Note: Xiao Lei, writer of this article, is a well-known financial commentator and a digital currency researcher.

China Securities Journal and Caixin reported last weekend that regulatory agencies are likely to ban all digital currency exchanges, including leading bitcoin exchanges such as BTCChina, Huobi and OkCoin.

Both China Securities Journal and Caixin are credible news sources. China Securities Journal is a subsidiary of Xinhua News Agency, and one of its missions is to propagandize relevant policies and guidelines concerning economy, finance and securities.

The “mysterious” man mentioned in the news is probably a person who attended the panel discussion on how to impose regulation on the bitcoin economy held in Beijing last week. And the regulatory authority mentioned in the news is a special leading group set up ad hoc last year to manage and control Internet financial risks.

Attached to the State Council, the leading group implements the State Council’s policies to encourage valuable innovations in internet finance and establish long-term mechanism monitoring and crack down any illegal financial activities.

The Group believes that the hot bitcoin market is one of the root causes of the craze of cryptocurrencies and ICOs market. In other words, bitcoin market shall be regulated first before regulations be imposed on the ICOs market.

Secondly, the Group points that since one can buy any portion of a bitcoin, which is similar to dividing security interest. As such, bitcoin transactions are by their very nature illegal securities activities.

Thirdly, the Group clarifies that bitcoin is not the blockchain technology, neither are bitcoin exchanges.

The three statements explain why the group think it is necessary to ban bitcoin exchanges. They want the market get a glimpse of upcoming regulations first and see how the market will react.

Furthermore, the Group notes that digital exchanges are not useful for technical development. Instead, they leave room for crimes to raise fund illegally. And bitcoin exchanges have done nothing to help grow real economy.

Some local governments are supportive of regulatory sandboxes that industrial players have been asking for. But the Group says that “there should be no green-lights”. As to the investment threshold, the Group believes that market risks would be decreased if threshold to be increased, but it will not avoid financial risks and social risks. In addition, if they recognize the legitimacy of digital currencies, they have to endorse them.

In a word, the Group denies all of the prerequisites for exchanges to operate.

Here I’m going to talk a little bit about how to carry out regulations.

The PBoC has the right to determine the nature of many currency and finance services; but it only notices risks and offers suggestions when many departments are involved. The announcement on Sept 4th is actually providing legal basis for the Group.

Though the Group is unanimous that bitcoin exchanges must be regulated, it depends on local governments when carrying out specific rules. Simply, local governments determine to shut down bitcoin exchanges or not. As major exchanges are all based in Beijing, it’s important to analyze Beijing’s policies first.

According to the regulatory document released by the Beijing leading group that is more specific and strict than that of the PBOC,

all platforms must stop services between CNY and tokens/virtual currencies.

platforms shall not provide pricing or serve as information intermediary for tokens or virtual currencies. If the terms are strictly implemented, all bitcoin exchanges should be shut down.

If the document only means to ban ICO tokens, then these platforms would simply transform to bitcoin exchanges. Even worse, if the big three are allowed to operate, then why other exchanges can’t considering no one in the industry has a license? Therefore, I assume the document is not only made to regulate ICOs, but to provide basis to supervise bitcoin exchanges.

As local governments, they will only be more tough when the responsibility fall on their shoulders.

What’s next?

As for major exchanges, they have done some job in account registration and anti-money laundering. Besides, they are relatively legitimate since they have been interacting with the PBOC. And daily transaction volumes of major exchanges surpass over 100 billion CNY. If they were banned altogether, it might bring about tremendous social insecurity. But regulatory authorities could start with limiting new registration and CNY deposit to reduce trade volumes and end up banning all exchanges. This would not be done overnight, probably will take two or three years.

Disclaimer: I personally don’t agree that bitcoin exchanges shall all be banned.