China’s bitcoin market: another ticking time bomb, South China Morning Post

China’s bitcoin market: another ticking time bomb?

Speculation, supported by leveraged betting and program trading, has left the virtual currency market in urgent need of regulation, say analysts

Xie Yu UPDATED : Thursday, nineteen Jan 2017, Trio:35PM

By the age of 34, Ding Wen had built up a individual fortune of more than two million yuan after years of hard work at an internet company in Nanjing, in east China’s Jiangsu province.

But he eyed most of that wealth go up in smoke on January Five, when China’s bitcoin market crashed, sending the price of the virtual currency plunging forty per cent in just a few hours after lunch.

With the market in free fall, Ding was incapable to log into his account with China’s largest bitcoin trading platform, Huobi, meaning he could not sell off his holdings or top up his principal to meet the margin call.

By the time he managed to log on in the evening, most of the bitcoins in his account had been compulsorily sold off by Huobi for 6,361 yuan each, lower than his purchase price of 8,101 yuan. This included the part of his investment he had bought using a loan he obtained from Huobi by pledging the bitcoins he wielded originally.

“I have taken on big risks when making leveraged betting, but the collapse of the trading system made me incapable to run stop-loss orders, so I think the platform should compensate for investors’ losses,” Ding said.

Ahead of the market crash, Ding had borrowed 9.95 million yuan from Huobi by pledging a principal consisting of the four hundred nine bitcoins he already possessed. He then bought a further 1,228 bitcoins with the loan.

Most of his holdings were compulsorily sold out by Huobi during the price collapse while he was incapable to access his account.

Wu Xing, head of marketing at Huobi, said the log-in delay was caused by a torrent of visits and selling orders, which exceeded the capacity of the website.

“[The loss] was due to irresistible factors and not included in the compensation scope. We are sorry and understand the feelings of the investors,” she said.

Many analysts and investors fear China’s bitcoin market is quickly turning into another time bomb like the scandal-hit peer-to-peer (P2P) lending sector. A series of P2P lending platform frauds rocked the country last year and washed away ems of billions of yuan of investment from petite investors, creating a headache for local and central governments, which feared social unrest.

Now speculation, derivative products, leveraged betting and program trading emerge to be spreading in the largely unregulated bitcoin market. Such practices are thought to be responsible for pushing up the price of bitcoin by more than two hundred sixty per cent since early 2016.

The market hit a historic high of 8,995 yuan on January Five, just ahead of the crash.

Most of the transactions are happening on three privately possessed platforms or through P2P trading.

Data provider Bitcoinity shows trading volume in China accounted for more than ninety eight per cent of the global total during the past thirty days amid more pronounced price fluctuations.

Until now, no regulator has overseen this market, which sees daily turnover worth ems of billions of yuan.

However, things show up to be switching prompt.

After the fine bitcoin crash, the People’s Bank of China announced on Wednesday afternoon that it had sent inspection teams to the country’s top three bitcoin trading platforms to scrutinise their practices.

It is the very first regulatory stir China’s central bank has made publicly involving the virtual currency.

The PBOC has been in talks with the platforms from time to time in private since two thousand thirteen and asked them for data and information, according to an executive from a major trading platform, who asked not to be named.

But the authorities have not formally listed bitcoin under their regulatory framework. Nor have they issued any rules to govern the market.

Like all other central banks, the PBOC defines bitcoin as a commodity rather than a currency, which ruled it out of their existing regulatory coverage in late 2013.

Aurélien Menant, founder and chief executive of Gatecoin, a cryptocurrency and blockchain assets trading platform based in Hong Kong, said: “Given the superior role of Chinese exchanges, which represent ninety five per cent of global bitcoin trading activity, at more than fifty billion yuan every day, it’s likely that the PBOC recognises the growing significance of this fresh and so far unregulated alternative financial market.

“The PBOC has been engaging with the major cryptocurrency exchanges in China for several years, but given the unexpected price movements and high volumes traded over the past few weeks, it’s very clear that now it just wished to step up their checks on market manipulation and money laundering.”

In an announcement issued on Wednesday, the central bank said it was joining compels with the Beijing Financial Bureau to probe trading platforms including Huobi and OKCoin to check if they were running in accordance with foreign-exchange management, anti-money-laundering and trading exchange rules.

Mainland media reported in latest months that bitcoins had become a popular implement for investors to export money out of China, circumventing capital controls that had been tightened by the regulators amid the yuan’s acute depreciation.

Cheung Chun-yin, a PwC China fintech playmate, said it was possible for bitcoin holders in China to circumvent domestic capital control boundaries by selling bitcoin to an overseas buyer in exchange for foreign currency.

“In theory, the bitcoin market is borderless, and as long as you could find a buyer overseas, you would be able to get US dollars, and the trade could happen without leaving a trace, with no record in the traditional banking system,” he said, adding that the volume of capital flow through this channel was likely to be fairly limited.

Zhao Dong, possessor of Jiandong Tech, a company that buys and sells bitcoin, agreed that the actual amount of capital leaving the country through bitcoin was not likely to be very high.

“Among the sixteen million bitcoins already dug out across the world by now, there are around four to five million held by the Chinese. That already caps the total value, while most of the owners are more interested in short-term speculation on the mainland market than exporting them for foreign currencies,” he said.

Cheung said that albeit neither the mainland nor Hong Kong financial regulators had included bitcoin in the existing regulatory framework, bitcoin-related activities were “evolving and bearing the features of traditional financial market activities” and overlapping with the traditional financial system. That makes it more significant than ever that the regulators begin to take notice.

The largest problem for the Chinese bitcoin market, according to Zhao, is that “the trading platforms are facing the challenge of having to prove themselves virginal” because many investors accuse them of inwards trading or market manipulation. The market boom and the quick build-up of leverage had left the market in urgent need of official regulation, he said.

Chen Yunfeng, a senior fucking partner with Zhonglun W&D law hard, based in Shanghai, said he was dealing with an enhancing number of bitcoin-related disputes. These included cases of bitcoin theft and scams in which investors have been incapable to verify their trading fucking partners.

“The bitcoin market is facing fine risks, with turnover and leverage climbing quickly, and mixed up with unregulated foreign-currency trading and money laundering. I think it is time that the PBOC ready fresh policies,” he added.

Industry players said the PBOC was mulling the idea of introducing third-party custodian services to govern the market by taking care of the account records, cash or bitcoins on behalf of the platforms.

In early August, investor confidence in bitcoin took another knock when Bitfinex, a prominent Hong Kong-based digital currency exchange, reported the theft of about US$65.8 million worth of bitcoins.

About 119,756 bitcoins were lost in a security breach, the company said.

In early 2014, Japan-based bitcoin exchange MtGox collapsed over the loss of almost US$390 million worth of the virtual currency. Police later arrested its chief executive, Mark Karpeles, who was suspected of having accessed the computer system of the exchange and falsifying data on its outstanding balance.

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