Will China shut bitcoin exchanges?

The authorities prohibit commercial trading for all virtual currencies and are preparing to shut down the bitcoin exchanges in China, which – according to people familiar with the matter – reflects the growing concern about virtual currency and its recent increase in value.

This policy shift in the world’s second biggest economy shows how nations are fighting bitcoin and its place in the financial system. Particularly in China, the government’s attacks on bitcoins are focused on preventing capital from fleeing to digital currencies.

This move could send shock waves to the growing market of virtual currencies and hundreds of new companies that have essentially been established in order to take advantage of the open-ledger technology which is the foundation of bitcoin. The largest of these virtual, or “cryptographic,” currencies, bitcoin has surged since March in part due to easing restrictions in places like Japan as well as progress in buying and selling.

After on Friday, November 17th, the Chinese news organization reported on the Chinese trade ban, Bitcoin moved about 10% to USD 4,186, from over USD 4,600 on Thursday, according to the CoinDesk website. The stock market position hovered around this level, since closing the Monday the exchange rate was USD 4211.

China has long been an important centre for bitcoin, which was created by an anonymous programmer during the financial crisis of 2008 as an alternative to official currencies. Most of the world’s bitcoin is created through powerful algorithms in China. Only in January, before new rules weakened trade in the country, over 80% of global bitcoin activity took place in yuan.

In the latest move, the central bank of China, along with other regulatory authorities, has drafted instructions prohibiting Chinese platforms to provide virtual currency trading services, according to people familiar with the matter.
The end of commercial trading in virtual currency in China is likely to further reduce the use of bitcoin in a large and once promising market. It also presents guidelines for regulators in other countries who seek to bring order to the market chaos for these instruments, stock market analysts said.

The ban was surprising for some, considering that the Chinese authorities allowed the exchange of bitcoins, such as BTCC, Huobi and OKCoin, which have been operating on the continent for years.

Beijing’s crackdown on bitcoin is part of a wider effort to eradicate the risk to the domestic financial system. At the beginning of this year, officials made public a draft of anti-money laundering regulations for bitcoin exchanges. This was a powerful warning, even though the rules were never formalized, as people who know the case assure. The People’s Bank of China did not respond to a message seeking comment. Now the representatives of the regulator informed at least one of the exchanges that the decision to shutter them had been made, as one of the people said. Another said that it could take several months to implement the order. More virtually currency activity in China withdraws from the stock exchanges, where private individuals can trade privately, analysts say.

The stakes for Beijing have grown, because the prices of virtual currencies such as bitcoin increased, also increasing the risk that Chinese investors will continue to speculate and expose themselves to large losses. Analysts and investors attribute the sharp increase in bitcoin to Chinese investors last year, who started to buy it up, while selling the yuan out of fear that the Chinese currency would weaken.

‘In recent days, bitcoin prices in China dipped lower than they did in other markets, reflecting uncertainty over the ban,’ said Charles Hayter, chief executive of CryptoCompare.

While China in the past accounted for the majority of global bitcoin operations, its share has fallen dramatically since the government started the moves aimed at cooling the market.

In April, Japan’s Financial Services Agency implemented rules that recognized Bitcoin as a payment method. Since then, Japan has become the main bitcoin trading market, accounting for almost half of global volumes. The US share of trading has increased to over 25% from 5% in the last year.

Virtual currencies theoretically allow holders to bypass the traditional Chinese banking system to transfer money outside the borders controlled by the capital. This could make it difficult for the Chinese regulators to maintain a close control over the yuan…

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