On June 9th, 2021, The El Salvador Bitcoin law was passed by the congress with absolute majority of votes in The Republic of El Salvador, a small country in Central America, which made El Salvador the first country in the world to recognize Bitcoin as legal tender. Bitcoin takes the first step in its legalization. At the same time, the United States, the European Union, Central American countries, and the IMF (International Monetary Fund) have all expressed concern about El Salvador's actions and communicated with El Salvador on a number of issues interms of macroeconomic, legal, monetary policy, anti-money laundering, and anti-terrorism that may be involved after Bitcoin becomes legal tender. However, there is still no article discussing how the El Salvador Bitcoin law would influence the regulation of bitcoin in China. This article will analyze the impact of El Salvador Bitcoin law on the regulation of Bitcoin in China in the context of Chinese laws and regulations.
The affect of the change of the nature of Bitcoin
Issued in 2013 by the People's Bank of China, the Ministry of Industry and Information Technology, the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission, the Notice on the Prevention of Bitcoin Risks (hereinafter referred to as the Notice) states in Article 1: "Bitcoin has four main characteristics: it has no centralized issuer; the total amount is limited; its use is not restricted by territory; it possesses the character of anonymity. Although Bitcoin is referred to as 'currency', it is not really a currency in the sense that it is not issued by a monetary authority and does not have monetary attributes such as fungibility and compulsion. In nature, Bitcoin should be a specific virtual commodity that does not have the same legal status as money and cannot be circulated on the market as currency. However, El Salvador Bitcoin law, Article 1 states that " The purpose of this law is to regulate bitcoin as unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require carrying out."
For the legal concept, the true premise of Bitcoin as a virtual commodity is that it doesn't have a status as legal tender. As a result, it could only be denominated in foreign currency. What’s more, it couldn’t or shouldn’t be used as currency in circulation process in some countries.The Notice, Article 1, remains valid today except for El Salvador, in that it no longer be a commodity but a legal tender to circulate and use. As you can see, the premise of this regulation rule, that Bitcoin were virtual commodity but not foreign currency, has lost. As mentioned above, the regulation of Bitcoin in China has been substantially affected by monetization of Bitcoin in El Salvador.
The difficulty of the regulation of Bitcoin
The Kingdom of the Netherlands has changed its attitude towards Bitcoin, since El Salvador passed the Bitcoin law. “It would be more effective if Dutch Officials monitor the activity of crypto rather than an outright ban.” says Dutch Finance Minster Wopke Hoekstra.Around the same time, the Indian authorities have scrapped their plans for a total ban and will instead move to classify cryptocurrencies as an alternative asset class. And the attitudes of governments and international organizations, such as IMF, towards bitcoin has changed to concern and worry.[The words concern and worry are chosen from news websites. Having seen the descriptions in news of IMF’s attitudes towards bitcoin ]
The widely concern about the regulation of Bitcoin means that all of the countries have met one problem, that whether domestic law can compete in the face of a foreign currency. From the views of public international law, the sovereignty is usually defined as the most essential attribute of the state in the form of its complete self-sufficiency in the frames of a certain territory i.e., its supremacy in the domestic policy and independence in the foreign one. Any countries has the right to choose its own society system and the form of nation, organize its own government, decide and deal with the internal and external affairs without the infringement and intervene of any other country. It’s true that El Salvador has a complete sovereignty, so even if the choice El Salvador made was ridiculous, it’s the reflection of sovereignty on currency. As a result, it will go against the international basic rules if we use domestic law to fight against a foreign currency.
Due to the good relationship between China and El Salvador, China’s attitude towards Bitcoin will be more neutralized after the coming of Bitcoin law, though the 51st meeting of the National Financial Stability and Development Commission has emphasized to fight the mining and transactions of Bitcoin.
Shock for China Foreign Exchange Management from the Bitcoin Law
Regulation of the People's Republic of China on Foreign Exchange Administration (hereinafter called regulations), Article 3, states that foreign exchange referred to in these Regulations shall mean the following payment means and assets expressed in foreign currency which may be used for international settlement:
(1) foreign currency cash, including notes and coins;
(2) foreign currency payment vouchers or payment tools, including notes, bank deposit vouchers, bank cards, etc;…So Bitcoin, as the legal tender of El Salvador, refers to foreign exchange no matter it’s defined as digital foreign currency notes or payment instruments in foreign currency.
Regulations, article 7 states that financial institutions engaging in foreign currency businesses shall open foreign exchange accounts for customers pursuant to the provisions of the foreign exchange control department of the State Council and handle foreign exchange businesses through foreign exchange accounts.
Regulations, article 14 Foreign exchange payments under current account items shall, pursuant to the administrative provisions of the foreign exchange control department of the State Council on payments of foreign currencies and purchase of foreign currencies, be made using self-owned foreign currency or foreign currency purchased from financial institutions engaging in conversion and sale of foreign currencies by presenting the valid documentation.
However, according to regulations, article 2, financial institutions and payment institutions shall not provide customers with services such as Bitcoin registration, transaction, clearing and settlement. Accept bitcoins or use bitcoins as payment and settlement tools; The exchange service between Bitcoins and RMB and foreign currencies will be launched. Imagine that a Chinese company receives bitcoin from the other party in the course of trade with a Salvadoran company, then a foreign exchange account and perform foreign exchange services are needed. And at that time, the contradiction between the provisions of the Regulations and the Notice comes to the fore. However, which is the right one to apply? Theoretically speaking, the answer is the Regulations. Because the Regulations were adopted by the State Council, the effect of which is significantly higher than that of the Notice. Nevertheless, application like that may result in a failure to the regulations of the Bitcoin.
Restructure of the Judicial logic of the Bitcoin cases
According to the Notice, the transaction contract of Bitcoin is invalid and the oblige has the right to claim return, except some contract like business contract and gift contract.
When the nature of bitcoin has turned into legal tender of El Salvador, there will be restructures of the Judicial logic of the Bitcoin cases.
First, China do not deny the payment of foreign currency as a claim judicially. If the plaintiff explicitly requests the defendant to pay a certain amount of bitcoin in the claim, and he explicitly refers to the bitcoin there as the legal currency, then the judicial authority may only be able to make a judgment based on the claim in accordance with the "Reply Letter on the Request on How to Determine the Exchange Rate of RMB to Major Foreign Currencies in the Trial of Foreign-related Civil and Commercial Cases" and other related provisions.
Secondly, after Bitcoin becomes legal tender in El Salvador, the validity of contracts involving Bitcoin such as loan contracts, entrusted finance contracts and investment contracts, especially if the above contracts explicitly agree that the Bitcoin referred to in the contract is legal tender in El Salvador, may no longer be determined as invalid according to the spirit of the Notice. This is because when bitcoin becomes a foreign currency, it changes from the subject matter of the transaction between the parties to the denomination of the subject matter of the transaction between the parties, just as all kinds of normal civil and commercial contracts entered into by parties denominated in U.S. dollars are legal and valid. Therefore, I believe that the subsequent judicial cases involving bitcoin may have new changes.
Bitcoin has taken its first step in the way of becoming legal tender. And the regulation of Bitcoin has been a part of the international regulation. The influence of the comprehensive national strength of El Salvador on China's bitcoin regulatory strategy is only the difference in intensity, not the difference in nature and logic. Therefore, our regulators may need to take into account the new situation and update their regulatory strategies to be ready for specific problems when they occur.
