China’s Domination of the Bitcoin Market

By any measure, Chinese users appeared to be the force behind fluctuations in the global Bitcoin market in 2013, contributing to the market's miraculous peak and recent downturn. First, it is clear that, throughout 2013, there was a high correlation between renminbi's (RMB) “share of volume of all Bitcoin exchanges and price of Bitcoin”.

This rising trend is explained by a series of events within China whereby Bitcoin rapidly gained mass exposure. The concept of Bitcoin was first introduced on a national level to the Chinese in May 2013 when CCTV aired a half hour-long documentary devoted entirely to the subject. Following this exposure, China surpassed all other countries in the number of downloads of desktop Bitcoin clients, or computer programs, that allow users to trade and store Bitcoins in digital “wallets”. By September, China logged the secondhighest number of nodes, or servers, which keep track of the public transaction ledger, accounting for 11.3 percent of the global total.

Several Chinese e-commerce companies, including merchants on China's eBay-like… and tech giant Baidu Inc.'s Jiasule software security service, started accepting Bitcoin as payment in October 2013. The virtual currency then became integrated into China's network of online payment services. The effects on the Bitcoin market were clear: the same month that these services started accepting Bitcoin, trades on China's top Bitcoin exchange, BTC China, surpassed those on the previous top exchange, Japan-based Mt. Gox (formerly the world's biggest Bitcoin exchange, collapsed and went bankrupt in February 2014 after it lost more than 850,000 Bitcoins, totaling more than $450 million. Critics believed that the coins had been stolen by hackers or by Mt. Gox itself. In late March, about $116 million of the missing Bitcoin was retrieved), RMB-denominated trades surpassed U.S. -denominated trades, and the market price of Bitcoin surged.

Bitcoin's surging rise in China came to an abrupt halt on December 5, 2013, when the People's Bank of China (PBoC) issued a notice prohibiting financial institutions from dealing in Bitcoin in order to “protect the status of the renminbi as the statutory currency, prevent of money laundering, and protect financial stability.”30 On December 16, PBoC ordered its largest third-party payment processing companies, including Alibaba's Alipay, to halt transactions in digital currency by January 31. Two days later, BTC China was forced to stop accepting RMB-denominated deposits, thereby prohibiting new purchases of Bitcoins within China. The effects of BTC China's closure devastated the market: the price of Bitcoin in China toppled more than 50 percent from its peak on December 1.

Effects of China's Bitcoin Policy on Price
Effects of China's Bitcoin Policy on Price (USD)

BTC China and other Chinese exchanges were able to continue trading by finding a loophole that allowed them to circumvent payment processing companies and accept payments directly in their corporate bank accounts. By March 27, 2014, PBoC appeared to have closed the loophole by “requiring banks and payment companies to close all the accounts opened by the operators of websites that trade in the virtual currency by April 15.”33 Perceived by some as a death knell to the Chinese and, by extension, the global Bitcoin market, this move was expected to force all virtual currency trading websites in China to close, or move their servers abroad and rely on foreign bank accounts and payment companies. Following the announcement, global Bitcoin prices tumbled yet again, falling 7.77 percent by the end of the day.

But these PBoC restrictions—first published by Caixin, a Chinese financial publication, but not independently verified—have not proven as definitive as was initially thought. In fact, none of China's three biggest Bitcoin exchanges said they received official notification from PBoC of the decision, reflecting the tendency of Chinese authorities to issue private verbal warnings to parties involved with Bitcoin without explicitly and publicly banning it. On April 10, however, some Chinese exchanges were informed by their local bank branches, not PBoC, that their business accounts would be . Following the closures of these exchanges, the market price of Bitcoin fell 10 percent overnight.

Despite the regulatory confusion, BTC China CEO Bobby Lee managed to install China's first physical Bitcoin ATM, which handles cash-to-Bitcoin transactions, in Shanghai on April 16.

By utilizing a mobile phone app, the ATM skirts PBoC's April 15 restrictions, though Bitcointo-cash transactions are still prohibited. Contrary to expectations, the April 15 restrictions have not significantly affected the overall Bitcoin market; the RMB percent of all trades has recovered to pre-announcement levels, though USD market price has decreased about 10 percent.

At the April 11 Boao Forum for Asia, a regional economic conference in China's Hainan Province, PBoC Governor Zhou Xiaochuan announced that “it is out of the question of banning [sic] Bitcoin as it is not started by central banks,” and that Bitcoin is more comparable to “a kind of tradable and collectible asset, such as stamps, rather than a payment currency.” When news of Zhou's statement broke, Bitcoin's price rose nearly 20 percent. Zhou's statement is significant for the future of Bitcoin in China. Though future PBoC regulations cannot be ruled out, non-threatening, official-level recognition of Bitcoin's presence has reignited optimism in the market.

Rumors and unofficial announcements of PBoC restrictions on Bitcoin continued to circulate through the end of April, perhaps in anticipation of China's upcoming Global Bitcoin Summit starting May 10 in Beijing. 41 On April 25, Caixin reported that central bank officials “specifically criticized various commercial banks for continuing to do business with BTC China” and other Bitcoin businesses during a closed-door meeting, prompting China Merchants Bank to issue a notice requiring all customers engaged in Bitcoin transactions to close their accounts. The announcement forced BTC China to suspend RMB crediting of customer accounts, causing the international Bitcoin price to drop $40 overnight. 43 Most Chinese exchanges have subsequently closed their bank accounts in the face of “unprecedented pressure” from the central bank. 44 On May 6, China's three biggest exchanges (BTC China, OKCoin, and…) collectively decided to pull out of the May 10, 2014 Global Bitcoin Summit “in light of the perceived clampdown of the central bank,” according to Bobby Lee.

The true attitude of China's regulators toward Bitcoin is characteristically ambiguous; while PBoC pressures banks and Bitcoin companies behind closed doors, its officials claim openly that China cannot ban Bitcoin. (PBoC has not released an official statement on Bitcoin since December 3, 2013.) Chinese IT entrepreneur Zhang Weiwu believes that “Bitcoin is tiny in the financial sense, but it is revolutionary in its essence,” which may explain the regulatory disconnect between China's biggest banks and its central bank. The closures of several exchanges at the end of April may suggest that Chinese banks are beginning to heed PBoC's warnings. Others within the Bitcoin community believe that “attempts by Chinese authorities to steer Bitcoin legitimacy” cannot succeed because “Bitcoin's legitimacy derives from its market adoption and continued usage among its participants,” not political institutions. 47 Until PBoC adopts an official policy toward Bitcoin, rumors of continued regulation may continue to affect the global Bitcoin market.