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The price of bitcoin has fallen by a third since peaking above US$1100 early in the year. The precipitous drop was accelerated on Wednesday as the People’s Bank of China (PBoC) announced a surprise inspection of the three major Chinese bitcoin exchanges, BTC China, OKCoin, and Huobi. The price plunged from $917 to $760 over nine frantic hours, and has dropped further since.
The Chinese average price, however, was fared much worse. Bitcoin exchange rates in every currency are typically higher than they are in China, with loses equating to US$40 dollars across the yen, the dollar, and euro. Only one week earlier, the price of a bitcoin in China hit the lucky number 8,888 on their three major exchanges, a new all-time high. Immediately afterward it plunged 20 percent, within four hour it was in the 6,000 range.
China Regulation Jan 2017The price of a bitcoin in yuan had fallen 42% by 17:50 Jan 11
The central bank issued a notice on the 6th explaining that a meeting with the three exchanges had taken place, during which time new rules were given to the bitcoin exchanges in order to stem capital flight. While no form of a ban was placed on the exchanges, it was clear that the PBoC would be closely watching them from now on. They also reiterated how they felt about bitcoin being used as a currency.
“Bitcoin is a specific virtual goods. It is not law-based and compulsory like currency thus does not have the legal status as a currency. It shall not, should not be circulated as a currency in the market.” - People’s Bank of China
After a small consolidation in the low $900 range, the event that set the price tumbling again Wednesday morning was a visit to BTC China headquarters by the PBoC. During the Chinese afternoon, the Shanghai office of the Central Bank stated ,“To prevent and lower the risk of Bitcoin and Litecoin trading market, PBOC shanghai and Financial Office of Shanghai have jointly carried out on-site inspections on BTCC.”
“The main focus is to examine whether BTCC 1) operates outside its statutory scope, carry out loans, payment and foreign exchange businesses, 2) manipulates market 3) complys with anti-money laundry law 4) has loopholes of funds security,” the central bank announcement explained.
Exchanges OKCoin and Huobi have been inspected as well, Reuters reports, but the two companies have held their comments and there has been no word yet if any violations have been found at any of the exchanges at press time.
The move marks a transition for the PBoC from merely watching the exchanges. While rumors of a raid on BTC China were unfounded, this new position from the Central Bank marks a transition to direct regulation of bitcoin exchanges in China. BTC China’s CEO Bobby Lee states that this is a positive development. "I wouldn't call it an investigation,” he told Reuters.
“I think they are working closely with us to learn more about our business model and the bitcoin exchange industry. We had a very fruitful meeting today." - Bobby Lee, CEO BTC China
BTC China’s Lee quickly took to twitter after his meeting to dispel rumors, as the price continued to sink. “Very excited that we can finally openly talk about & acknowledge these important mtgs! Road to successful Bitcoin regulation is always long,” he said of his time with the PBoC representatives.
He also sent a series of tweets throughout Wednesday, explaining the meeting with the PBoC in more depth. “During this visit, we followed up on prior discussions and shared details about our business model and operations with the group,” he said, mentioning more meetings later in the 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.” - Lee
Typically, bitcoin demands a premium in China in comparison to other currencies. A lack of trading fees across most Chinese bitcoin exchanges boosts trading demand and is assumed to be responsible for China’s dominance in global trading volumes. However, BTC China and Huobi have both been criticized in the past for faking exchange volumes, either directly or by providing excessive margin trading leverage.
It is unknown what would happen to the price of bitcoin if the PBoC is able to put a stop to such practices across all three exchanges. “The current Bitcoin downswing is very healthty for the charts and 2017. This should (a) keep exuberance in check and (b) clean up China,” states Vinny Lingham, Co-founder & CEO of Civic.com.