Bitcoin has bounced back in China, helping to push the virtual currency back above $1,000 a unit, as exchanges devise work-around solutions to the regulatory crackdown last month.
When Chinese regulators banned financial institutions from doing business with Bitcoin exchanges last month, the move was thought by many to spell the end for the virtual currency in China. Would-be buyers were told they would no longer be able to transfer cash onto exchanges via digital payment platforms, in effect making it impossible to buy Bitcoins.
“In the darkest hours we thought everything was going to come crashing down and the game was over,” said Bobby Lee, co-founder of BTC China, one of the country’s top exchanges.
But China’s Bitcoin brigades have defied that gloomy outlook to start the new year much as they left off 2013 – with a dominant share of global transactions in the virtual currency.
In the US, Bitcoin received a further fillip after Zynga, the provider of online social network games, said it would begin a pilot programme to accept the virtual currency.
Players of FarmVille 2, a farming simulation game, CastleVille, ChefVille, CoasterVille, Hidden Chronicles, Hidden Shadows and CityVille, will have the option to make in-game purchases using Bitcoin.
Bitcoin’s survival in China has helped push the currency back above $1,000 a unit, about double its value just a few weeks earlier. This resilience is testament to the agility of the leading Chinese exchanges. Faced with the crackdown on third-party payment systems, the exchanges have all devised work-around solutions, some in legal grey areas.
One exchange, BTCtrade, has continued using a third-party payment provider even though the central bank banned such links with Bitcoin exchanges. A customer service representative for the exchange said its payment provider had yet to receive a formal notice from regulators and so remained active.
Other exchanges have looked for loopholes. Huobi, a Beijing-based exchange, allows users to make direct deposits in its own corporate bank account or even the personal one of Li Lin, its founder, with the company then brings the money onto its trading platform.
“We are a company and we have a business selling a product, and we need to settle accounts. This is totally legal. Yes, we can’t co-operate with payment providers but we can still conduct our own business,” Mr Li said.
OkayCoin has tried both approaches. It has worked with 95gateway.com, a small payment provider still willing to do business with Bitcoin exchanges, but this payment company has struggled to cope with the volume of transactions. At the end of December, OkayCoin created a corporate account similar to that of Huobi to handle deals. “For the two weeks that funds could not be added to our exchange, it was as painful as sitting on a thorn. The days went by like years,” it said in a statement on its website when unveiling the new corporate account method for transferring funds.
The competitive landscape in the Chinese Bitcoin market has changed dramatically as a result. BTC China, which became the world’s biggest Bitcoin exchange by transaction volume in November, saw its share of the global market plunge from more than 30 per cent to less than 5 per cent virtually overnight after it stopped users from making new cash deposits.
Huobi, its rival, quickly plugged that gap, and then some. It has hosted 58 per cent of global Bitcoin transactions over the past seven days, according to Bitcoinity, a website that tracks the virtual currency.
BTC China is beginning to fight back. It has opted not to use the corporate account transfer method out of concern that regulators might deem this to be the same as using a third-party payment provider. However, it has created a voucher system that allows people with money on the exchange to sell the right to that cash to people who want to buy Bitcoins.
To regain transaction volume, it also unveiled a new market maker incentive this weekend that allows people dealing in Bitcoins to earn a small fee.
“We want to find a viable way to align our business with what the government wants to see,” BTC China’s Mr Lee said. “We are trying to compete fairly, without crossing the line in terms of ethical and legal boundaries.”
Yet the resurgent Bitcoin optimism in China still faces one major hurdle. By banning financial institutions from dealing with Bitcoin, the central bank has made it all but impossible for the virtual currency to be used in transactions for goods and services. Unlike social gaming company Zynga and other international companies that accept Bitcoin as a payment option, China’s big internet companies have stopped using the virtual currency. Yet even on this front, China’s Bitcoin enthusiasts see a sliver of hope.
“In the short term, using Bitcoin for payment or as a currency is clearly not allowed,” said Mr Li of Huobi. “But in the long term, it will depend on the government’s perspective, and that will be shaped by lots of other factors, including the stances of other countries.”