In a new move on Thursday, the Chinese government barred its banks and financial institutions from treating Bitcoins as a currency. According to The New York Times, the government cited concerns about “money laundering” and “[threats] to financial stability.” The People’s Bank of China has released a statement (in Chinese). Despite reports and a dip in the price of Bitcoins on the news, the move does not amount to a complete ban on Bitcoins, such as Thailand’s.
According to Bloomberg News, the PBOC’s decision stems from reported Bitcoin-based investment scams in China that have cost investors dearly, forcing a regulatory response.
The price of a single Bitcoin, the much-discussed digital cryptocurrency, surged from around $200 in late-October to a high of $1200 by the end of November. This surge was driven in large part by a massive boom in Chinese demand, spurred by Baidu’s decision to accept it as payment for the services of one of its subsidiaries and a broader recognition by savvy Chinese investors that Bitcoin provided an ingenious means of bypassing the Chinese government’s strict capital control rules.
November’s surge in demand was also driven by a reassuring Senate hearing in the United States that saw the likes of outgoing Federal Reserve Chairman Ben Bernanke and securities regulators give their unofficial blessing to the currency. Bitcoin investors had long feared a regulatory crackdown as one of the major risks facing the price of the highly volatile currency.
The Chinese move does not contradict earlier statements by the deputy governor of the People’s Bank of China this year, which noted that Chinese denizens ought to have the right to freely participate in the booming market for the virtual currency. The current move simply regulates the currency and protects China’s financial system from undesired exposure to its volatility. Private businesses and Chinese citizens remain free to conduct Bitcoin commerce — the new regulations simply attempt to mitigate systemic risk and the frequency of fraud and money laundering.
Although the Bitcoin blockchain — the public peer-to-peer ledger that catalogues all transactions ever made in the currency — does not log geographic activity, evidence of a marked boom in Chinese demand is visible by examining trading activity on BTCChina, the largest Chinese exchange for the digital currency. Responding to the regulatory news, Li Qiyuan, the CEO of BTCChina, said that he expected that private Bitcoin transactions would remain legal. In this sense, the regulatory news is unlikely to alter the long-term demand for the currency in China — investors may still flock to Bitcoin as a viable method of transferring capital abroad and for price speculation.
The regulation could be a positive step for the currency as it matures into a mainstream financial instrument. With demand and prices at all-time highs, the PBOC presents an appealing model for Bitcoin regulation. What remains to be seen is whether China’s banks will be able to continue to provide Bitcoin exchanges with bank accounts and transfer facilities. The new regulations could serve to reduce overall liquidity in the Chinese Bitcoin market and stymie exchange activity.