Bitcoin Tumbles After China Central Bank Bans Financial Companies From Using Digital Currency

Tyler Durden's picture

As we said back in March, when Bitcoin's parabolic rise first started, it was only a matter of time before first one, then all central banks take on Bitcoin for the simple fact that it present too great a threat to the fiat system. Sure enough, on the chart below of BTC China it is quite clear just at what point overnight the People's Bank of China announced that Bitcoin is simply a virtual commodity and "isn't a currency with any real meaning" (paraphrasing Alan Greenspan), and that it officially bans financial companies from Bitcoin transactions.

However, the reason why Chinese Bitcoin didn't tumble all the way to zero is because the PBOC added a loophole that the public is free to participate in internet transactions provided they bear their own risks.

FT adds:

The Chinese regulators noted three main risks. First, they said Bitcoin was an unsafe investment because the amount in circulation is small and can be easily controlled by speculators, making it highly volatile.

 

Second, because it is a largely anonymous product with few controls on it, they said that Bitcoin makes money laundering easy and can be used to support terrorism.

 

Third, they said there was a risk that it could be used by criminal organisations, noting that Bitcoin had been used internationally for the purchase of drugs and weapons.

 

“We have clearly stipulated that at the present moment all financial institutions and payment institutions cannot develop any business related to Bitcoin,” the central bank said. The regulators said that any websites serving as platforms for Bitcoin transactions would have to provide detailed information about their users and report any suspicious activity.

 

The central bank said it would continue to monitor Bitcoin trends and risks, adding that it would also focus on educating the public. “We will guide people to correctly understand the concept of a currency as well as investment theory,” it said.

However, as noted, the ban was not outright, and the PBOC did allow an option for continuing the use of Bitcoin. That said, with increasingly more central banks rejecting BTC and outright warning about its usage, one can expect that the main draw of Bitcoin, its independence from the legacy fiat system, will be increasingly more scrutizinied until it too is institutionalized, or until the BIS creates its own Bitcoin slamdown trading desk.

The Chinese government stopped short of banning Bitcoin altogether, saying that as an online product people were free to buy and sell it at their own risk. But it highlighted many dangers associated with it, including money laundering and criminality. From a systemic perspective, it noted that the one saving grace was that the amount circulating in the economy was too limited to pose a real threat.

 

“Although there are people calling it a ‘currency’, it is not issued by the monetary authority, it does not possess the attributes of a currency such as legal repayment and enforcement abilities,” the central bank said in a statement explaining the notice.

 

“Judged by its nature, Bitcoin is one particular kind of a virtual product. It does not have the legal status of a currency, and it cannot and moreover should not be allowed to circulate in the market as a currency.”

 

About a third of global Bitcoin transactions have been taking place in China and BTCChina became the world’s biggest bitcoin exchange by trading volume last month.

 

No major financial institutions have yet been involved in the Bitcoin trade in China, but online vendors on ecommerce group Alibaba’s platforms have started using it, as has Baidu, the internet search engine leader.

So that's that. Next, we hope to provide shortly the latest monthly total gold import number by China, where the PBOC has yet to provide an update of its total holdings since 2009.