China’s Central Bank Crackdown On Bitcoin: Exchanges Required To Validate Customer’s Identity
China’s Central Bank Crackdown On Bitcoin: Exchanges Required To Validate Customer’s Identity
30 MAR 2017 
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China’s central bank is moving to regulate its domestic bitcoin industry, circulating new guidelines that, if enacted, would require exchanges to verify the identity of clients and adhere to banking regulations.
The move to regulate bitcoin exchanges brings assurance that Chinese authorities will tolerate some level of trading, after months of uncertainty. A draft of the guidelines also indicates they aim to bring practices in line with how bitcoin is traded in other markets.
The draft states that Chinese bitcoin exchanges would be subject to current banking and anti-money-laundering laws and be required to collect information to identify customers, according to people familiar with the matter. They say the draft, if implemented, would require exchanges to install systems for collecting and reporting suspicious trading activity to authorities; China’s central bank would be in charge of handling violations by the exchanges.
The people said officials could still revise the guidelines, which were passed to exchanges in recent days.
The People’s Bank of China didn’t respond to a request for comment.
Chinese investors have fled the market since authorities started scrutinizing bitcoin trading in the country, prompting exchanges to install trading fees and, in some cases, to suspend withdrawal of bitcoin from their platforms.
The central bank opened up investigations in January at the country’s three largest bitcoin exchanges, Huobi, OkCoin and BTCC, and delivered a terse warning last month that bitcoin platforms risk being shut down if they skirt rules on money laundering and foreign exchange.
In the past 30 days, yuan-denominated bitcoin trades accounted for 17% of global volumes, down from 97% in the past six months, according to data tracker Bitcoinity.
Bitcoin trading volumes are highly volatile and can be skewed by high levels of automated trading. Nevertheless, the reduced Chinese presence in the bitcoin market appeared to have opened up market share for non-China trading. Dollar-based bitcoin trades accounted for nearly half of global volumes in the period, soaring from 1.4% in the past six months. Japanese yen-denominated trades accounted for 15%, up from 1%.
In China, the exchanges Huobi, OkCoin and BTCC have said since the scrutiny started that they are working with authorities. An OkCoin spokeswoman said in an email on Friday that the firm continues to work with the PBOC and welcomes a balanced, risk-based regulatory framework.
Analysts say a big reason China’s central bank began probing bitcoin exchanges this year was concern that Chinese investors were using bitcoin to get money out of the country, albeit in small amounts, at a time when Beijing has tried to rein in capital outflows. The bitcoin network flies under the radar of authorities, which has allowed holders to move bitcoin from an exchange based in the Chinese mainland to a foreign location.
A New York startup called Chainalysis estimated that roughly $2 billion of bitcoin moved out of China in 2016.
Financial regulators around the world have struggled with how to handle the virtual currency and the legal status of bitcoin.
U.S. federal and state regulators continue to explore how to regulate the industry. San Francisco-based startup Coinbase Inc. opened the first licensed U.S. bitcoin exchange, backed by the New York Stock Exchange, in 2015.
Earlier this month, the U.S. Securities and Exchange Commission rejected the application of an exchange-traded fund backed by Cameron and Tyler Winklevoss that would track prices of bitcoin, citing insufficient oversight.
Japan is already moving to regulate bitcoin exchanges after the 2014 bankruptcy of a Tokyo-based exchange highlighted gaps in regulation. A law passed last year paved the way for exchange regulation designed to protect users and prevent money laundering, and the Financial Services Agency said it intends to start implementing the law as soon as next month.
Increasingly in China, “you know where the lines are in the sand, but it also costs businesses to meet these requirements,” said Neil Woodfine, chief operating officer of Beijing-based Remitsy, which helps foreign businesses make payments to China using bitcoin. “If China comes out with a codified regulation, then it would be leading the world in bitcoin regulation.”
Beijing-based HaoBTC decided to shut down its small bitcoin trading platform to focus on so-called bitcoin wallets, which allow investors to store rather than buy and sell bitcoin, according to a person familiar with the situation. The firm made the decision in light of recent moves by authorities, he said.
Traders say that bitcoin trading by Chinese investors is increasingly moving away from exchanges and into private arrangements, including over-the-counter trading.
“China doesn’t have a lot of long-term investors, more speculators,” so regulation is flushing out people, said Robin Hua, a longtime bitcoin investor in Shanghai. “We used to be the No. 1 place for bitcoin, but now the overseas market is beating us.”
When Chinese investors first snapped up bitcoin and drove up prices in 2013, the central bank banned banks and third-party payment platforms from engaging in the industry and defined bitcoin as a virtual good, not a financial asset. They stopped short of issuing direct regulations on bitcoin exchanges, which flourished in the years following.
The latest guidelines apply to any “trading platform for virtual internet goods,” say the people familiar with the matter.
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