Regulatory authorities “draw the line” to encourage Bitcoin platforms to seek new ways out

From 8,890.77 yuan to 6,144.64 yuan...On January 5, Bitcoin fell by more than 30% in a single day.

The increasingly active Bitcoin market is experiencing a roller coaster ride due to the intervention of regulatory authorities and risk warnings.

Following the central bank's talks with the main responsible persons of the three major bitcoin trading platforms - Huobi, Bihang and Bitcoin China - in early January, in mid-January, the central bank's Business Management Department and relevant departments formed a joint inspection team to conduct on-site inspections of the above three bitcoin platforms.

According to information publicly disclosed by the central bank, the content of this inspection includes the platform's implementation of relevant financial laws and regulations such as anti-money laundering and foreign exchange management, and trading venue management.

Affected by on-site inspections and risk warnings from regulatory authorities, the Bitcoin market has experienced huge fluctuations. The financing and currency lending business, which was once regarded as an important source of income for some Bitcoin trading platforms, has stagnated. Industry insiders said that changes in regulatory policies will also prompt platforms to transform their businesses.

Financing and currency lending business was identified as illegal

Xiao Lei, a senior Bitcoin researcher, believes that the reason why the regulatory authorities formed a joint inspection team to enter the Bitcoin platform is mainly because as the price of Bitcoin continues to rise, various funds began to chase Bitcoin, and various scams under the banner of Bitcoin have occurred frequently. "Investigations into major trading platforms will help cool down the Bitcoin market to prevent the market from participating in Bitcoin on a large scale and prevent the formation of a larger herd effect."

Driven by the pursuit of Bitcoin by various funds, Bitcoin rose by more than 200% in 2016, and the financing and currency lending business of some Bitcoin trading platforms also increased accordingly. The so-called financing and currency lending business is similar to the margin trading business in the stock market, and investors can conduct long and short operations. Taking the financing business as an example, for short-term investors, if they predict that the price of Bitcoin will rise, they can borrow funds from the platform to buy Bitcoin, sell it after the price of Bitcoin rises, and then return the funds to the platform.

A senior person in the industry told Legal Weekly that the funds for margin trading and lending business mainly come from the platform's own funds. For example, Huobi.com's services are all self-funded. In order to control risks, the Bitcoin platform sets a certain leverage position risk rate (total assets divided by leverage amount, including handling fees). Once it falls below this rate, the platform will force liquidation. Since the margin trading and lending business is based on accurate judgment of market trends, once the judgment is wrong, the loss will be heavy.

Regarding the margin trading business, the regulatory authorities found that it violated regulations after investigation, causing abnormal market fluctuations. Xiao Sa, a partner at Dacheng Law Firm, believes that if the platform uses its own funds to provide margin trading services, it is suspected of illegal operation.

Xiao Lei said that two years ago, some Bitcoin trading platforms were trying similar innovative businesses, but it did not become a common phenomenon until 2016. "When financing and currency lending were more popular, they accounted for a large part of the entire platform's revenue. Currently, it still accounts for 50% of the revenue on some platforms."

Legal Weekly reporter learned that before this regulation, Huobi.com and BiXing both provided leverage of up to five times, with a margin trading fee of 0.1% per day. After the regulatory authorities intervened in the inspection, the financing and currency lending businesses of these major trading platforms have been suspended.

Among them, Huobi.com stopped its margin trading business as early as January 16; on January 24, the relevant person in charge of Huobi.com also said in an interview with Legal Weekly that the platform's margin trading business had also been suspended. The reporter noticed that the practices of these major trading platforms are similar, all of which suspend the issuance of new leverage quotas, and old users will no longer renew their loans after paying off the corresponding amount.

A familiar cliff-like decline

The market effect caused by the central bank's inspection of the Bitcoin platform made the public think of the central bank's control over the Bitcoin market in 2013.

In early December 2013, the People's Bank of China and several other ministries and commissions jointly issued the "Notice on Preventing Bitcoin Risks", which pointed out that Bitcoin does not have the same legal status as currency, cannot and should not be circulated and used as currency in the market. It requires financial institutions and payment institutions not to price products or services in Bitcoin, and not to directly or indirectly provide customers with other Bitcoin-related services, such as registration, trading, clearing, and settlement services.

Affected by the notice, the price of Bitcoin experienced a cliff-like drop in a short period of time, with the highest drop reaching 3,000 yuan in 3 days. The central bank once again issued a risk warning on Bitcoin, and the Bitcoin market once again experienced huge fluctuations. On January 12, the price of Bitcoin once quickly fell below 5,000 yuan, a drop of nearly 10%. During the Spring Festival, the price of Bitcoin gradually rebounded. As of February 6, the price of Bitcoin was about 7,200 yuan.

Xiao Lei told reporters that the initial profit model of Bitcoin trading platforms was mainly transaction fees. Later, due to fierce competition, in order to compete for trading customers and increase trading volume, various platforms gradually cancelled transaction fees and relied mainly on withdrawal fees (the fee rate was about 0.3% to 0.5%). In the past two years, some major Bitcoin trading platforms have begun to innovate their businesses, including launching financing and currency lending businesses, in order to seek interest income.

Business innovation boundaries need to be established

As the financing and currency lending business is restricted and the price of Bitcoin falls, some Bitcoin trading platforms are beginning to look for new ways out. Huobi COO Zhu Jiawei told Legal Weekly that Huobi has established a blockchain research center, which is committed to the formulation and research of blockchain project standards.

Affected by regulatory policies, an obvious change is that several major Bitcoin trading platforms, including Huobi, have begun to resume charging fees. On January 22, the three major trading platforms announced that from January 24, a fixed rate of 0.2% of the transaction amount will be charged for both Bitcoin and Litecoin transactions.

The reporter noticed that the transaction volume of Bitcoin trading platforms has dropped significantly since the transaction service fee was charged, and due to the Spring Festival. Regarding the collection of transaction service fees, Xiao Lei said that this move can expand the platform's income, enter a virtuous cycle, and can also curb the frequent trading of Bitcoin. However, "if the handling fee is too high, it may also drive some traders away from these major platforms and enter the underground trading market or small platforms that are more difficult to regulate."

Xiao Lei believes that if some red lines are not drawn for Bitcoin, Bitcoin trading platforms may not know the innovative boundaries of their business, and may cross the boundaries from time to time, or even mislead investors. "There is relatively large uncertainty in this market, and how to combine blocking and loosening supervision will test the wisdom of all parties."