Crypto prices dive as China shuts exchanges

Chinese financial authorities have ordered cryptocurrency exchanges to stop trading and taking new registrations by midnight on 15 September, reports Gary McFarlane.

China's Internet Financial Risk Rectification Work Leading Group, which is comprised of all of China's financial regulators including the People's Bank of China, issued the order in a statement late Thursday.

The country's second-largest cryptocurrency exchange, BTCChina, announced yesterday that it was closing and has since been followed by the smaller exchanges ViaBTC, Yunbi and YoBTC. More exchanges will no doubt be announcing compliance with the order today.

According to Chinese financial news outlet Caixin, BTCC offices were visited yesterday by officials representing the Leading Group and it is likely that other exchanges will have had similar contact.

The Leading Group has also instructed exchanges to in effect ringfence user funds by putting them into a separate bank account and to close all other company bank accounts by 20 September, and making arrangements for customers to be able to withdraw their deposits.

The statement, in part, said: "Before 20 September 6pm, exchanges shall come up with a detailed risk-free clearing plan and send this plan to the office. Exchanges shall deal with their claims and liabilities properly, and insure that investors' funds and virtual currencies are safe."

The official clampdown follows a report by Caixin last week that all exchanges were to be shuttered, which had the effect of pressuring the price of bitcoin and all other virtual currencies. Bitcoin has now dropped more than 30% from its all-time high of $5,014 on 2 September, briefly dipping below $3,000 today, although it has since recovered somewhat to trade at $3,600 on the Coindesk bitcoin price index.

It's an open question whether the digital currency has found a bottom or the correction has further to run as the ramifications of the exchange closures sink in. Ethereum is at $243.

Rumours swirling in China's financial community suggest that complaints and threats to launch protests by private investors who had lost money in initial coin offerings (ICOs), prompted the authorities to act. Chinese regulators closed down ICOs in the country on 5 September. ICOs are used by blockchain companies to raise funds by issuing coins and tokens.

Additionally, the Communist Party of China Congress opens on 18 October and the last thing the government wants is social unrest among disgruntled investors.

China once accounted for the majority of bitcoin trading, but has since fallen to around 25%; China's BTCChina, OKCoin and Huobi were among the largest exchanges in the world. China is also home to the majority of the world's bitcoin mining and it is unclear if the latest moves by the authorities will impact those operations. What is known, however, is that the falling price of bitcoin makes mining operation less profitable.

Li Lihui, former president of the Bank of China and currently a leading official of the National Internet Finance Association, told a conference in Shanghai yesterday that bitcoin and other cryptocurrencies "can become a tool for illegal fund flows and investment deals".

He welcomed the crackdown by authorities in China on "digital tokens like bitcoin, ethereum that are stateless" as it was "protecting market stability and the interests of investors", although he spoke favourably of the digital currencies being developed by a number of central banks including the People's Bank of China.The PBOC revealed in 2016 that is was working on blockchain technology and developing its own digital currency.

The Leading Group has also ruled that the exchanges were trading without a licence, although a licence has not been required by the authorities up until this point. This might suggest that the authorities will allow exchanges to reopen, but only after imposing a new tougher regulatory regime in which exchanges would have to obtain a license from the government to operate.

Chinese president Xi Jinping is standing for re-election at the party Congress and could be positioning himself with the party base by cracking down on what might be perceived as the wilder areas of the free market.

Also pressuring crypto prices were comments by JP Morgan chief executive Jamie Dimon on 12 September that bitcoin was "a fraud" and "not a real thing".

Bitcoin has suffered 10 major corrections since 2010, at one stage dropping 94% between August and November 2011 and 85% between November 2013 and January 2015. More recently, in June-July this year the price fell 35%.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.