China moves to ban Bitcoin banking

China has decided to ban all financial and payment institutions from establishing any Bitcoin services, as the digital currency carries high risks, the People's Bank of China (PBOC) said in a notice released Thursday.[Special coverage]

The PBC, China's central bank, said in the notice that Bitcoin "is a virtual product, does not carry equal legal status as fiat currencies, and cannot and should not be circulated in the market as a fiat currency."

Although there is no official data, several foreign independent Bitcoin trading websites and forums show that more than half of the world's Bitcoin transactions are done in China and the country has the most active trading network globally.

The price of a Bitcoin stood at 80 yuan ($13.1) on Chinese Bitcoin trading platform btcchina.com on January 1, and it skyrocketed by nearly 90 times to more than 6,900 yuan early Thursday.

The dramatic surge in the value of Bitcoins, a peer-to-peer virtual currency, attracted tens of thousands of Chinese investors to cash in the market, hoping to earn fat profits within a short period of time.

However, the digital currency is a risky speculation mechanism, because there is no limit to the digital currency's price swings, and also because investors are not protected against possible glitches of the trading or storage of Bitcoins, according to the notice.

Bitcoin, introduced in 2008, functions without the intervention of a central authority and is traded in a 24-hour global market. The currency is generated, or "mined," through complicated computer algorithms and the total number of Bitcoins that can be mined is capped at 21 million, a limit expected to be reached in 2140. Currently, 57 percent of Bitcoins have been created, the Guardian reported.

The notice required financial and payment institutions not to price their products or services with Bitcoins, to accept or issue insurances to insure Bitcoins, or to buy, sell or facilitate transactions of Bitcoins.

Nonetheless, the authorities did not act to curtail investors engaging in the trading of Bitcoins online at their own risk.

Lu Zhengwei, Shanghai-based chief economist with Industrial Bank, told the Global Times Thursday that the notice is vital since it will limit Bitcoins' negative impacts and protect investors from losing money.

"If financial and payment institutions are allowed to offer Bitcoin services, more investors would enter the market assuming that the digital currency is worth buying and will likely appreciate," Lu said. "That will spread the risks that Bitcoins carry."

The PBC said in the notice that Bitcoin also carries risks for money laundering due to its anonymous nature, and it can be used in illegal transactions for drugs and guns. The notice as well urged online Bitcoin transaction platforms to register at China's telecommunications industry regulator in accordance with the law.

A professional Bitcoin investor surnamed Yang, who owns 3,800 Bitcoins with a value of more than 20 million yuan, told the Global Times Thursday that he was actually encouraged by the notice.

"I did not expect to use Bitcoins to buy expensive tangible products or financial services in the first place," said Yang, who is a former software company manager in Suzhou, East China's Jiangsu Province.

"And now the regulators are trying to ensure that the trading websites are safe and will act to prevent money laundering. This makes me feel more optimistic about the market's prospects," he said.

The value of Bitcoins plummeted by almost 35 percent from 6,972 yuan each within an hour after the news was announced, but bounced back to 6,027 as of late Thursday, according to btcchina.com.

Li Chao, an analyst with Internet service consultancy iResearch, told the Global Times Thursday that the price of Bitcoins will go through a short-term tumble, because many Chinese investors were hoping to use the currency to buy tangible products. However, the price slide will not sustain in the long run.

"Bitcoins are traded in a global market. The fact that China's central bank decided to tighten its grip will not lead to a worldwide downturn," Li said. "Although some Chinese investors are selling their holdings, which cuts the price, foreign investors can easily buy in the China market and raise the price up again."

The notice, though focused on Bitcoins, will offer guidance for the authorities to regulate other popular digital coins, such as Litecoins and Peercoins, Li said. However, since the other Bitcoin-like digital currencies do not have an amount cap, the central authorities will never be able to surely determine the number and location of the virtual coins, he said. And that adds difficulty to the government's regulatory efforts.

The French central bank Thursday also added its voice to concerns over the virtual currency, warning that the price of Bitcoin in legal currencies was inherently volatile and users may find it difficult to convert to real money, according to Reuters.