Bitcoin - Freefall in China - Part Five

by Dorsey & Whitney LLP

The nature and prospects of “virtual currencies”, and bitcoin in particular, have been keenly debated. In early December 2013, Chinese government authorities took the first steps towards defining and regulating virtual currencies. As a major proportion of bitcoin trading takes place in China, this had a substantial impact on the bitcoin market. This eUpdate is the fifth part in a series of eUpdates on bitcoin-related topics and issues. It is essentially an update on the third part in a series, wherein we analyzed the effects of Chinese demand on bitcoin, as well as how bitcoin is approached in China. The first part of the series described what bitcoin is. The second part explained the legal status of bitcoin and how it is approached in different countries. The fourth part analyzed risks that virtual currency users may encounter.

Further steps by Chinese government authorities

On December 16, 2013, the People’s Bank of China (PBOC) reportedly met with more than 10 third-party virtual currency payment providers in Beijing, including Alipay, which accounted for approximately half of all online transactions involving virtual currencies in China. The meeting was said to be chaired by Zhou Jinhuang, a deputy director of the PBOC, who ordered the payment providers to stop providing clearing services to bitcoin, litecoin and other virtual currency exchanges; providers currently supplying services to bitcoin exchanges were told to end the working relationship before January 31, 2014.1 The use of bitcoin remains legal in China, and the PBOC still stands by an earlier notice that individuals are free to trade bitcoin at their own risk. Without third-party payment providers, however, new purchases of the virtual currency became practically impossible.

Third-party payment providers began to take swift actions in response to the PBOC’s unofficial order and stopped funding Chinese virtual currency exchanges. BTC China, the world’s largest bitcoin exchange by volume with approximately 40% of global bitcoin trading, said that it had stopped accepting new renminbi deposits in its marketplace after receiving the PBOC’s unofficial order. “We essentially got notice from our third-party payment provider today that they will discontinue accepting payments for us and new deposits,” said Bobby Lee, the CEO of BTC China.2 Other Chinese bitcoin exchanges and trading platforms followed suit. Assessing bitcoin’s future in China, Bobby Lee said: “We’re still trying to clarify whether it’s a permanent outright ban or if it is short-term discouragement."3 A number of bitcoin users, retailers and entrepreneurs withdrew from the virtual currency after the PBOC’s unofficial order to “avoid regulatory attention”.

The PBOC’s official website went down at around 5 p.m. local time on December 18, 2013, possibly due to an attack by bitcoin users after the PBOC curbed bitcoin transactions in China.4 The PBOC did not comment on the situation.

Following the PBOC’s unofficial order, the Hong Kong government reiterated its opposition to virtual currencies. “Bitcoin is not an electronic currency, nor is it an e-wallet [like the Octopus card],” the Secretary for Financial Services and the Treasury Chan Ka-keung said. “It is not qualified to become an electronic currency. Citizens should beware of it.” Chan Ka-keung added that bitcoin price goes up and down like a roller coaster. On bitcoin’s fluctuating price, he added “It is not suitable to use bitcoin for settling payments. The risk is very big, the government will continue to monitor its development and step up regulation if necessary”.5

As a result, prices of bitcoin and other virtual currencies tumbled. On BTC China, bitcoin was trading at CN¥2,011 (US$330) on December 18, 2013, a 71% decrease compared with CN¥7,050 (US$1,154) on December 4, 2013. Bitcoin value also dropped on other major bitcoin exchanges. Some Chinese investors rushed to sell their rapidly depreciating bitcoin. Bitcoin prices, however, soon bounced back and reached approximately CN¥4,380 (US$716) on BTC China on December 27, 2013.6

As of December 27, 2013, approximately 40% of bitcoin global trading occurred on exchanges which trade in renminbi (a 19% drop over the past two weeks) while trading in U.S. dollars accounted for roughly 55% (a 20% increase over the same period); trading in euros accounted for approximately 2.3%; and no other currency accounted for more than 1% of global trading.7

Bitcoin’s delicate situation in China is casting a shadow over its future. The boom of the virtual currency this autumn is widely thought to be the result of Chinese users’ demand. As Chinese support has since waned, so has the price. It is expected that bitcoin price would tumble further on news of an all-out ban, since many industry observers credit a rise in bitcoin demand in China as a major contributor to the virtual currency’s price and popularity surge over the past few months. But until the Chinese government takes further actions, a total bitcoin meltdown does not appear to be on the horizon. The ban on new deposits was a blow to the bitcoin system in China and perhaps worldwide, but it does not look like a death knell.8


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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