In 2019, Matcha MXC is a well deserved "dark horse" in the currency circle. Securities Times quoted coin speculators as saying that Matcha uses air coins for two-way harvesting. At present, its office has been investigated by economic investigators. Li Yi, a former employee, was not surprised when he heard that Matcha had been investigated, but was glad that he was "running fast". Before leaving from Matcha, he saw that the government supervision was becoming stricter, and he was always uncertain, thinking that something would happen sooner or later.

As early as September 4, 2017, the Announcement on Preventing the Financing Risks of Token Issuance jointly issued by the Central Bank and other seven ministries and commissions (hereinafter referred to as the "September 4th Announcement") pointed out that any so-called token financing trading platform shall not engage in the exchange business between legal tender and token, "virtual currency", or buy or sell tokens or "virtual currency" as a central counterparty, Do not provide pricing, information intermediary and other services for token or "virtual currency".

In view of the "free ride" and speculation of "virtual currency" in the blockchain craze of virtual asset exchanges, recently the regulatory authorities in Beijing, Shanghai, Dongguan, Hangzhou and other places have "shown their swords" to conduct thorough investigation of relevant activities.

This makes Li Yi feel that the industry is encountering an unprecedented "earthquake". People he knows may be arrested, transformed, or closed down... The relevant exchanges are nervous at the moment.

"Running Tide"

The "big earthquake" of the exchange also affected the project parties and investors.

In a currency community, the investor Chen Fei decided to withdraw from the community indefinitely after a few discouraging words. This unexpected event made the whole group fell silent, but the pessimism was still spreading. "Some people complained that it was good every day, and the price fell every day." "Will our currency also be off the shelf?" "I heard that the exchange was investigated"... In just a few days, the number of community members has decreased by more than 100 people. Someone exclaimed, "The big guys are gone, and the currency circle is really cold."

Li Yi still remembers that in October this year, after a Shanghai exchange with tens of billions of dollars in capital was cashed out at a high level, the exchange was suddenly closed and the money was withdrawn.

"No one expected that this person would run away, and his friend's early investment money was also lost." In his impression, 2018 to 2019 was the most chaotic time in the blockchain industry. Now it is hard to earn money, and the exchange began to go astray.

The "94 Announcement" was the trigger of the "Great Earthquake". This also led to the first "runaway trend" in the currency circle. "The state says that it is illegal to open exchanges, and some exchanges are closed." Li Yi said that when the state strikes hard, people feel unsafe and close exchanges one after another. Some people transform into blockchain+business, some go overseas for backdoor listing, or IPO, or consulting.

Li Yi once saw an interesting digital currency exchange. When the boss felt that the bear market was coming, he changed the exchange into an information platform, The main page of the PC side is almost full of information, and the content of the exchange occupies a very small page. Then he went to the Tokyo Stock Exchange to buy more than 30 shells of TSEC, merge and invest in the upstream and downstream industries of the blockchain, and occasionally make capital investment in traditional industries. At present, this exchange has become a financial intermediary for blockchain projects.

Now, the currency circle is encountering the second wave of "runaway tide". Recently, the regulatory authorities in Beijing, Shanghai, Dongguan, Hangzhou and other places have been "showing their swords" to investigate the activities related to digital currency exchanges. On November 21, the Shenzhen Leading Group Office for Internet Financial Risk and Other Special Remedies issued a risk warning on preventing illegal activities of "virtual currency", and carried out investigation and rectification of virtual currency trading venues. This action will focus on three activities: first, providing virtual currency trading services or opening virtual currency trading venues in China; The second is to provide service channels for overseas virtual currency trading places, including services such as diversion and agency buying and selling; The third is to sell tokens in various names to raise funds from investors or virtual currencies such as Bitcoin and Ethercoin.

"After this strict management, many exchanges have closed down." Li Yi said that since the cloud exchanges (which provide cloud computing services for exchanges) have sprung up, one can serve thousands of exchanges or even tens of thousands of exchanges. The threshold is low and cheap, less than 100000 yuan a year. He also said that at present, many exchange owners have become more cautious, and some have temporarily lived abroad.

Evasion of supervision

In fact, many domestic digital currency exchanges have servers overseas and have registered shell companies overseas. Strictly speaking, they belong to "foreign trading places".

Li Yi said that in order to avoid supervision, the Exchange first registered overseas and set up servers, and then carried out business in China as a foreign capital, using distributed office mode. For example, the identity of the founder of an exchange has always been a mystery. He used code to communicate with the company's management and direct its work and operation. His identity was not revealed until the regulatory authorities investigated him, but he was already abroad.

Zhang Wei, a senior partner of Yingke Law Firm, once encountered a case in which a digital currency exchange registered in a country in Africa ran away with money. Due to language difficulties, after hearing the investors' demands and the costs they could afford, he suggested that the other party calm down and give up their rights protection.

Zhang Wei said that there are four main difficulties for the relevant departments to supervise the overseas registered exchanges. First, the judicial and regulatory resources are limited, and the number of exchanges is too large for regulators to deal with. Second, the processor is located overseas, and the specific legal application is still under discussion. Third, some exchanges adopt a distributed office mode, and the identity of the senior management is confidential. Some exchanges are nominally companies, but they are not registered as effective entities. Instead, they operate in a community way. It is difficult to define who the legal person and the main responsible person are. Fourth, passive supervision is difficult to implement, and the exchange is still at large after breaking the law. The way to safeguard the rights of digital currency is very difficult. Digital currency is traded based on the network, and the evidence is difficult to preserve, difficult to track, complex to obtain evidence, professional procedures, and long waiting. This leads to the police and administrative organs taking a long time to investigate even if they file a case.

However, on November 13 this year, the Beijing Municipal Bureau of Local Financial Supervision issued the Risk Alert on Unapproved Business Activities of Branches of Trading Places, which pointed out that "if branches of foreign trading places (especially financial asset exchanges) conduct business activities in Beijing, it is an illegal business behavior."

Recently, the Beijing police also cracked the illegal digital currency exchange BISS, characterized it as "illegal fund-raising fraud", and arrested dozens of suspects, even interns who had been on duty for several months.

Li Bang, a partner of King&Wood Law Firm, believes that from the perspective of legal provisions, those who illegally operate securities and futures without the approval of the relevant competent authorities of the state, disrupting the market order, if the circumstances are serious, constitute a crime of illegal operation, while the acts of the exchange may involve illegal securities trading, which is suspected to constitute a crime of illegal operation. In addition, digital currency transactions involve transactions with USDT, which is suspected of violating the relevant laws and regulations on fund payment settlement and foreign exchange trading. In addition, the exchange and the project party are also suspected of illegal fund-raising. There are three key elements for illegal fund-raising. Publicize to the public through the media, promotion conferences, leaflets, mobile phone messages, etc., promise to guarantee the principal and pay interest, and absorb funds from unspecified social objects. Digital currency exchanges and project parties have occupied the second place. If the publicity is exaggerated and false, it may be regarded as illegal fund-raising.

"Many digital currency exchanges have their registration places and servers abroad, similar to some pornographic websites, which are as difficult to eradicate as cockroaches, which is the reason why digital currency exchanges are rampant," Li Bang said.

A profiteering exchange

Chen Fei's community has existed for many years, and members who joined the group early were honored as "big men", but whether the big men really bought digital currency, Duan Peng, who has been "hiding" in the community for three years, said "You never know". He knew that many people in the group were entrusted, but he was trapped by hundreds of thousands of people and was in a dilemma.

"Some project parties claim to have a community of tens of thousands of people, but only a few real buyers." Chen Wei, a partner of a rating agency in the securities market, said that he had seen a WeChat group of 200 people, and only one of them was a customer, and the others were trust.

Chen Wei also heard that an exchange in a county in China has the same method of soliciting members as pyramid schemes. It forces them to develop offline by soliciting people's heads, and even establishes a "prison" to punish disobedient members. "It's hard to make money now, and some small and medium-sized exchanges still want to take advantage of the loopholes to attract customers in an aggressive way."

"Some exchanges specially design trading volume trend charts for customers, and investors simply don't understand the intrigue." Chen Wei said that when you plan to buy coins at a certain price, you simply can't buy them, because the moment you click to buy, the currency price starts to rise, and you can only buy at a higher price, but after you buy, the currency price starts to fall.

"Buying coins needs to go through multiple servers. The path is long and the transaction speed is slow. Before the formal transaction, the exchange can sense the transaction behavior of customers and pull the order." Chen Wei said that investors were fooled by the exchange to applaud and ended up losing money.

In the opinion of Zhang Quan, the founder of a digital currency project, the period from 2010 to 2017 was a time of brutal growth of digital currency. Regardless of exchanges, mining, currency speculation, or technology companies, the return rate was more than 50 times.

But the most profitable is the exchange. Zhang Quan said that the currency listing is the transaction of the project party's currency on the exchange. At first, millions of yuan could be listed on the top digital currency exchange in China, but now some of the currency listing fees have risen to hundreds of millions.

In Chen Wei's view, the currency listing fee is a game between the exchange and the project party. If the currency listing fee keeps rising, it means that the currency has a trading demand, and this demand continues to increase.

Another important source of income for exchanges is transaction fees. Chen Wei said that the transaction rate of stocks is about one ten thousandth, that of digital currencies is about two thousandths, and that of digital currencies is 20 times that of stocks.

"The transaction volume means the transaction value, even though these digital currencies themselves have no value." Chen Wei said that after the project party issues coins, only a part of them actually circulate in the exchange, most of them are in the hands of the project party. Once the currency is listed in the exchange, the project party can exchange the currency for money.

False trading volume

"A small holiday can make a small truth, and a small truth can become a big truth after development." This is a conventional rule in the currency circle.

He Xin, the founder of a digital currency, said that it is difficult for the exchange to strengthen itself through legitimate means, but it is a shortcut to achieve the goal through harmless hype and even deception.

In He Xin's view, from the actual situation, the exchange adopts the volume brushing method to enhance the value of the exchange, which is also understood by everyone. However, this must be done in a proper way. Once the scale is exceeded, other exchanges, except the medium and upper ones, may use improper competition means excessively, which may lead to 'group attack'. "

The People's Network Venture Capital Channel obtained a report on the real trading volume of an exchange (I) from a research institution, which shows that nearly half of the digital currency exchanges have serious volume swiping behavior, and 36% of the exchanges have more than 80% of the real trading volume; Nearly 50% of exchanges have less than half of their real trading volume.

It is worth noting that the real trading volume of more than 25% of the exchanges accounts for less than 20% of the reported trading volume. There are only less than 10 exchanges in the world that have no obvious problems with the trading volume, and other exchanges have false components.

BTI, a blockchain transparency organization, once released a report saying that more than 10% of the transactions of Coin Security were suspected of being false, and more than 50% of the transactions were fire coins, OKEx is up to 90%. The organization found that among the 40 exchanges with the largest actual trading volume, about 65% of bitcoin trading volume was forged, and almost all forged data came from OKEx Bibox, HitBTC and Firecoin.

In the data provided by BTI, CoinBend's real trading volume is only 2%. Similarly, if calculated according to BTI data, OKEx, which currently ranks fourth in 24-hour trading volume, will only rank 58th in the list after deducting 91% of the false traffic.

"The brush volume company was born in the exchange, and its income even exceeded that of the exchange." Zhang Quan said that the brush volume company made both payment and delivery, but the establishment of the exchange has certain risks, and the cost of investment may not be recovered. Therefore, under the strict control of the exchange, the revenue of the brush volume company increased rather than fell, creating many billionaires.

Yang He, a rating analyst of a digital exchange, said that volume brushing has created the false prosperity of the exchange and created the illusion that demand is greater than supply, which has brought many benefits to the exchange or project parties. From the perspective of the current situation of the exchange industry, the first step is to intervene in the industry at a small cost, and use large-scale fraud to continuously improve the ranking in the industry, which also leads to serious exaggeration of the data of the entire industry,

In Yang He's opinion, the calculation method of market size cannot be separated from the trading frequency and volume of the exchange. The real data is far lower than this figure, and the false trading directly leads to the false high price of the overall currency circle. However, for the exchange and the project party, the amount of brush can not only stabilize the currency price, but also control the currency price.

Today, professional volume companies also study the reports of many research institutions. They use anti reconnaissance methods to avoid the measurement of research institutions. As long as they pay, volume companies can brush the ranking of exchanges to the top.

What Yang He didn't understand was that investors knew that the trading volume of the exchange was fake, and they also knew that they might be cheated, but they knew that there was a pit ahead and they had to jump down.

Digital currency tends to zero

Since the "September 4th announcement", various digital currencies have been removed from the front exchanges. On November 27, 2018, the cryptocurrency trading platform OKex made another announcement, announcing the third batch of currencies that were taken off the shelves. There are as many as 38 currencies involved in this delisting, of which 26 will be completely delisted.

OKex said in the announcement that according to the OKEX Rules on Hiding TOKEN and Offline Trading Pairs, the platform will delete TOKEN trading pairs with poor liquidity and trading volume.

The currency is removed from the shelf in batches, which means that the currency cannot be traded, and the funds invested by the speculators are all returned to zero. "In the long run, more than 90% of the digital currency will eventually return to zero." Chen Wei said that in the short term, pulling the order by volume can temporarily increase customers' desire to buy. However, it is difficult to distinguish the price fluctuation caused by false transactions from the normal asset price fluctuation, so after the price of digital currency is manipulated, the project party or the exchange takes charge of the life and death of investors.

"The new currency will be sold out within a week of its launch, and then the project will be unmanaged, the transaction volume will not go up, and the natural price will return to zero." Zhang Quan said that in the future, the counterfeit currency and the air currency will definitely return to zero, because these currencies do not have the technical support of Ethereum and Lettercoin, but only sell dog meat on the basis of sheep's head. At present, these coins have soared dozens of times when they were launched online, but they will slowly decline, and eventually reach zero indefinitely.

Zhang Quan believes that counterfeit coins and air coins lack application scenarios and belong to abstract assets. Only when everyone reaches a consensus that the algorithm is valuable, can this asset be valuable. Just like virtual equipment in the game, no one buys it, no price, and someone buys it, no price. For the act of issuing tokens only for financing, the illusion will eventually be seen through by the market, and the project will end up with zero price.

In Yang He's view, in the short term, the price is determined by supply. However, in the long run, the currency price is related to the value. Digital currency cannot bring social value, but only through transactions. If the price of a certain currency decreases, it is difficult to pull upward. Therefore, the project party basically throws out the currency when the currency price is at the peak, otherwise the currency transaction will slowly decrease and eventually return to zero.

Harry Edelson, nicknamed "Happy Harry", is not only an expert in the field of technology and finance, but also a legendary financial giant on Wall Street worthy of Buffett's reputation. Harry believes that any single currency will return to zero if there is no corresponding value support behind it. The blockchain technology itself will always exist, and will make great changes to finance.

Steve Strongin, head of global investment research department of Goldman Sachs, once took a pessimistic attitude towards digital currency in a report. He believed that digital currency lacked intrinsic value, and most of them would not continue to exist in the future, and the price would eventually fall to zero.

Even, Vitalik Buterin, the co-founder of Ethereum, once said on Twitter that digital currency is still a new asset type with strong volatility and may fall to a level close to zero at any time.

"For investors, returning to zero means losing money." Zhang Quan said that, for the exchange, they have already received the fee for loading coins and the "hard fee" for raising the currency price when loading coins. Whether the currency price returns to zero has nothing to do with the exchange.

"Digital currency may breed many illegal behaviors, and the exchange may be one of the fields where illegal behaviors occur." He Ping, professor of the Department of Finance of the School of Economics and Management of Tsinghua University and director of the China Financial Research Center, said that the exchange may manipulate the stability of the value of digital currency, but the stability of the value of the currency is closely related to the risks of the financial system, If currency fluctuation is artificially operated, it may lead to bad capital flow and affect the security of the national financial system.

He Ping said that from the perspective of financial stability, increasing supervision on exchanges is conducive to maintaining financial order and stability. For chain circle practitioners, due to the large amount of capital flowing into the exchange, under the influence of profit seeking merchants, it is likely to cause the behavior of currency circle ICO, resulting in the lack of necessary support for technology research and development of the chain circle. In order to regulate the market, it is necessary for the relevant departments to strengthen the supervision of the exchange.

(At the request of the interviewer, Li Yi, He Xin, Yang He, Zhang Quan, Chen Wei, Chen Fei and Duan Peng are pseudonyms)

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