China's central bank has sent inspection teams to three top Bitcoin exchange platforms over a possible breach of financial regulations.
The Shanghai Head Office of the People's Bank of China (PBOC) said in a statement late Wednesday that it had started investigating BTCChina, the country's biggest Bitcoin trading platform, over issues ranging from money laundering to foreign currency exchange.
At the same time, two other major Bitcoin exchanges, Huobi and Okcoin, are under investigation by the PBOC's operations office in Beijing.
The probes saw the virtual currency drop by over 15 percent to 5,350 yuan (about 774 U.S. dollars) per unit as of 8 p.m. Wednesday. The slump was echoed on overseas Bitcoin exchanges as over 90 percent of global Bitcoin trading occurs in China.
Steeper declines last week saw the central bank issue warnings on the legal and technical risks of the exchanges.
The web-based currency plummeted after surpassing 8,000 yuan per unit on Jan. 5, when panicked investors found themselves unable to access Huobi and Okcoin transaction services.
Such flucuations are reminiscent of roller-coaster prices in 2013 when the digital currency gained 900 percent before nosediving.
After the heavy falls, the PBOC and finance watchdogs issued a guideline to term such currencies "digital goods" instead of legitimate currency, calling Bitcoin "risky for its role in money laundering and usage by criminals."
Zhang Wei, an associate professor with Tsinghua University, said instability was a major feature of Bitcoin and that its boom-and-bust cycles were a deadly weakness.
Bitcoin, without ties to the bank or government, is underpinned by blockchain technology, a digital ledger system that uses sophisticated cryptography.
It allows users to spend money anonymously, which Zhang said was more of a defect than a merit, adding that anonymity made the digital currency a handy tool in money laundering and capital flight.
With its help, investors are able to buy with Chinese yuan and sell for U.S. dollars, effectively bypassing the annual forex quota of 50,000 U.S. dollars.
Financial critic Ye Tan said that leveraged funds worth billions of yuan could be channeled into foreign exchange trade via the virtual currency.
Previous rallies in the Bitcoin price came as the Chinese yuan depreciated about 7 percent against the surging dollar in 2016 amid concerns of more U.S. interest rate hikes and capital outflows.
The PBOC has prohibited Huobi and Okcoin from mentioning depreciation of the yuan in their advertizements, as the yuan started the new year with a big jump, surprising the market with a strong performance.
The central parity rate of the yuan gained a hefty 639 basis points against the U.S. dollar on Jan. 6 to reach 6.8668, the biggest single-day increase since 2005, according to the China Foreign Exchange Trade System.
Meanwhile, China is still home to the world's largest forex reserve and enjoys forex inflows from its trade surplus and foreign direct investment of about 620 billion U.S. dollars each year.
Ye said the latest probes had sent a clear warning signal and checked the possibility of money laundering.
Despite the warnings, digital currency has it merits, using sophisticated cryptographic techniques, costing less to circulate, improving transaction efficiency and boosting transparency.
After floating the plan in 2014, China is accelerating research into its official digital currency, which will be issued by the central bank and be backed by the government.
It will initially introduce the currency in certain money markets and promote its use in a gradual and cautious way, according to a PBOC official leading the research efforts.