China says goodbye to Bitcoin exchange: the destruction of the world’s biggest Bitcoin market
Source: Tencent Finance
Author: LIU Peng, one of the first observers of the Bitcoin industry in China, covering securities, insurance and blockchain industries
Date: September 9, 2017
This is a direct English translation of the report of Mr. LIU Peng. All copyrights and credits of this report belong to Mr. LIU Peng.
In the evening of September 8, HUANG Bo and his colleagues who worked at a Bitcoin exchange came to a bar in Wudaokou, Beijing, celebrating the coming weekend by playing a card game called “Werewolf”.
A message poped-up on his cell phone: “the authority is considering to close virtual currency exchanges including Bitcoint, ETH, and etc..”
After a couple of days, it will be the 4th anniversary of the exchange he worked at. They had been preparing for a conference about the self-discipline of the Bitcoin exchanges, in order to celebrate their anniversary. Now it does not seem to be necessary anymore.
Bitcoin, a virtual currency born in 2009 and composed of 33 letters and digits, has its ups and downs after it enters into the China market. Its highest price once exceeded RMB 30,000 per Bitcoin.
As the price of Bitcoin soars, many players come to this market with a lot of money. In a long period, China holds firmly the pricing right in the Bitcoin world, because it has the biggest trading market in the world, and takes more than 80% of the trading volume of the world.
After the issuance of the latest regulatory policies, China will say goodbye to its special position in the Bitcoin world.
“We know there will be regulatory measures, but no one can imagine that they will close us down directly”, said by a senior management of an exchange in China over our telephone interview.
This was not the first time that the Bitcoin exchanges were regulated. In early 2017, due to the foreign exchange control and the risk control in semi-financial businesses in China, the People’s Bank of China visited and talked to several major exchanges in China in a very short period, and asked them “not engage in financial businesses such as financing and coin lending, and not engage in money laundering businesses”, and temporarily suspended the withdraw of Bitcoin and other virtual currencies.
This action immediately affected the market. The trading volume in China decreased significantly. The trading volume of a major exchange was dropped to less than 1% of its trading volume in the peak period. However, the regulatory requirement of suspending the withdrawn of coins had driven a large amount of demands in buying and selling Bitcoin to the Over The Counter (OTC) trading. The twisted supply-demand status made the Bitcoin price in the OTC market 20% higher than the price in the exchange. Some big players took this opportunity and earned significant commissions by connecting the parties in demand and the parties to supply.
According to the information obtained by Tencent Finance, the proposed measures of the People’s Bank of China on regulating the virtual currency exchanges were this: putting these exchanges under the current regulation and supervision system as the Internet financing businesses. They had even drafted an official document on this. However, the supervision authority eventually changed its mind, gave up the supervision with licenses, and started to research on new regulatory measures.
After half a year, the withdraw of coin was back to normal, and the Bitcoin price continued to soar. The exchanges were very optimistic and believed that there will be a clearer regulatory policy.
After 2 months, the exchanges were facing probably the worst outcome: closing down.
As affected by this news, the Bitcoin price dropped about 20%. For Bitcoin players in China, some were dumping the Bitcoin out of panic, some took this opportunity to buy more Bitcoin with lower price, and some withdrew their Bitcoin to the wallet and were planning to transfer to the overseas market or even the OTC market so that they can continue to trade.
Money Laundering
As a virtual currency based on mathematical algorithm, Bitcoin was widely recognized by the world for its characteristics of having a limit in its quantity, decentralizing, and encryption, and drew a lot of attention.
However, due to these characteristics, Bitcoin was also used in many grey areas since its birth. One of its main function was to bypass the foreign exchange control of central banks, and transfer the funds outside the border.
An extreme case was this: during the stock market crash in 2015, a trading company called Eston who gained more than RMB 2 billion through high frequency trading was seeking to transfer huge funds out of China through Bitcoin.
Tencent Finance learned that, at that time, Eston turned to BTC China for trading. But the relevant person at BTC China told Tencent Finance that they turned down the trading request of Eston because it did not verify its real name and the trading volume was so huge that the exchange was alerted about it.
Comparing to the exchange like BTC China, there were more risks in the Bitcoin OTC market.
The Bitcoin OTC market is just like the stock OTC market. There is no fixed premises for trading, there is no articles of association and rules, and they trade by one on one negotiation.
Comparing to the Bitcoin exchange, the Bitcoin OTC market usually had larger trading volume. A player with many years of experience in the OTC market told Tencent Finance: “For instance, one piece of trading may involve a thousand Bitcoins, which value more than RMB 20 million based on the current price”.
Besides, the OTC trading is very simple. Usually a middle man will find the buyer and the seller. If they agree on the quantity and the price and the commission of the middle man, the trading is usually completed without any problem.
These features made the OTC trading of Bitcoin more suitable for transferring funds in order to evading the foreign exchange control.
Buying Bitcoin from the OTC market — transferring the Bitcoin to the overseas trading platform — selling the Bitcoin — withdrawing the cash to the bank account, through this path, the fund can go back and forth across the borders without limitation comparing to the normal Bitcoin exchanges.
Transfer
The latest regulatory measures may drive a large amount of demands of buy and sell to the OTC market.
Once the news came out that the Bitcoin exchanges may be closed down, the players who had experienced many ups and downs of Bitcoin had to surrender and the Bitcoin price dropped by 20%.
“I lost a Tesla” said by a player to his friends about his loss. It was popular in the Chinese Bitcoin players community to calculate the money they earned or lost in trading Bitcoin by something that they loved and made jokes about it.
Someone was fearful but someone was greedy. In the market which was going down dramatically, there were still players who jumped in and bought several Bitcoins. They explained: “The price after the market drop is much cheaper than the price in the overseas exchanges. You can make some money simply trading it in the overseas market.”
As the first virtual currency in the world, Bitcoin can be traded all around the world. This gave these players the courage to buy more Bitcoin after the market crash. They withdrew Bitcoin from the exchange in China and traded it at the overseas exchanges. This became the major activity of many Bitcoin players at that night.
Someone took this opportunity to persuade the other: “No matter whether the exchanges will be closed or not, put your coins in your hard wallet and wait for its value to grow. You need to look at it from a global angle when investing in the cryptocurrency. What you need to do is to save your coin in your hard wallet and you do not worry about closing down the exchanges, the ups and downs in the coin price, nothing.”
Another one added: “Bitcoin price is dropping in China. But there is still a huge market outside China. The price will definitely get back. So my advice is that you should not sell. You should immediately withdraw your coin from the exchange to your wallet. If you need to trade, come to the OTC market.”
“After all, Bitcoin is recognized by the world. There is nothing to worry.” he said.
Going forward
“BTC China is operating normally. We do not receive notice from the relevant supervision authority.”
“Huobi.com is operating normally. No such message is received as of now.”
“OKCoin does not receive any notice. The withdraw and trading functions are normal.”
After the news report comes out, the top 3 Bitcoin trading platforms in China all stated that they did not receive any notice.
The customer service personnel of these exchanges also explained the same to the customers who made such inquiry and asked them to be calm and wait for further development.
The young men who were playing Werewolf received calls from their bosses who told them to be “focused and do what they should do”.
But the upset emotion was spreading. Before the official notice was sent out, the exchanges need to be prepared and think about what to do next.
Like the Bitcoin players, the major plan for exchanges was also to go abroad. An investor who was planning to set up an exchange told Tencent Finance that he decided to set up the exchange in Japan directly because the laws there recognized the legal status of Bitcoin, and were “very friendly” to the start-ups in this business.
Another big Bitcoin exchange in China also expressed that if they were to be closed in China, they will transfer their business to the overseas market.
Someone thought that they discovered a new “business opportunity” after they studies the full report. They said that the authority was to ban the exchange between the virtual currency and Fiat, and this meant that “the Crypto to Crypto exchange is allowed”.
They said, excitedly, that after banning the exchange between the virtual currency and Fiat, the Crypto to Crypto exchange will become the mainstream in the exchanges in China.
Under such a strict regulation, the Bitcoin players in China were still looking for a way to go forward.
