China’s Central Bank and The State Administration of Foreign Exchange has scrutinised some transactions for fear of tax evasion. They asked online bitcoin trading platform BTCChina.com to convoy self-checks and correct any problems. The situation further extended Bitcoin’s tumble, pushing the cryptocurrency at a value of $900 with a -1.48% decrease as of 9th of January 2017, at 14:39 GMT.
Bitcoin’s price took a fairly precipitous plunge on Friday after China’s Central Bank cautioned buyers and investors to take a rational and cautious approach to committing in the digital currency. The warnings scared a few investors and slightly deviated the value growth experienced by bitcoin in the past weeks up to a maximum of $1,162 on Thursday.
The Chinese government has been struggling with major capital outflows which caused the depreciation of the yuan, up to a 7% loss against the U.S. dollar last year. Chinese investors seem to increasingly prefer buying alternative assets such as cryptocurrencies to avoid the weakening yuan and to offshore cash, thus avoiding the ever-tightening scrutiny on cash outflows. Even so, China has always had a hands-off approach on cryptocurrency and has limited itself to ban solely the involvement of financial institutions in 2013. The measure provoked a similar devaluation of Bitcoin. The same reactionary stance has been reiterated Friday by The Shanghai Office of the People’s Bank of China (PBOC) that the virtual ‘commodity’ (that’s how bitcoin is considered, a virtual good) behaves “unusual” and that it acts as a currency without the legal status, making it suitable for money laundering and other fraudulent activities.
Zennon Kapron, managing director of Shangai-based consulting firm Kapronasia had this to say in merit to the fact that China has been ignoring cryptocurrencies for so long: “Bitcoin is one of the rocks they haven’t turned yet in terms of controlling the flows, it’s inevitable that there’s going to be something but the question is what the regulations will be when it happens.”
Chinese policy makers are expected to tighten regulations, requiring more documentation for cryptocurrencies transactions in the preexisting $50,000 quota per citizen for yuan to foreign currency exchange. Although such regulations are to be expected, Zennon Kapron said it’s going to be quite challenging to keep tabs on such a decentralised cryptocurrency.
In front of such warnings from the Chinese government, most major online bitcoin platforms such as BTCChina.com, Huobi, OkCoin Co. all agreed to collaborate with the authorities for an industry standard implementation. People’s Bank of China (PBOC) has declared that it had met with BTCChina.com to understand the website’s operations, risks, and remind such virtual cryptocurrency trading platforms to “carry out self-examination and corresponding clean-up and rectification” according to law. A sort of precautionary warning to avoid future legal problems.
Bobby Lee, CEO of BTCChina.com was asked if he had received direct pressure from the government. He declared: “No. Not as of yet… Nothing verbal or written to us.” He also declared that “to be honest, not many” buy bitcoin with yuan and then sell it off-shore for a foreign currency because trading in the range of 100,000 yuan ($14,423) to 1 million yuan ($144,233), and up, would influence the bitcoin spot price and affect said transaction. “For that range, you’re not going to be able to do it at a good rate. You’re going to lose 10 percent of your money,” Bobby Lee said. “Maybe the individual household might buy 20,000 more dollars worth of bitcoin than their $50,000 (forex) quota, but that’s a drop in the bucket.”
No new rules regarding bitcoin were discussed in the latest meeting with the PBOC. Bobby Lee estimates it will take another two to three years before China regulates bitcoin.
“The policy risks of bitcoin trading in China are higher because the nation has capital controls,” said Dong Dengxin, director of Finance and Securities Research Institution at Wuhan University of Science and Technology. China has a mixed economy under a one-party rule which allows the government to better manipulate and influence the national and global economy. Dong Dengxin elaborates: “If bitcoin trading disturbs China’s financial order, there’s a possibility it will be deemed illegal or banned.”
Exchange shops in China say they account for more than 90% of international bitcoin trading, which would explain why a shift in Chinese demand would clearly affect the price.
Other bitcoin specialists say Chinese exchanges exceed their volumes in the virtual currency and attribute sharp moves to speculation by foreign-based hedge funds.