China may introduce tighter regulations on bitcoin trading, that will affect and possibly restrict operation the major Chinese bitcoin exchanges.
Chinese bitcoin exchanges are responsible for overwhelming majority of all bitcoin transactions. The exact share of transaction is unknown: the reported number of 95% is biased and include ‘fake’ transactions (exchange clients buying bitcoins from themselves, which is beneficial due to peculiar structure of exchange fees). An honest attempt to estimate the real share of transactions executed on Chinese exchanges resulted in still the large number of 85%. Obviously, restrictions or possible closure of the Chinese exchanges will seriously affect the global bitcoin market.
The bitcoin reached its peak value since 2013 on January 4, when PBOC issued the warning about bitcoin:
“PBOC officers in Beijing visited the offices of Huobi and OKCoin, and PBOC officers in Shanghai visited the offices of BTCC, for checkups that, “focused on whether the firm was operating out of its business scope, whether it was launching unauthorized financing, payment, forex business or other related businesses, whether it was involved in market manipulation, anti-money laundering or (carried) fund security risks,” as Reuters translated the PBOC statement.
The price of bitcoin fell sharply on the news.
Five days earlier, the PBOC issued press releases, in Beijing and Shanghai, that contained a more general warning about bitcoin. The releases recirculated a government statement from back in 2013 stating that the Chinese government does not recognize bitcoin as a currency, and that it carries investment risk.
The price of bitcoin fell 12% in the aftermath, but then recovered. It was climbing back when the PBOC announced its inspections on January 11, sending the price down again, as much as 15% at one point.
The PBOC did not say bitcoin is illegal, or expressly tell Chinese citizens they cannot buy bitcoin.”
PBOC did not declare bitcoins illegal, or expressed any intention to ban bitcoin trading. But as a result of site inspections margin bitcoin trading was halted on all major Chinese bitcoin exchanges:
“The first result of the PBOC’s on-site checks at the exchanges, which were conducted to look into possible market manipulation, unauthorized financing and money laundering, was that all three exchanges initially halted margin trading for its users.
Margin trading across the three exchanges has since been reactivated but with limitations on the amount of leverage that users are able to trade with.
While it is unclear whether exchanges were ordered by the PBOC to reduce margin trading or whether it was a move to appease the Chinese central bank, the initial reaction to this announcement was negative for the price of bitcoin, dipping below the $800 mark to the mid $700s on Friday.
However, the reality is that reduced margin trading at the three largest bitcoin exchanges in the world could actually turn out to be very bitcoin-positive, as reduced margin trading will likely reduce bitcoin volatility.”
The possible reason of PBOC attention to bitcoin exchanges is the unregulated status of bitcoin, which can be used for unauthorized foreign transactions. China burnt through $69 billion of reserves in November 2016 in order to prop up its falling currency. Yuan is experiencing pressure partly due to capital flight from China, which is estimated as $540 billion in 2016. Current regulation limit foreign exchange transactions to $50,000 per year per individual. Unregulated bitcoin market may be potentially used to circumvent the restrictions.