Global Implications of China’s Cryptocurrency Exchange Regulation

For years, Chinese exchanges have been dominant players in the Bitcoin market, with RMB exchanges capturing up to 98% of global trade volume in 2016. Over the course of one week in January 2017, the world watched as volume of yuan denominated Bitcoin trades plummeted to below 15% after a series of interventions from China’s central bank. Chinaccelerator consults Arthur Hayes, CEO of Batch 8 alumnus BitMEX, on what this development means for Bitcoin exchanges in China and the future of cryptocurrency regulation.

BitMEX, short for Bitcoin Mercantile Exchange, is a platform allowing professional investors to trade Bitcoin derivatives. As of January 2017, BitMEX ranked first among global Bitcoin exchanges for USD volume.

Some Background: Outbound Chinese Investment & Bitcoin as a Proxy Currency Exchange

Since early 2015, over $1.2 trillion USD worth of RMB has left China by way of international investment. This “capital flight” is primarily due to investor uncertainty regarding the stability of China’s stock exchanges and currency, and attempts by Chinese companies to shift away from China’s manufacturing-based model to move into higher value-adding industries. In fact, in 2016, Chinese companies engaged in an unprecedented volume of international M&A activity, with closure of historic deals such as the $5 billion USD acquisition of leading German robotics company Kuka by China’s Midea.

These outflows all led to incessant depreciation of the yuan, triggering the People’s Bank of China (PBOC) to spend its foreign currency reserves to maintain the government’s desired RMB price, and to begin scrutinizing other methods of stabilizing the yuan. These restrictions have included restricting the issuance of dual-currency credit cards, and requiring that all yuan-denominated transactions exceeding 50,000 RMB (that’s only around $7,200 USD) be reported to the PBOC.

As China tightened capital controls, Chinese investors began using China’s fee-free, unregulated Bitcoin exchanges as surrogates for direct currency conversion, essentially buying Bitcoin using RMB and selling Bitcoin to gain foreign currency.

The Beginning of Cryptocurrency Exchange Regulation in China

In January 2017, two significant developments propelled the PBOC into action: China’s foreign currency reserves dropped to $3 trillion USD for the first time since early 2011, and the price of Bitcoin rose above the gold parity. After issuing statements alleging that Chinese Bitcoin exchanges operate illegally by maintaining a fee-free structure, therefore encouraging speculation, margin trading, and market volatility, the PBOC took the first critical step in regulating Chinese exchanges.

Essentially, two main changes came to fruition. Chinese exchanges are now implementing a 0.2% trading fee to tackle the “issue” of margin trading. This fee is similar to those seen on exchanges in the United States. Additionally, the exchanges were accused of failing to develop satisfactorily stringent anti-money laundering policies, and are now enforcing withdrawal restrictions in currencies other than RMB.

Little information has been given regarding long-term policy changes on these exchanges. Due to these unattractive regulations, the uncertainty surrounding details of exchange policy revisions in months to come, and this unprecedented intervention by the Chinese central bank, the yuan is no longer the predominant currency used to trade Bitcoin globally.

In a characteristic move, investors have chased the fee-free model, and Japan is now the world’s largest Bitcoin exchange market.

The Global Debate

This intervention has sparked a worldwide debate surrounding the ideal classification of Bitcoin (as a commodity, currency, or some other independent product) and potential regulation of Bitcoin exchanges. Will countries opt for regulation at the expense of the health of their infant bitcoin exchanges? Is it possible to predict how regulation will differ between countries?

We reached out to the CEO of BitMEX, Arthur Hayes, to shed some light on the issue for our readers.

1) Do you think that 2017 will yield a more standardized profile for Bitcoin exchange regulation across countries and regions?

Regulation of the cryptocurrency industry will differ widely between countries. Countries who, due to internal imbalances, are facing currency depreciation and banking crises will lash out at the nascent cryptocurrency industry. Countries who feel confident that their financial systems can handle innovation will nurture the industry.

2) What is your opinion relating to Bitcoin exchange regulation and classification? Do you think it is possible for governments to successfully enforce Bitcoin regulation or is Bitcoin above regulation?

The best regulation is no regulation. Regulation does not benefit the end consumer. It serves to protect incumbents and extract economic rents from the poorer members of society. Governments should classify Bitcoin as a currency and use existing laws and regulations to police theft and malfeasance. The Bitcoin on and off ramps are subject to regulation. Exchanges where one exchanges a government fiat currency for Bitcoin or another cryptocurrency are and will be heavily regulated. Once Bitcoin has been acquired, however, it is very difficult to regulate the ways in which it is used and transferred.

3) What will it take for investors of lower risk profiles to invest in Bitcoin and Bitcoin derivatives? How will entry of these investors impact the market?

In the United States, there is a chance that a Bitcoin ETF could be approved. If approved, it will allow retail and institutional investors who would never have bought physical Bitcoin the ability to easily trade the currency. The price and volatility will skyrocket.

4) What is your outlook for Bitcoin in 2017? How have the PBOC’s actions impacted China’s role in the market going forward?

I am very bullish on the Bitcoin price in 2017. My end of year price target range is $2,000 to $3,000. Bitcoin volatility will increase in 2017. France and Germany elect their leaders this year. If the elected representatives are isolationists and Euroskeptic, it will increase the volatility in financial markets and Bitcoin. In addition, the financial issues faced by China and other emerging markets create demand for assets that can protect against the currency depreciation and inflation to come. Simply put, the PBOC’s actions against Bitcoin exchanges diminish China’s influence on Bitcoin.

5) What product would you suggest to investors looking to invest in Bitcoin derivatives?

The best way to play the bull market is to buy the BitMEX Bitcoin / USD 100x leveraged swap product. It does not have an expiry date, so clients can go long with leverage for as long as their capital provides.

6) What advice do you have for investors holding Bitcoin on Chinese exchanges, or just in general to Bitcoin investors in China?

You only truly own Bitcoin if you hold it yourself. If you truly desire financial freedom through ownership of Bitcoin, you should invest the time to learn how to secure it instead of entrusting that security to organizations.

Originally published at on March 6, 2017.