Bitcoin Exchanges Scramble in China; Central-Bank Stance Forces Changes; Alibaba’s Taobao Shuns Virtual Currency

January 12, 2014 Leave a comment

Bitcoin Exchanges Scramble in China

Central-Bank Stance Forces Changes; Alibaba’s Taobao Shuns Virtual Currency

CHAO DENG

Updated Jan. 8, 2014 1:00 p.m. ET

Bitcoin exchanges in China are trying to maneuver around tight rules imposed by the central bank, even as the virtual currency faces a new challenge now that Alibaba Group Holding Ltd.’s giant online shopping site has banned the sale of bitcoin and related items.Bitcoin prices have rebounded globally since a plunge in December after the People’s Bank of China took a strict stance toward the currency. Chinese buyers had flocked to bitcoin exchanges, sending prices soaring, but after the central bank acted prices fell by half.

One big driver of the rebound was a decision by social-networking game siteZynga ZNGA +0.84% to accept bitcoin as payment for its games such as “Farmville 2.” The CoinDesk bitcoin price index, which tracks three exchanges, rose more than 80% in less than a month to hit $951.39 on Jan. 6.

But negative news out of China on Tuesday sent the index retreating, to $867.60 by Wednesday evening in China.

Alibaba’s Taobao, by some measures the world’s largest online retailer, said that as of Jan. 14 it will ban sales of bitcoin, other virtual currencies and items related to bitcoin such as tutorials and hardware used for so-called mining, the computer process for creating bitcoin.

Chinese exchanges are trying a new tack to survive, after media reported in December that the central bank told third-party payment providers not to work with bitcoin exchanges and after an official ruling from the bank prohibited financial institutions from engaging in bitcoin-related businesses.

Bitcoin exchanges make money through trading commissions and other service fees.

“We don’t want to go back to the old Wild West days” of speculation, said Bobby Lee, chief executive of Shanghai-based bitcoin exchange site BTC China. If the price runs up quickly, “the government will come down hard,” he said. His goal, he said, is a stable market.

As the price jumped fourfold in November, BTC China accounted for more than one-third of trading volumes globally. Prices on the exchange hit a record of 7,395 yuan ($1,222) on Dec. 1, before tumbling after the central bank’s clampdown.

Mr. Lee said the exchange reinstated trading fees in December to discourage speculative trading and that it plans to keep those fees in place. It had dropped the fees in September, which contributed to a jump in trading volumes on the site and the rise in prices.

Bitcoin prices on BTC China hit a low of 2,011 yuan Dec. 18 before rebounding to 5,970 yuan Jan. 6. As of Wednesday evening in China, the price on the site was 4,945 yuan ($817).

Since the central bank’s clampdown on third-party payment providers, BTC China has introduced vouchers allowing users to continue buying and selling bitcoin without having to pay the exchange through a third party. And this past weekend it introduced a small rebate for certain traders to draw users to the site.

BTC China has “been struggling a lot,” but this allows it to “get back in the game,” Mr. Lee said. Daily trading volume, after sliding below 1,000 bitcoin, has rebounded to 28,000 bitcoin, he added. But according to industry tracker Bitcoinity, daily volumes in early December sometimes exceeded 200,000 bitcoin.

Two other Chinese exchanges are allowing users to make payments directly to bank accounts—the personal account of founder Li Lin in the case of Huobi, a corporate account in the case of OKCoin.

OKCoin founder Xu Mingxing said direct deposits don’t overstep what the Chinese government allows.

“In China, exchanges will have lots of regulatory issues,” he said. There is no choice but to respect how the government regulates the industry, he added: “Trading volumes depend on the government.” He said the exchange, founded last June, hopes to turn profitable this year.

Given the discouraging tone of the central bank, businesses such as Alibaba’s Taobao are taking pre-emptive measures. “Transactions related to bitcoin are likely still a very small part of Taobao’s overall business, so likely not worth the potential risk,” said Zennon Kapron, founder of Shanghai-based consultancy Kapronasia. “There is little downside for Alibaba of a wait-and-see approach beyond losing a bit of marketing exposure.”

BTC China’s Mr. Lee, though, called Taobao’s ban “way extreme” given that the central bank has said bitcoin is legitimate and is letting people buy and sell the virtual currency.

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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