BTC China begins accepting deposits and launches liquidity rewards, but challenges remain

By Michael Carney , written on January 30, 2014

From The News Desk

It’s been a tough two months for bitcoin in China. Trading activity has fallen precipitously since December 5 when China’s central bank (PBOC) warned financial institutions to avoid accepting the digital currency. This temporarilly cut off the ability for the region’s largest exchanges to accept new RNB (Chinese Renminbi) deposits. Around the same time, BTC China, then the world’s largest exchange, eliminated its no-fee trading offer. It was a one, two punch that stunted a regional market that was until that point one, for better or for worse, of the largest drivers of the global bitcoin economy.

Today, BTC China and thus the Chinese market as a whole took an important step back their bitcoin glory days. BTC China announced that it will once again accept new customer deposits. In an unexpected wrinkle, it will accept those deposits directly into its corporate bank account, rather than through third-party payment platforms like Chinese PayPal analogs Alipay and TenPay.

It’s an atypical arrangement and one that has given some bitcoin enthusiasts pause for concern. After all, more than one bitcoin exchange has previously absconded with client deposits. That’s not to say that the involvement of third-party payment platforms or financial institutions would have prevented such incidents, but the prevailing wisdom is that the more watchful eyes trained on a company’s behavior the better. But BTC China is far more well-established and has raised funding from Silicon Valley’s Lightspeed Venture Partners.

Public perception aside, BTC China CEO Bobby Lee explains the decision to Coindesk, saying:

Previously, we judged doing this as not being viable, however, we have since changed our stance. We looked again at the guidance issued in December and we think it’s reasonable for us to accept customer deposits via our corporate bank account... The fact the PBOC said exchanges need to register with MIIT essentially means it recognizes exchanges as a business category and BTC China as a legitimate business.

The company previously enacted a voucher system under which users would first purchase a voucher and then redeem that voucher for bitcoins, or do the inverse in the case of withdrawal. Today’s announcement, if deemed legal, would be the most direct option available to consumers since the PBOC’s December action.

BTC China isn’t just accepting deposits again. The company introduced a new gamification system that will incentivize traders to increase liquidity in the system. Under new program, dubbed Maker-Taker, traders who take liquidity out of the system will pay a fee of 0.3 percent on every transaction. At the current trading price on BTC China of $795.65, this would amount to about $2.38 per bitcoin traded. Those people who post large numbers of buy and sell offers (in Wall Street terms, “market makers”) will be rewarded with a fraction of these fees.

Lee explains:

Obviously if you’re a taker, to go and buy and sell bitcoin actively, you have to pay a small commission, however, the reason you pay for that is access to the liquidity and the depth of our order book.

From now through February 15th, additional prizes of 1,000 RMB ($165) will be rewarded to one maker and one taker every time the total amount paid out to makers rises by 100,000 RMB. The company claims that it has already issued 3 million RMB worth of rebates to 62 winners.

Lee is confident that BTC China has sufficient volume that customers can trade thousands of bitcoins – effectively millions of dollars worth of value – without moving the market. He says:

We’re not trying to be different for the sake of being different. We’re trying to be innovative and benefit bitcoin in China. The Maker-Taker method accomplishes two things – it brings more market depth and more liquidity to the site, plus it reduces volatility, which makes for a healthier for market for bitcoin in China.

Even in the short time since its announcement, the Maker-Taker initiative hasn’t been without its issues. At least one trading bot that had been operating on BTC China prior to the change appears to have been exploited by a large seller looking to capitalize on the new Maker fees. The bot, which apparently wasn’t recalibrated to consider the changing market dynamics, was trapped into repeatedly buying and selling from this “whale” at very little spread and in decreasing volume, and may have lost as much as 30 percent of its value, according to a report in TheBlogChain. Other traders have taken notice as well, calling the activity suspicious and questioning whether to put much stock BTC China’s rising volume.

One more thing weighing on the Chinese bitcoin market this week is the arrival of Chinese New Year, which this year is on January 31. The ensuing extended holiday could mean a lull in bitcoin trading activity and thus a delay in discovering what, if any, impact the BTC China changes will have.

Additionally, when the PBOC initially warned payment companies about avoiding bitcoin, the deadline they set for compliance was January 31. Recent reports suggest that the major processors had cleared all bitcoin balances by the 27th, but it’s still possible that the government could hand down further enforcement following the holiday.

The takeaway from today’s news, and the ensuing drama, is that bitcoin in China is showing signs of life but the verdict is still out on whether the virtual currency can regain its earlier market appeal.

[Image adapted from Thinkstock]