Beijing threatens to shut down bitcoin exchanges

China’s central bank has warned domestic bitcoin exchanges they risk being closed if found violating the country’s currency regulations. The warning came as the regulator tries to curb capital outflows following fears of continued weakness in the yuan.

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On its website, the People’s Bank of China (PBOC) said it has told the exchanges not to take part in financial activities such as margin lending or allow money laundering.

If such a violation is found “the circumstance will be serious,” and an inspection team will close down the offending exchange, PBOC said.

“People in the industry are watching if the regulators do more,” Wen Hao, founder of Bitpie, a Beijing-based bitcoin-related business, told the Wall Street Journal. “They’ve never said they would close a business. Based on that statement, they are getting stricter.”

Chinese regulators met with the country’s three largest bitcoin exchanges last month to remind them to “strictly” follow relevant regulations.

Demand for the virtual currency in China has been rising in recent months, fueled by yuan’s depreciation. A bitcoin was trading at about $1,065 on Thursday.

The cryptocurrency more than doubled in value in 2016, up 126 percent on the year. The Chinese yuan, on the contrary, suffered its worst year on record, weakening 6.5 percent.

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China accounts for about 90 percent of all bitcoin trading on exchanges. The country has strict capital controls, which makes it difficult for the Chinese to convert the yuan into foreign currency and limits the amount of cash investors can move abroad. That pushes Chinese investors to use the digital currency as a way to circumvent capital controls and minimize risk from the falling value of the domestic currency.

Bitcoin's rally to become last year’s best-performing currency has caught the attention of Chinese regulators concerned the virtual asset was contributing to capital outflow.

Data released by PBOC this week showed China’s FX reserves fell below $3 trillion for the first time in six years in January. They declined by $12.3 billion to $2.9 trillion.

Beijing has spent more than a quarter of its reserves propping up the yuan over the past two years. The reserves fell by $320 billion in 2016, after a record drop of $513 billion the previous year.