China may introduce ‘custodian service’ to stabilise the world’s largest bitcoin market

The Chinese authorities are mulling whether to introduce third-party custodian services to oversee the world’s largest bitcoin market, after its rapid expansion and a recent sharp price fall highlighted the potential threat it poses to the stability of financial markets.

“Regulators have noticed that some bitcoin platforms crashed during the recent market volatilities, causing some investors, particularly those trading with leverage tools, to bear huge losses because they were unable to log on to the website during the sell-off,” the official China Securities Journal (CSJ) reported on Tuesday morning.

The newspaper said that the regulators are discussing with industry insiders the possibility of improving trading security by setting up third-party custodian platforms for the bitcoin market.

Turnover of bitcoin in China now accounts for 80 per cent of the global total. The price surged to around 8,000 yuan per bitcoin by the end of 2016 from 2,500 yuan at the beginning of the year, CSJ said.

Zhao Dong, owner of Jiandong Tech, a company which buys and sells bitcoin, and himself a seasoned bitcoin investor, said individual investors would welcome the support of state-backed institutions, ideally banks or third-party payment firms, to bolster security and add credibility to the industry as it undergoes such breakneck expansion.

In late 2013, the People’s Bank of China (PBOC) banned financial institutions on the mainland from accepting bitcoin or providing related services.

Therefore, it would represent “a great turn of regulatory gesture” if banks or payment firms were introduced to govern the industry, Zhao said.

On January 5, bitcoin surged to a record high of 8,995 yuan in China, before turning around and plunging to 6,000 yuan later that day. Many investors complained that they could not log on to BTCC or OKCoin, two of the largest mainland exchanges, during the price fall.

The two platforms later said their trading systems had been temporarily brought down by explosive trading offers.

The PBOC and its Shanghai branch issued two notices last Friday, announcing that they have held meetings with the major bitcoin platform managers in which they urged them to reinforce risk control and reminded investors that bitcoin is “a virtual commodity, not a currency”.

William Gee, PwC China Fintech Partner, said based on what happened in early January, the major risk with bitcoin arises from the trading infrastructure rather than the credibility of the platforms.

“The bitcoins were not stolen or hacked. Investors suffered loss as they were unable to trade, possibly because of the sudden price fluctuation and large sell offers. Introducing a third-party custodian for the investors would not reduce this risk,” said Gee.

However, derivatives of bitcoins, such as leveraged tools and futures products, are being invented and traded in China as speculation increases.

Chun Yin Cheung, another PwC China Fintech Partner, said: “Although both mainland and Hong Kong financial regulators have made it quite clear that bitcoin is not a currency and thus not covered by the existing regulatory framework, the bitcoin-related behaviours are evolving and bearing the features of traditional financial market activities.

“Regardless of the current position adopted by the regulators, recent market activities have certainly attracted their attention. Indeed, we have noticed more active engagement from the PBOC in this respect.”

Bitcoin has also become a popular tool some investors use to export money out of China, as a way to circumvent capital controls that have been tightened by the regulators in recent months amid the yuan’s sharp depreciation, mainland media reported.