China has banned Chinese banks from dealing in Bitcoin transactions.
The country’s IT Ministry and financial watchdogs announced the ban in an official notice. The notice described Bitcoin as a “virtual good” which does not have legal status in China, and hence should not be used as a currency. The ban was reportedly imposed because Bitcoin is not backed by a formal organisation or country, thus its unregulated nature.
China is most concerned about the status and management of Bitcoin, specifically its lack of legal status and the absence of a central authority. Rather, it is created through a complicated computing process called mining. Furthermore, coins can be easily used in unregulated Internet exchanges around the world. Money laundering and fraud are also chief concerns.
Interference with Chinese Policies
More importantly, the digital currency poses a threat to China’s capital controls and financial stability.
“The concern is that it interferes with normal monetary policy operation,” said Hao Hong, head of research at Bocom International Holdings Co. in Hong Kong. “It represents an unofficial leakage to the current monetary system and trades globally. It is difficult to regulate and could be used for money laundering. I think the central bank is right to make this move.”
Subsequently, China’s central bank banned financial institutions from trading the emerging currency. The price of a Bitcoin has since fallen below $1,000.
The People’s Bank of China has warned people about the risks of using Bitcoins. While individuals are still permitted to trade using Bitcoins, the PBOC has encouraged people to familiarise themselves with the currency’s risks. The PBOC added that plans to regulate the use of Bitcoin as a currency were being considered.
In contrast, the Bank of America has indicated their liking for the virtual currency, highlighting its potential for success. A report compiled by the Bank outlining the benefits of Bitcoin as a virtual currency predicts that Bitcoin could become a “serious competitor” to traditional money transfers. In addition, the report said that Bitcoin not only can help users avoid high taxes, capital controls and government seizures, but it is also highly volatile. Bitcoin has also attracted considerable attention from traditional Wall Street analysts who have begun assessing its impact on global currencies and payment systems.