2017 has proven to be a volatile year for Bitcoin. Uncertainty in global financial markets made cryptocurrency an attractive exit strategy for some wishing to shed the weight of weakening fiat currencies. This has been especially true for the chinese yuan, which has continuously depreciated against the dollar over the last few years. Roughly 30-35% of the world’s bitcoin trading occurs in China between CNY and BTC.
In response to a sharp increase in the value of BTC at the end of 2016, the People’s Bank of China (PBOC), China’s central bank, began investigating China based crypto-exchanges for possible regulatory violations. The PBOC has threatened to close down any exchange found to be non-compliant with the law.
In response to these investigations, crypto-exchanges scrambled to tighten up their operations. The three largest Chinese crypto-exchanges have already voluntarily begun imposing additional controls and oversight over their users. The regulatory environment in China is evolving quickly. Here is everything that happened in the last month.
“One Step Forward”: A timeline of increasing oversight
January 6th, 2017: The PBOC issues an announcement that they will enter into talks with the leaders of China’s top three Bitcoin exchanges (Huobi, BTTC, and OKcoin) to better “understand the exchange’s operating conditions” and “point out the possible existence of legal, regulatory, and technical risks” in their business operations.
Note: In 2016, Huobi, BTTC, and OKcoin accounted for about 90% of the BTC/CNY trade volume in China.
January 11th, 2017: The PBOC announces that they will conduct on-site spot checks at Huobi, BTTC, and OKcoin to ensure that they are complying with domestic laws and regulations. The announcement says they are specifically looking for compliance with anti-money laundering, credit lending, and foreign exchange capital control regulations.
January 21st, 2017: After the PBOC regulatory spot-check, Huobi releases a memo on their website announcing that they will begin charging a 0.2% transaction fee in order to “take a step towards controlling speculation and limiting price volatility” in crypto-markets. BTTC and OKcoin make similar announcements.
January 24th, 2017: Huobi, BTTC, and OKcoin all begin charging 0.2% transaction fees and cease margin lending. Soon after, trade volumes on Chinese exchanges dropped sharply.
January 25th, 2017: The PBOC announces that they will continue to investigate Chinese crypto-exchanges for possible violations of payment settlement, anti-money laundering, foreign exchange capital control, and safety laws and regulations.
February 8th, 2017: Sina news agency publishes an article announcing that the PBOC met with the leaders of all the major Beijing based crypto-exchanges.
February 9th, 2017: The PBOC issues a statement confirming that they met with leaders from ChBTC, BtcTrade, HaoBTC, Yunbi, YuanBao, BTC100, Jubi, Bitbays, and Dahonghuo to discuss their ongoing investigation into the business practices of domestic crypto-exchanges.
According to the memo, the purpose of the meeting was to clarify the PBOC’s compliance requirements. The PBOC states that it will require crypto-exchanges to comply with all relevant finance laws and regulations, and will not tolerate money laundering, foreign exchange capital control violations, or tax evasion. The memo concludes by saying that they will close down any crypto-exchanges that are found to be non-compliant with the law.
Later that afternoon, these nine crypto-exchanges as well as Huobi, OkCoin and BTTC released a statement to their users announcing that they would begin complying with Know Your Customer (KYC) and Anti-Money Laundering (AML) guidelines. Specifically, they announced that they would start collecting customer identification information and improve their ability to track the source of user funds. Additionally, they state that any users that are discovered to be using their platforms for illegal purposes may have their accounts frozen.
The source(s) of Bitcoin’s value
Bitcoin initially raised eyebrows and whetted appetites because of its novelty as a decentralized, unregulated, and borderless currency. Despite increasing compliance with KYC and AML guidelines, Bitcoin is still associated in the minds of many as a means of side stepping capital controls, particularly those perceived as unfair.
More and more world governments are beginning to normalize Bitcoin and bring it into some kind of regulatory fold. If the price of Bitcoin can remain relatively stable in response to enhanced regulation and oversight, it would indicate that people increasingly value Bitcoin for reasons other than its ability to circumvent financial regulation. In the past, tightening monetary controls on fiat currencies have pushed the price of the borderless, ‘anonymous,’ regulation-free cryptocurrency up. If monetary controls tighten around Bitcoin without pushing its price down, cryptocurrencies will have turned a page in their history of challenging the financial status quo.