Bitcoin Gets Smacked Down in China, The Crypto-Currency’s Hotbed

Chinese investors have helped drive up the price of Bitcoin to dizzying heights. Now, the Beijing government is doing its best to drive enthusiasm for the cryto-currency back down.

The Chinese central bank warned consumers about the risks of Bitcoin and banned Chinese banks from trading the digital currency.  The bank said that Chinese people could still invest in the currency, but they do so at their own risk.

Chinese regulators are the latest to issue rules for Bitcoin, as governments around the world struggle to come to terms with the anonymously-created currency’s role. Authorities are stepping in to warn investors as the currency’s meteoric rise in value has attracted more and more speculators and to crackdown on the illicit uses of the currency in online black markets such as Silk Road.

The announcement comes as the value of the currency has skyrocketed over the past month peaking at over $1200, according to popular Bitcoin trading site Mt. Gox.  It’s unclear yet what the ramifications of the announcement will be on that price, or whether traders’ interest in Bitcoin will be dampened by the announcement. Some news reports Thursday pointed to the falling value of the currency as proof that investors are scared-off by China’s move.  Though the value was dropping at last look, Bitcoin is too volatile to attribute the drop to China’s crackdown.

There’s no record of where Bitcoin buyers and sellers live, but Chinese traders are seen as the biggest contributors to the recent run-up in the value of a Bitcoin because of the increase in trading on Chinese exchange BTC China. Bitcoin had been gaining wider acceptance in China; a unit of Baidu, the Chinese equivalent of Google, started taking Bitcoin in October. Thursday’s warning by central bankers could discourage more retailers and websites from accepting it.

Chinese authorities said the move was to avoid "harming the public interest and the status of the [Chinese currency] as legal tender," in a notice on its website. Though it seems counterintuitive, the warning that Chinese banks could harm the country’s currency by using Bitcoin could be seen by enthusiasts as proof of the digital currency’s legitimacy.  Many Bitcoin advocates see the currency as a possible replacement for currencies controlled by individual countries, so the notion that China’s threatened by Bitcoin could be seen as proof of that idea.  Bitcoin is maintained by a distributed group of programmers, so there is no central bank with the power to control its value. Bitcoin backers see that as a welcome alternative to a currency that is subject to the political whims of a central bank.

China’s financial system is strictly controlled by the central government, which limits the role of foreign banks and the flow of its own currency across its borders. While Thursday’s move goes further than U.S. regulators, it’s not out of keeping with the central government’s tight hold over the country’s banking and investing sectors.

U.S. regulators have also recently increased scrutiny of the four-year-old digital currency.  Like Chinese authorities, the U.S. now requires Bitcoin trading platforms and online banks to comply with rules to prevent money laundering, but the U.S. has not banned financial institutions from using it. 

The U.S. Securities and Exchange Commission has not yet ruled on whether tech investors Cameron and Tyler Winklevoss can create a fund that would allow ordinary investors to trade Bitcoin like stock. Last month, two U.S. Senate committees held hearings examining Bitcoin, but have made no conclusions.  The Senate Committee on Homeland Security and Governmental Affairs continues to monitor the situation and plans to issue a comprehensive report on digital currencies, according to a committee aide.

Though we don’t know how far global regulators will go in reining in Bitcoin, they’ve made it plain they’re watching the trendy currency. "Given its duties, the People’s Bank of China will continue to pay close attention to Bitcoin trends and related risks," the Chinese central bank announced Thursday.