Bitcoin’s price fell by more than $100 in minutes around 9 A.M. London time as the People’s Bank of China announced they have opened an “inspection” on BTC China, Huobi and OKCoin, which in combination account for 90% of bitcoin trading volume.
According to Reuters:
“The probe of bitcoin exchanges, including BTCC, Huobi and OKCoin, was to look into a range of possible rule violations, including market manipulation, money laundering and unauthorized financing, the People’s Bank of China (PBOC) said. It did not say if any violations had been found.”
Huobi has been criticized for going “offline” during fast price movements, preventing traders from reacting. For years now there have been speculations that both OKCoin and Huobi fake their volumes. All three exchanges are unregulated. BTCC publicly stated:
“A group of regulators consisting of the SH branch of PBOC, the SH Financial Affairs office & other related govt agencies visited BTCC. During this visit, we followed up on prior discussions and shared details about our business model and operations with the group. We expect to continue with additional meetings later this week.
All operations at BTCC are normal and we continue to actively work with regulators to ensure that we remain compliant. In the meantime, we urge our customers to take a rational & cautious view to news articles which speculate on the visit and discussions.”
The latest announcement follows a meeting between PBOC representatives and all three exchanges last week. It usually ends there. As such, many found PBOC’s announcement that they are opening an “inspection” as surprising.
Will China Regulate Exchanges?
If violations are found, Chinese authorities would have a number of options. They could make an example of one exchange or they could be lenient towards all three, say the law did not apply at the time, but now does apply, and set up a regulatory regime, requiring licensing, perhaps audits, security measures, and insurance.
Regardless of whether they take enforcement action towards current exchanges, it is probable they will now regulate them with rumors already circulating that China’s central bank may step in as a “third-party custodian.”
How that would operate in practice no one can say at this point, but on the surface, it sounds like nationalization of exchanges with PBOC effectively being directly involved in the day to day operation of bitcoin exchanges.
Although PBOC would probably use security as an excuse, their more likely aim would be to ensure strict compliance with foreign exchange rules and regulations while giving them direct say on bitcoin trading.
Might China Shut Down the Exchanges?
China could use any violation as an excuse to shut down all three exchanges and perhaps even declare bitcoin illegal, but that would be a drastic move and very unlikely as it would ensure underground, anonymous and unaccountable exchanges spring up. Moreover, such move would effectively send miners out of business, cutting off a billion dollars or more in direct and indirect investment.
Politically, China would alienate the entire tech scene, and even more widely foreign businesses would not be able to trust the upholding of property rights in the country.
China, however, is no stranger to drastic measures. In 2013, they effectively prohibited all Chinese businesses from accepting bitcoins after the currency surged in popularity. Their government is not elected, nor accountable, with central planning leading to ghost towns and ghost factories due to no consultation with the public as to what is desired or needed.
China remains an authoritative country with a strong central government that controls many state-owned companies. They have previously taken unpredictable and shocking actions, such as the 2% devaluation of Yuan in August 2015 and the recent speculated ordering of its banks to dry up yuan liquidity from offshore markets, sending borrowing rates for shorting to more than 100%.
An outright ban, therefore, cannot be ruled out, but China would have nothing to gain and much to lose from taking such approach, making it highly unlikely.
The main reason why China has opened an investigation is because Yuan fell by 7% last year, leading to a capital flight of almost $1 trillion. In response, China instituted strict capital controls, requiring its citizens to complete detailed forms as well as provide ID if they wished to exchange yuan for foreign currency. It has had some effect, as Yuan has now somewhat stabilized for the past two days, but Chinese authorities remain concerned, taking further measures according to CNBC:
“China’s forex regulator is telling banks to keep its instructions about curbing capital outflows secret and to ensure that research analysts keep any negative views about the yuan’s prospects to themselves, several bankers said.”
Chinese authorities appear to be taking all measures to ensure some Yuan stability after their foreign exchange reserves fell to just above the psychological threshold of $3 trillion. However, Yuan’s behavior has more to do with the soaring dollar and the US economy following a Trump victory.
He has stated that on his first day in office China will be labeled as a currency manipulator, allowing USA to impose tariffs of as high as 45% on certain goods. It is probably a negotiation tactic to encourage a more open market in China as well as respect for the property rights of foreign businesses, but he intends to nominate Robert Lighthizer, a proponent of a tough U.S. position on China, as U.S. trade representative. He may, therefore, actually do what he said which of course would slow down China’s economy, leading global markets to bet on a falling yuan.
Trump is to hold a press conference today after many months, perhaps explaining Yuan’s relative stability recently as analysts wait to see what Trump says on America’s economic relationship with China.
In this wider context, bitcoin has to follow the winds. If Yuan does indeed stabilize then the Chinese authorities will probably lose interest, but if volatility returns all bets are off.