China’s Central Bank Is Behind Bitcoin’s Falling Price



 

A recent bull run for bitcoin has turned dramatically, with the price of the digital currency registering double-digit percentage drops on several days already in 2017.

The comedown traces back to recent comments from the People’s Bank of China, which met with representatives of major bitcoin exchanges in China prior to issuing a pair of notices. The notices set off a swirl of fresh rumors that Beijing is planning further regulatory action regarding mainland bitcoin exchanges, which account for the majority of global bitcoin trading volume.

What happened, exactly?

On Jan. 5, the People’s Bank issued two notices, one from its Beijing headquarters (link in Mandarin), and another from its Shanghai branch (Mandarin). In essence, the notices said the same thing: that bitcoin is a commodity, not a currency, and organizations and individuals trading are responsible for the risks associated with the investment.

The bank said it called meetings with the exchanges because of bitcoin’s recent price fluctuations, and urged “self-examination” on the part of the exchanges to ensure everything was onside with regulations, and that risk was being managed. The bank issued a similar statement in 2013, when bitcoin’s price spiked dramatically and Chinese investors first began to take notice of the currency.

Later that day it emerged that China’s foreign exchange regulator, SAFE, was looking at whether bitcoin was being used to avoid the country’s capital controls. Evasion of capital controls has long been cited as a major reason for bitcoin’s popularity on the mainland. The detail was first reported by Tencent Finance, citing an anonymous source close to the regulator.

More information from the central bank’s meeting with regulators was published in a report from financial news service Caixin. It said the government wanted to bar exchanges from mentioning the yuan’s depreciation in marketing bitcoin as an asset class.

So what’s the upshot for bitcoin exchanges in China?

Beijing is now reportedly looking at making exchanges use escrow services, according to a report from the China Securities Journal (link in Mandarin). The article, based on an anonymous source, says the central bank will convene experts to discuss how to manage bitcoin services, or to set up an escrow platform for the exchanges. Plans for some sort of regulated escrow service would represent a significant increase in government oversight for Chinese exchanges.

(Update: OKCoin CEO Star Xu told us he was the source of the discussion of an escrow service during the Jan. 6 meeting with the central bank. He brought up the idea of bitcoin exchanges using a “third-party custodian-like platform” to enhance customer protection, similar to those used by stock brokerages, for instance. Xu says this was “simply an idea” suggested for further discussion.)

However, exchange operators are painting the central bank’s engagement as a routine matter. “BTCC regularly meets with the People’s Bank of China and we work closely with them to ensure that we are operating in accordance with the laws and regulations of China,” said Samson Mow, BTCC’s chief operating officer.

It’s worth noting that although bitcoin is significantly down on news of Beijing’s intervention, it’s still up more than double compared to a year earlier.

Increased engagement from Beijing with bitcoin exchanges is a double-edged sword. On one hand, it legitimizes the cryptocurrency as an asset class worth regulating. On the other hand, it increases the compliance burden for these startup exchanges. What is clear from this latest episode is that bitcoin’s price, at least in the short term, is at the mercy of officials in Beijing.

This story was updated with details of discussion around a proposed custodian platform.