The three biggest global bitcoin exchanges, BTCC, OKCoin and Huobi, currently under “inspection” by the Chinese authorities, have stopped margin trading. We can further confirm that OKCoin no longer offers futures trading to Chinese citizens. Non-Chinese citizens can continue to use the international version (OKCoin.com) which appears to continue providing 3x margins and up to 20x futures.

We have not received any response in time for publishing, therefore cannot confirm why they have taken such move, but it is most likely in response to probable PBOC orders.

The Chinese authorities met with representatives of the three exchanges last week. Some expected it to end there, but surprisingly they have begun an investigation on possible rule violations, including market manipulation, money laundering and whether there has been any breach of foreign exchange rules. In response, BTC123, a Chinese based bitcoin investment platform established in 2011, has halted deposits. Although they have not been contacted by PBOC, the shifting regulatory environment has forced them to restructure.

It is not very clear what PBOC has in mind. There are suggestions they plan to set up a PBOC controlled “third-party custody” system which in effect would give China’s central bank day to day control over more than 90% of bitcoin trading. They have not, however, made any public announcements regarding any regulation, so far only stating they have opened an “inspection.”

The Chinese exchanges have publicly asked to be regulated, but haven’t made any public suggestions of what such regulations may entail. The public, therefore, seems to be left in the dark by both Chinese exchanges and Chinese regulators, so leaving us to read between the lines, with the latest move suggesting PBOC clearly intends to take significant measures.

Margins and futures are a basic and necessary instrument for any financial market. They reduce volatility, add liquidity, provide risk management functions and increase the maturity of any market. A margin of maximum 20x for most Chinese exchanges compares to margin offers of 200x and some even as high as 2,000x for foreign exchange trading.

Without margin, counterparty risks significantly increase as individuals have to deposit huge sums on exchanges that may go bust for a variety of reasons. Moreover, as one would not be easily able to short, bubbles can form that quickly get out of hand as was the case in November 2013 when price went up by $900 in days to then crash to $200.

Hopefully, therefore, the withdrawal of margins and futures offerings is only temporarily, but the move does raise concerns that PBOC’s involvement will be far more extensive than previously thought.

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