Bitcoin drops by $100 as China’s central bank corrals the market

Chinese bitcoin exchanges have disabled withdrawals of the cryptocurrency after meeting with the People's Bank of China, indicating the central bank has stepped up its efforts to regulate the market.

Throughout January, the PBoC made announcements that it was looking into bitcoin, including setting up a task force to carry out inspections and ensure bitcoin exchanges had implemented anti-money laundering systems.

Then on Thursday, the central bank announced it had met with nine exchanges to warn them they would be closed if they violated regulations. This prompted the three main Chinese bitcoin exchanges, BTCC, Houbi and OKCoin to temporarily disable bitcoin withdrawal (users can deposit and withdraw yuan but not bitcoins) for the next 30 days, while they improve their anti-money laundering systems and customer identification measures.

A man walks out of a bitcoin retail shop in Hong Kong.
Philippe Lopez | AFP | Getty Images

The news caused the price for bitcoin to drop sharply on Thursday, from near a one-month high of around $1063 to as low as $954. Bitcoin prices recovered marginally, and are currently trading around $964.

Despite the hit to prices, bitcoin analysts believe the move by the PBoC will be healthy for the market.

"The PBoC moves to regulate Bitcoin more stringently will bring short term woes but will ultimately strengthen the ecosystem," Charles Hayter, chief executive and founder of digital currency comparison website CryptoCompare, told CNBC via email.

The moves by the PBoC and the improved systems will add respectability and rigor to the bitcoin market, according to Hayter.

These measures, along with the introduction of standard trading fees by Chinese exchanges, should also slow down the volume of bitcoin trading across China, which had become a cause for concern.

According to CryptoCompare data, trading volumes on Chinese exchanges have fallen from 10 million bitcoins per day to a range of 30,000 to 90,000. Bitcoin-yuan trades made up 98 percent of market share, but this is now around 26 percent, behind bitcoin-dollar and bitcoin-yen pairs.

"This has been a long time coming and many in the industry view these developments as a positive clean up. We already see liquidity resettling in other trading pairs like BTC/JPY & ," Fran Strajnar, co-founder & CEO of data and research company Brave New Coin, told CNBC via email.

"These marketplace changes will inevitably slow nefarious activity and open channels to more and more institutional investors. In my opinion the 'PBoC cleanup' is the best thing that could have happened to bitcoin this year."

Other central banks may now be considering how to regulate bitcoin activity.

"I think all governments are trying to figure out how they can adjust laws and regulations to this new field, allowing them to get the benefit of the technology while at the same time curbing any usage for illicit purposes," Linus Lindgren, strategic investor and advisor at BTCXIndia, told CNBC via email.

"My recommendation to any regulator wondering how to go ahead with this would be to involve the industry and work together to reach common goals."

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