operation, and create good conditions to ensure the process of digital currency from issuance to circulation. Combining with other emerging technologies can also maximize the advantages of blockchain technology. For example, combining cryptography, biometrics and artificial intelligence, we can jointly strengthen the security of digital currency and help investors and regulators identify fraudulent transactions, so that they can take corresponding actions quickly. In addition, blockchain technology can also be effectively combined with traditional encryption technology to complete the issuance, storage and circulation of digital currency with the help of their common technical characteristics, so as to ensure the security of transactions.
（2） Strengthen publicity and education to improve investors' risk awareness
Although some countries have issued relevant documents to regulate the digital currency market and remind investors to pay attention to the risks and scams in digital currency transactions, digital currency is still a new concept for most investors, especially those who blindly follow the trend. For example, from 2013 to 2017, the Central Bank of China successively issued the notice on preventing bitcoin risks and the notice on preventing token issuance financing risks, reminding the general public about the risks in digital currency investment and strengthening prevention. In addition to issuing such normative documents, the government should also use posters, promotional videos and public platforms such as wechat, QQ and Weibo to carry out extensive publicity, explain to the majority of investors what digital currency is, how it came into being and its operating principle, and improve investors' understanding of digital currency. At the same time, the government should also use case analysis and other means to inform investors of the risks they will encounter in the process of investment and what kind of scams exist, so as to improve investors' risk awareness. Through these measures, we can guide investors to invest rationally and reduce speculation, so as to reduce the economic losses caused by blindly following the trend of investment.
（3） Combining government guidance with market leadership to develop digital currency
There is no precedent for digital currency regulation. All countries are actively exploring effective regulatory measures. Under such circumstances, the guiding role of government policies can not be ignored. First of all, the government should make a good positioning for digital currency, such as whether digital is a currency with means of payment or just an investment tool. As money, it has value and use value; If it is an investment tool, it should have investment value. Therefore, it is important to position digital currency. Secondly, digital currency has no national credit endorsement, and there is no accountability for problems. Therefore, governments should let their central banks lead the issuance of digital currency, and use their credit as a guarantee to provide protection for the issuance and flow of digital currency. Finally, we will formulate policies and regulations applicable to the development of digital currency and establish a globally unified regulatory framework for digital currency. We will make full use of platforms such as the G20 to coordinate national cooperation, promote information sharing on international digital currency transactions, and jointly combat all criminal activities of criminals. In addition, there are many kinds of digital currencies at present, and they may continue to increase in the future. Different digital currencies compete fairly, so as to eliminate those low-quality digital currencies and leave high-quality digital currencies, providing certain security for people's investment choices. This paper analyzes the development status, existing risks and current regulatory measures of digital currency, and puts forward policy suggestions from three aspects: technology, digital currency investors, government and market to support the development of digital currency. In the face of financial innovations like digital currency coming into our lives, we should neither blindly pursue them because they break the tradition and bring high profits, nor exclude them because of their existing risks. Instead, we should consider how to promote the more standardized and healthy development of similar financial innovations and give full play to their role in economic development on the basis of avoiding risks, preventing asset losses and actively combating criminal acts, More effectively promote economic growth and maintain social stability. There is no doubt that the solution to the problems existing in the development of digital currency can not be separated from the coordination and cooperation between various countries, government departments, investors, trading institutions and platforms. All parties should actively explore more effective regulatory models to meet the needs of the current market environment development of digital currency, so as to promote its stable development and achieve social and economic growth.