Bitcoin has extended Friday’s tumble amid concern China will tighten rules on the digital currency to curb capital outflows.
The cryptocurrency slid 1,2% to US$887,34 at 12.28pm in Hong Kong, after falling as much as 10% on Friday.
The People’s Bank of China’s Shanghai branch said in a statement late on Friday that its officials, along with the city’s financial office, asked bitcoin trading platform BTCChina.com to conduct self-checks and rectify any problems. The State Administration of Foreign Exchange has scrutinised some major bitcoin exchanges, possibly to investigate the use of the digital asset to evade capital controls, QQ.com reported.
Bitcoin rallied since early 2015 as Chinese buyers turned to alternative assets to hedge against the weakening yuan and take cash out of the nation. By buying bitcoin onshore and selling it offshore for another currency, investors can evade the tightening scrutiny on fund outflows. Other than a ban on financial institutions’ involvement, Chinese regulators had largely taken a hands-off approach on the cryptocurrency.
“Bitcoin is one of the rocks they haven’t turned yet in terms of controlling the flows,” said Zennon Kapron, MD of Shanghai-based consulting firm Kapronasia. “It’s inevitable that there’s going to be something but the question is what the regulations will be when it happens.”
This is not the first time China’s government has sent bitcoin tumbling. In 2013, it banned financial institutions from handling bitcoin transactions, sparking a slide in price. The People’s Bank of China reiterated that stance in Friday’s statement, saying that bitcoin is a virtual commodity without the legal status of a currency. It characterised recent bitcoin moves as “unusual”.
Bitcoin has become increasingly volatile since rallying to a record-high of $1 162 on Thursday, slumping 11% that day after the yuan jumped. In December, it surged 28%.
Policy makers are likely to require more reporting from bitcoin exchanges and incorporate their flows into the monitoring of the $50 000 quota Chinese citizens are given to convert yuan to foreign exchange — though it will be more challenging to do so with the decentralised cryptocurrency, said Kapron.
BTCC — which runs BTCChina.com, one of the most active Chinese exchanges — said in a statement on its website that it works closely with the People’s Bank of China to ensure that it’s operating in accordance with Chinese laws. Huobi, another major Chinese platform, will also conduct strict self-checks as required by regulators and it plans to work with other bitcoin firms to establish industry standards, chief operating officer Zhu Jiawei said in a message.
“The policy risks of bitcoin trading in China are higher” as the nation has capital controls, said Dong Dengxin, director of Finance and Securities Research Institution at Wuhan University of Science and Technology. “If bitcoin trading disturbs China’s financial order, there’s a possibility it will be deemed illegal or banned.”
Bitcoin surged 120% in 2016 as the yuan dropped the most since 1994 and Chinese bonds and equities declined, though its value of around $15bn still pales in comparison with most mainstream asset classes in the nation.
The digital asset traded at 6 128 yuan ($883,90) on Chinese firm OKCoin’s platform, a small discount to the dollar price based on spot rates. As recently as Friday morning, bitcoin’s yuan price had traded at a premium to its dollar price.
“Until there’s more clarity over what the [People’s Bank of China] is planning or what exactly they mean, I think it will be difficult for bitcoin price to retrace the rally,” said Kapron. — (c) 2017 Bloomberg LP