The People’s Bank of China (PBoC) has taken a significant step in addressing cryptocurrency regulation and decentralized finance (DeFi) by dedicating a section to these topics in its latest financial stability report. Published on December 22, the report emphasizes the need for international collaboration in establishing cryptocurrency regulations.
Key points from the PBoC’s report include:
Global Collaboration: The PBoC advocates for a unified global approach to cryptocurrency regulation, emphasizing the principle of “same business, same risks, same supervision.” This approach aims to prevent regulatory arbitrage, where entities exploit differences in regulatory systems across countries.
Market Size and Connection to Traditional Finance: The report notes that the cryptocurrency market represents about 1% of the global financial system and has limited connections with traditional finance.
Risks and Vulnerabilities: The PBoC highlights several risks associated with cryptocurrencies, including susceptibility to hacker attacks, market manipulation, and issues related to DeFi governance mechanisms. The report specifically references major events like the collapse of the Terra ecosystem and the downfall of the FTX exchange in 2022, underscoring the need to address regulatory fragmentation and eliminate supervision arbitrage.
This focus on cryptocurrency in the PBoC’s report is notable, especially considering China’s stringent stance on crypto activities. In 2021, the PBoC announced measures to combat crypto adoption in mainland China, leading to a comprehensive ban on crypto transactions and mining. Despite this, mainland China continues to be a significant hub for crypto mining.
The contrasting approaches between mainland China and Hong Kong regarding cryptocurrency are also noteworthy. While mainland China maintains a strict ban, Hong Kong has been rapidly adopting crypto, potentially indicating a shift in the broader regulatory landscape. Animoca co-founder Yat Siu suggests that Hong Kong’s stance could signal significant future developments in crypto regulation in mainland China. However, other local executives believe that China’s stance on cryptocurrency is independent of Hong Kong’s more crypto-friendly moves.
Overall, the PBoC’s report reflects a growing recognition of the importance of cryptocurrency in the global financial system and the need for coordinated regulatory efforts.
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