The central bank conducted a high-profile surprise inspection of Bitcoin and three potential risks remain to be resolved

Our reporters Hou Xiaoyi and Yang Xiaoyan reported from Beijing and Shanghai

On January 12, after the central bank sent an inspection team to the three largest bitcoin trading platforms in China to conduct on-site inspections on the implementation of foreign exchange management, anti-money laundering and other relevant financial laws and regulations, and relevant regulations on trading venue management, the price of bitcoin has plummeted, with the lowest price falling below 4,900 and the maximum decline exceeding 23%.

A person close to the regulator revealed to the 21st Century Business Herald reporter that the personnel dispatched by the central bank's Shanghai headquarters for the on-site inspection of Bitcoin China were far more specialized than those for general Internet finance risk inspections, which shows how much importance the central bank attaches to it.

"The main thing is to understand the company first. We can only draw a conclusion on the specific risk points after looking at the materials. We don't know when the results will come out." said the person close to the regulator.

Central bank concerns

Regarding the central bank’s inspection, there are reports that Bitcoin China CEO Li Qiyuan responded to the central bank’s inspection.

A reporter from 21st Century Business Herald asked Bitcoin China for confirmation, and it said that Li Qiyuan did respond. His response was roughly, "What Bitcoin exchanges do is still in a gray area in law. We know that the reason is that there is no such thing as Bitcoin in law. The central bank came this time and asked us a lot of questions, such as how to position Bitcoin exchanges and how to set rules in the future. They also discussed some basic issues, such as handling fees, leverage, lending, price fluctuations, whether the exchange is open 24 hours a day, and whether there are restrictions on deposits and withdrawals, etc."

In addition, the central bank also asked Bitcoin China to issue a report on the details of the exchange's operations as soon as possible. In response, Li Qiyuan said that in the past two or three years, the central bank and Bitcoin exchanges have always communicated, mostly in meetings, and there have been few such inspections. The recent surge in Bitcoin prices may have made the central bank feel a little worried.

An executive of a Bitcoin platform once posted on WeChat Moments when Bitcoin was rising: It seems that I bought too little.

From the overall rise of Bitcoin in 2016 to the surge in the price of Bitcoin from 6900 to 8890 in early 2017, a record high, Bitcoin has evolved from a carnival within a small circle of technology geeks to a kind of investment and financial management behavior that is scrambled by the whole nation.

This wave of strict regulation can be regarded as a wake-up call for Bitcoin, which undoubtedly has a direct impact on the mentality of investors. "I made a fortune by shorting the price from 8,800 to 6,600, but I dare not do it now," a Bitcoin investor working in the securities industry told the 21st Century Business Herald reporter: "The central bank is strictly investigating, and I am worried that it may be difficult to withdraw cash from the platform. There are also some problems in other links. I observed for a month before investing."

The attack was sudden, but there were signs of it. A 21st Century Business Herald reporter found that Bitcoin had already exposed three major thorny risks.

First, under the existing trading model, users can easily circumvent the annual 50,000 USD quota by buying RMB and selling USD, or registering two separate accounts for RMB and USD. This is a huge hidden danger in the current foreign exchange control and anti-money laundering policies.

Second, there are increasingly prominent technical and security loopholes in trading platforms. Under the recent sharp fluctuations in the Bitcoin market, Huobi.com and BiXin have both been paralyzed due to technical failures, causing investors to suffer heavy losses.

Third, there is a lack of safeguard mechanisms such as fund custody and corresponding rights protection mechanisms. A Bitcoin player told the 21st Century Business Herald reporter that he lost more than 2 million yuan due to two system crashes on a Bitcoin trading platform, but he had no way to complain. The platform service agreement also clearly stated that the platform is exempt from liability for losses suffered by players due to force majeure factors such as hacker attacks. In addition, the lack of supervision has led to a lack of rights protection.

Previously, the Hong Kong Bitcoin exchange MyCoin ran away with $390 million, and the MMM pyramid scheme founded by the famous Russian mathematician Mavrodi, etc., all used Bitcoin to foster crime. Supervision is imminent and timely.

To be or not to be

There have been voices criticizing Bitcoin. An IT industry insider told a reporter from 21st Century Business Herald that he is not optimistic about Bitcoin. Bitcoin relies on a set of computer algorithms that are detached from the real world and try to break national boundaries, but is it really good to have no restrictions? Without precious metals as a foundation and without national credit guarantees, as long as a loophole is found in Bitcoin's mathematical model, the entire Bitcoin world will collapse immediately.

On January 10, the China Securities Regulatory Commission announced that it would launch a new round of "cleaning up and rectifying various trading venues" with heavy punches, mainly involving some precious metals, crude oil futures trading, stamps, coins, phone cards, etc. There are pessimistic voices saying that Bitcoin will soon be completely cleaned up and thoroughly rectified.

But judging from the signals released so far, standardized management is more likely.

On the one hand, although there are risks of foreign exchange outflow, money laundering and cashing out on Bitcoin trading platforms; on the other hand, a private equity Bitcoin investor said that taking the Bihang trading platform as an example, the actual USD/RMB exchange rate on the platform on January 12 was 6.9365, while the official exchange rate was 6.8950. The official exchange rate was 3%-4% lower than the Bitcoin exchange rate. In other words, it is not cost-effective to convert RMB into USD through Bitcoin compared to formal channels.

"There are definitely people who exchange currency through Bitcoin, but the cost is also high, so the scale of the exchange is questionable, and it may not be the core factor for the central bank to inspect Bitcoin trading platforms this time." The investor analyzed.

On the other hand, Bitcoin is currently a high-yield financial product that hedges against legal currency risks. Huobi.com founder and CEO Li Lin said: "Today, mainstream investors treat Bitcoin as a pure long-term investment product, which is not much different from investing in stocks and futures. Although some of them do not understand the characteristics of Bitcoin, they only treat Bitcoin as an investment product such as stocks and gold for short-term operations."

It can be predicted that the next six months will be a period of concentrated rectification in the industry.