In early June, China's three major Bitcoin exchanges—OKCoin, Huobi, and Bitcoin China—announced upgrades to their anti-money laundering (AML) systems. A key enhancement involves stricter customer identification procedures. For instance, OKCoin now requires registered users to provide their full name, national ID number, and mobile number, verifying this information against the national citizen database.
This move follows an on-site inspection conducted by the People's Bank of China (PBOC) on January 11, 2017. Sources close to the inspection revealed that the central bank identified weaknesses in the platforms' AML frameworks, including a lack of internal controls and operational procedures for customer due diligence and record-keeping. The exchanges were instructed to rectify these issues within a specified timeframe.
Further regulatory measures are expected. According to earlier reports from state media, the PBOC has issued substantial penalty notices to these platforms and is developing two key Bitcoin management policies: one for trading platforms and another specifically for AML standards on these platforms.
The Initial Regulatory Intervention
On January 11, 2017, the PBOC's Beijing Operations Office conducted surprise on-site inspections of several Bitcoin exchanges.
The inspection, which lasted four months, resulted in a detailed six-page report outlining the findings. The central bank identified critical deficiencies in the platforms' AML protocols. These included the absence of internal systems for customer identification, record retention, and the reporting of large or suspicious transactions. The platforms had also failed to establish risk-based customer ranking systems or maintain watchlists for AML and counter-terrorist financing.
This regulatory action caused significant volatility in Bitcoin's price. In response, the three major exchanges suspended the ability for users to withdraw their Bitcoin holdings.
The suspension of withdrawals led to a sharp decline in trading activity on these domestic platforms. However, it also fueled a surge in over-the-counter (OTC) trading and on international exchanges. At times, the OTC price for Bitcoin in China was thousands of yuan higher than on the domestic platforms. During this period, Japanese exchanges overtook Chinese ones to become the world's most active Bitcoin trading markets.
Exchange Countermeasures
On May 31, the three major platforms reinstated Bitcoin withdrawal services. This was accompanied by the rollout of new, more robust AML measures, particularly concerning user information management.
Platform representatives stated they have now established internal systems for customer identification and data retention. The new measures include:
- Mandatory registration with name, ID number, and phone number, verified against government databases.
- Comprehensive storage of all user transaction data and logs, with secure backups.
- Mandatory video verification for users whose cumulative RMB deposits exceed 100,000 yuan.
- Enhanced screening for suspicious activity, requiring identified users to provide proof of address, source of funds, and assets.
A Bitcoin investor noted that while some smaller platforms had experimented with real-name verification before, the requirements were not stringent. The post-June measures represent a much more thorough and comprehensive approach.
The pressure for compliance continues. The PBOC's planned regulatory frameworks for trading platforms and AML are expected to further formalize these requirements.
The platforms have committed to ongoing efforts. For example, OKCoin stated that AML is a long-term priority and that it has established a dedicated AML team that receives quarterly training on compliance procedures. To stay ahead of regulatory demands, many are now exploring advanced compliance tools and frameworks.
The Challenge of the OTC Market
Despite these significant steps on regulated exchanges, some investors remain cautious about the overall effectiveness of these measures, primarily due to the rise of the unregulated OTC market.
During the months when withdrawals were suspended, a vast OTC Bitcoin market emerged in China. Existing investors flocked to this market, developing an entire ecosystem with its own operational protocols.
OTC traders conduct business through dedicated agencies or social messaging apps. Some trading groups even developed smart plugins that aggregate real-time price information from within the group to generate price charts.
From an investor's perspective, this OTC market is far less controllable. Once Bitcoin is withdrawn from a regulated exchange, tracing its subsequent movement through various OTC transactions becomes extremely difficult.
If on-exchange channels become restrictive, OTC trading will likely become the dominant method. This could make the entire domestic Bitcoin market more challenging to supervise. "Effective regulation is only possible when the majority of Bitcoin trading occurs within controllable, on-exchange markets," one seasoned Bitcoin investor concluded.
Frequently Asked Questions
What is the difference between on-exchange and OTC Bitcoin trading?
On-exchange trading occurs on a regulated platform that matches buy and sell orders. OTC trading involves two parties negotiating a trade directly, often facilitated by a broker, outside of a formal exchange structure. OTC trades are more private but less transparent.
Why did Chinese exchanges upgrade their AML systems?
The upgrades were a direct response to mandates from the People's Bank of China following inspections that found deficiencies in their existing anti-money laundering controls and customer verification processes.
What kind of information do I need to provide on these exchanges now?
Most major exchanges now require full know-your-customer (KYC) details, including your full legal name, government-issued ID number, and a mobile phone number for verification. High-volume traders may need to undergo additional checks like video verification.
What are the risks associated with OTC Bitcoin trading?
OTC trading carries higher risks of fraud, default (where one party doesn't honor the trade), and a lack of legal recourse. It also operates in a regulatory gray area, making it more susceptible to being used for illicit activities.
How does regulating exchanges help with overall Bitcoin oversight?
Regulating exchanges creates "chokepoints" where authorities can monitor the flow of funds between traditional finance and the cryptocurrency world. It allows for the enforcement of AML and CFT rules, making it harder to use cryptocurrencies for money laundering.
Are other countries implementing similar crypto regulations?
Yes, many jurisdictions globally are moving towards stricter regulatory frameworks for cryptocurrency exchanges, focusing primarily on AML/KYC compliance, tax reporting, and investor protection. The specific rules vary significantly from country to country. For a deeper understanding of the global regulatory landscape, you can explore more strategies and insights.