Bitcoin moves to the OTC market, with multiple hidden risks

The price of Bitcoin hit a record high on November 17, breaking through $8,000 (about RMB 53,000). According to the CoinDesk Bitcoin Price Index, on November 9, Bitcoin had a fork problem, which caused part of the computing power to switch to Bitcoin Cash, causing the price to fall all the way to $5,906 on November 12. However, in just less than 5 days, the price of Bitcoin broke through the $8,000 mark again, with a 5-day increase of 35%. So far this year, the price of Bitcoin has risen by more than 600%.

At present, all countries are issuing regulatory policies for Bitcoin. On October 31, all Chinese Bitcoin platforms officially stopped the digital asset exchange for RMB. Subsequently, Bitcoin trading websites Huobi and OKCoin successively launched peer-to-peer trading platforms overseas to lay out over-the-counter transactions.

Over-the-counter transactions that are in an "unattended" state also bring a lot of risks to users due to the strong anonymity of both parties to the transaction and the numerous payment channels.

OTC trading is hot

"I have no need to cash out, so after China suspended Bitcoin trading, I did not sell it. I wanted to hold on to it and see how it goes. Later, people in the circle pulled me into a WeChat group and kept an eye on the trading situation." Zhang Jiaqi (pseudonym) told a reporter from China Business News.

The WeChat group mentioned by Zhang Jiaqi is the most active place for over-the-counter transactions. "How many bitcoins do you want?" "I want 1 bitcoin, is there anyone who wants it?" These inquiries have become the most common questions in the WeChat group.

According to Zhang Jiaqi, users in the WeChat group are introduced by acquaintances and join the middleman's WeChat group. They trade freely with other users in the group or conduct guaranteed transactions through middlemen. In guaranteed transactions, the middleman will charge a handling fee ranging from 1% to 5%.

"For some small transactions, such as one or two bitcoins, people generally choose to trade directly; for larger quantities, they will look for guarantors in the WeChat group; for particularly large amounts such as hundreds or even 1,000 bitcoins, people will find reputable guarantors in the circle, or trade offline," Zhang Jiaqi told reporters.

Zhang Jiaqi said that over-the-counter transactions rely on relationships within the circle and mutual trust, and there are no other credentials.

The so-called over-the-counter trading is relative to the "on-site trading" of the trading platform. OTC trading usually does not have a fixed venue, prescribed membership and strict rules and regulations. It is mainly a one-to-one transaction between counterparties through private negotiations. In simple terms, OTC trading is a private transaction between people, with each party quoting prices and transferring money when they reach an agreement.

Currently, there are three main forms of Bitcoin over-the-counter transactions, including: online P2P transactions, online B2C transactions, and offline transactions.

According to Zhang Jiaqi's observation, the intermediary's daily income from one group is approximately between 500 and 600 yuan. Generally speaking, the intermediary will have five or six groups running at the same time.

"The daily income must be at least three to four thousand yuan," said Zhang Jiaqi.

In addition to WeChat groups, over-the-counter trading platforms are also very popular. Currently, there are four Bitcoin over-the-counter trading platforms commonly used by domestic users, all of which are overseas, namely LocalBitcoins, Paxful, CoinCola and BitcoinWorld. OTC transactions often have no national border restrictions, and related platforms can provide services to the world.

According to the "Bitcoin OTC Trading Monitoring Report" recently released by the National Internet Finance Committee, since 2017, 96.3% of Paxful's transaction orders have completed RMB transfers through Alipay; on CoinCola, 85% of the sell order advertisements choose Alipay as the payment method.

The report also pointed out that before February 2017, the volume of over-the-counter transactions was relatively small; in early February, major domestic Bitcoin trading platforms banned withdrawals, and the scale of transactions experienced explosive growth; since major domestic trading platforms opened withdrawals in June, the scale of transactions has decreased significantly; and the business cleanup of domestic ICOs and Bitcoin transactions in early September promoted the resurgence of over-the-counter transactions.

"The main problems currently faced by over-the-counter transactions are fraud risks and credit risks. For example, users may defraud coins, or unexpected circumstances may cause one party to fail to pay or pay coins as agreed. These are difficult to guarantee." said Zhang Feng, a blockchain legal affairs lawyer at Beijing Jincheng Tongda (Shanghai) Law Firm.

Xue Hongyan, director of the Internet Finance Center of Suning Financial Research Institute, said that over-the-counter transactions have problems such as high matching transaction costs, unrealistic prices and fund security. The main difficulties in overseas exchange transactions are language barriers and currency exchange issues. At present, only a very small number of regions in the world have substantive supervision on virtual currency exchanges. The vast majority of exchanges have no regulatory intervention and have more or less potential problems such as technical strength, integrity and user rights protection.

Li Hanhong, a researcher at the International Monetary Institute of Renmin University of China, also said that the current laws and regulations of various countries have not fully defined Bitcoin, and the policy risks of future cryptocurrency speculation cannot be ruled out.

Low-key platform layout

After China suspended the digital asset exchange business for RMB, Huobi and OKCoin both launched over-the-counter trading business, and the company's operating entities are both located overseas.

Li Lin, founder of Huobi.com, said that Huobi has developed five major businesses worldwide. Among them, Huobi Global Professional Station is an innovative digital asset trading platform serving professional traders around the world, currently providing trading and peer-to-peer investment services for nearly ten digital asset categories. It is understood that Huobi Global Professional Station is headquartered in Singapore and has a subsidiary in Hong Kong, China.

OKCoin said that the company has obtained digital asset trading licenses in many countries around the world through investment and cooperation, and will enter the overseas market. All overseas businesses of OKEx.com and OKCoin.com are operated by local companies and teams.

According to Xue Hongyan, the so-called peer-to-peer investment service or trading service is a form of over-the-counter trading, which is significantly different from the previous exchange trading model: before, investors deposited money into the public account opened by the exchange in the bank, and then bought and sold virtual currency within the platform; while under the C2C model, a large number of buyers and sellers gathered on the platform, and both parties independently determined the price and completed the transaction. Funds were transferred directly from the buyer's account to the seller's account, and the platform did not touch the funds, which can be regarded as a peer-to-peer over-the-counter matching transaction model.

"I used to trade on Huobi. After the Chinese site stopped trading, I could use my account and password to log in directly to the global site. User migration is very convenient," said Zhang Jiaqi.

Zhang Feng told reporters that using Huobi and OKCoin platforms for over-the-counter transactions is much safer than WeChat groups, because the original user records and the user's financial transaction status are all on them, which can be used for credit assessment.

At the same time, an industry insider (Li Wei, a researcher at the 21st Century Research Institute) also pointed out that as a platform that only provides a trading venue, they will not be responsible for the transaction risks, which will ultimately be borne by the users themselves.

It is understood that the countries that have issued licenses for Bitcoin are the United States, South Korea and Japan. Among them, Japan, which has replaced China as the largest Bitcoin trading country, has only recently started issuing licenses. According to a report by the Wall Street Journal on September 29, 11 digital currency exchanges including BitFlyer have obtained the first batch of digital currency exchange operating licenses issued by the Japanese Financial Services Agency (FSA), and another 17 digital currency operators are undergoing review.

The world is paying close attention to the soaring prices of digital currencies such as Bitcoin. Recently, the Office of the Chief Investment Officer of UBS Wealth Management released its latest views on cryptocurrencies. They believe that cryptocurrencies have become popular since 2008, and there are thousands of them so far, with a total value exceeding the market value of IBM. The sharp rise in the valuation of cryptocurrencies in recent months is a speculative bubble; they are still highly skeptical about whether cryptocurrencies can become mainstream currencies.