Chinese Regulators Target Bitcoin

• Chinese Regulators Target Bitcoin to Curb Capital Outflow

China’s central bank stepped up supervision of bitcoin trading as it escalates a battle to curb capital outflows and stabilize the yuan. The move sent the virtual currency into a tailspin Wednesday.

In separate statements, the Shanghai and Beijing branches of the People’s Bank of China said they conducted spot inspections of the major exchanges of bitcoin, which many analysts have said has been used by investors to move money out of the country as the yuan falls in value.

Following the PBOC’s announcements, bitcoin dropped more than 13% against the dollar on the day. The virtual currency surged last year, and the major exchanges have claimed that China accounted for more than 90% of its global trading.

Representatives at the bitcoin exchanges cited by the regulator—BTCC, Huobi and OKCoin—didn’t immediately respond to requests for comment.

The inspections came after warnings by the central bank last week about the risks associated with bitcoin trading and come as Chinese authorities are ramping up efforts to police the movement of capital offshore and ease pressure on the yuan. Latest official data shows that China’s foreign-exchange reserves fell to the lowest in nearly six years last month, to $3.011 trillion, highlighting accelerated outflows and the central bank’s intensified spending to defend the local currency.

In recent months, Beijing has tightened capital controls, making it more difficult for companies to invest overseas and for individuals to convert their yuan funds into foreign currencies. With bitcoin trading increasingly popular among Chinese investors, regulators are trying to close what analysts say is a channel that could contribute to more outflows.

Over the past few years, China has become a hub for bitcoin. Three of the largest exchanges are located in the country, which is also home to the largest “miners”—businesses that process transactions and maintain the network in return for newly minted bitcoin.

Two trends are driving bitcoin in China. One is its usefulness in getting money out of the country. Traders buy bitcoins on a Chinese exchange using yuan and then sell it on a foreign exchange using dollars. The other is simply speculation by active Chinese traders.

According to the PBOC’s statements, the purpose of the inspections was to look into possible market manipulation, money laundering, unauthorized financing, currency conversion and other issues.

Last Friday, the central bank’s Shanghai branch said it had met with executives of BTCC, one of the exchanges, warning them about potential risks in its operations and urging it to comply with rules and regulations. The central bank didn’t elaborate.

“BTCC regularly meets with the People’s Bank of China and we work closely with them to ensure that we are operating in accordance with the laws and regulations of China,” the exchange said in a statement on its website Friday.