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OKCoin Disputes Bitcoin Use in Capital Flight as PBOC Mulls Regulations

Last Updated March 4, 2021 4:53 PM
Andrew Quentson
Last Updated March 4, 2021 4:53 PM

Star Xu, OKCoin’s CEO, one of the biggest bitcoin exchange with around 37% of total trading volume, has disputed bitcoin was used for capital flight, publicly stating today according to a translation:

“Constant price difference between China and the west over a long time tells us capital flight with Bitcoin is purely imaginary.”

OKCoin’s and Huobi’s price was almost $200 higher than in western exchanges at one point, providing a unique opportunity for arbitrage in a somewhat risk free manner. However, the fact that few, if any, took advantage suggests that moving money from a Chinese bank account to a US or western bank account and vice versa is very difficult and time-consuming with some estimating it takes 1-2 months.

The Chinese exchanges now trade at around $20-30 lower than western exchanges and have done so for a few days, but this difference in price is not unique. Indian exchanges have had a premium of $100 or more for some months, as have Nigerian, Venezuelan, Argentinian and, at times, even Russian exchanges. But they usually have very little liquidity, with just 200 or so BTC changing hands. Chinese exchanges, on the other hand, have volumes in the millions.

Industry executives in China have scoffed at suggestions of bitcoin enabling capital flight beyond China’s borders.

Responding to suggestions that much of this volume is fake, Xu states that fierce competition has led Chinese exchanges to offer zero fee trading, so charging only for withdrawals, before adding:

“We observe huge volumes of high-frequency trades by users, often attributed to “faked by exchanges.”

Western exchanges are somewhat balkanized with some based in the US, some based in Europe, serving different markets. As most of them are now licensed, with Bitfinex a notable exception, they rarely provide margins, thus lacking the liquidity of Chinese exchanges. None of them has ever offered zero fee trading.

Chinese exchanges, on the other hand, serve one market, considerably increasing competition between them, but how they make any profits just from withdrawal fees while hiring hundreds of employees is not very clear, leading some to accusing them of engaging in “tricks.”

Regulations Suggested

Based on Chinese media reports, it appears PBOC became interested after it observed Huobi becoming inaccessible following a steep reversal on January the 5th when price declined by around $300 in minutes. The official China Securities Journal reports:

“Regulators have noticed that some bitcoin platforms crashed during the recent market volatilities, causing some investors, particularly those trading with leverage tools, to bear huge losses because they were unable to log on to the website during the sell-off.”

Huobi, which according to unconfirmed statements has today limited margins to just 100,000 CNY (~$14,000), responded to state that the situation was caused by technical problems, according to China Daily which further reports :

“China’s financial market regulators are seeking opinions about how to better regulate trading of bitcoin, the virtual currency. These steps may include setting up a depository platform, said sources with close knowledge of the matter.”

Bobby Lee, CEO of BTCC, stated in an interview to the Chinese media according to a translation by Eric Zhao, from the Chinese Academy of Sciences:

“Bitcoin exchanges are in the “grey areas” of the law. We know there’s absolutely nothing else like bitcoin in the law yet. PBOC asked (discussed with) us a lot of questions like what roles bitcoin exchanges should play, what rules should be set up, whether or not to issue licenses, and some basic questions like trading fees, leverage, loans, price fluctuations, whether or not we operate 24hr a day, deposit/withdrawal limits, etc.”

Will PBOC Take Direct Control of Bitcoin Trading?

It appears China is clearly looking to regulate exchanges, but as far as we know there has been no request for public comments on what approach would be best nor are there any suggestions of a public consultation period, but there are indications PBOC may move forward with setting up a “third-party custodian platform” to improve trading security.

Depending on how it is implemented, it may lead to effective nationalization of the exchanges, just as the “big four” Chinese banks are state owned. That would give Chinese authorities direct say on bitcoin trading and an incredible amount of influence on the global bitcoin market.

Some welcome additional oversight and scrutiny, arguing that regulation legitimizes the digital currency, potentially attracting institutional investors, but Chines authorities haven’t shown much fondness for bitcoin. They effectively banned bitcoin’s acceptance and any bitcoin related service offering by Chinese companies in 2013, with the currency limited to just buying and selling. Moreover, their intervention coincides, for the second time, with bitcoin surpassing the all-time high in China.

It remains to be seen if the PBOC is planning on a more hands-on approach with bitcoin trading in China.

As such, many would rightly be very suspicious of any direct involvement by PBOC over 90% of the trading market. Licensing, audit requirements, perhaps insurance, combined with requirements for higher levels of professionalism may be desirable, but a PBOC controlled third-party custodian platform would give the central bank undue influence on a global digital currency and further give ammunition to those who criticize the country of engaging in market protectionism at the expense of others.

A PBOC controlled third-party custodian platform would not provide any added security in any event, according to William Gee, PwC China Fintech Partner, who states :

“The bitcoins were not stolen or hacked. Investors suffered loss as they were unable to trade, possibly because of the sudden price fluctuation and large sell offers. Introducing a third-party custodian for the investors would not reduce this risk.”

The implementation of any such direct control would probably use security as only an excuse, with the actual aim likely being to give Chinese authorities the ability to limit bitcoin trading whenever they please and especially at times of global market stress potentially at the expense of foreign traders and investors who would find their $15 billion market at the mercy of China’s Central Bank.

If they do go to such extreme lengths, many would have good reasons to accuse Chinese authorities of hijacking a global good for their own benefit at the expense of everyone else without any reason whatever as they have plenty of examples of successful regulation of exchanges, from America to Britain, Europe and the wider world. None of them include a day-to-day say on bitcoin trading as a PBOC controlled “third-party platform,” clearly implies.

China, now the second-largest economy in the world, might perhaps wish to mature and behave responsibly when global matters are concerned, and rather than take unilateral actions based on secret discussions with “insiders,” instead request open and public global commentary on how a global good with a market in the billions should be regulated in a way that benefits all, instead of appearing to just grab and loot a global asset by having direct control in its day to day trading at the expense of all.

Images from Shutterstock.