China Bans Financial Companies From Bitcoin Transactions

By Bloomberg News - Dec 5, 2013 12:25 PM GMT+0200

China’s central bank barred financial institutions from handling Bitcoin transactions, moving to regulate the virtual currency after an 89-fold jump in its value sparked a surge of investor interest in the country.

Bitcoin plunged more than 20 percent to below $1,000 on the BitStamp Internet exchange after the People’s Bank of China said it isn’t a currency with “real meaning” and doesn’t have the same legal status. The public is free to participate in Internet transactions provided they take on the risk themselves, it said.

The ban reflects concern about the risk the digital currency may pose to China’s capital controls and financial stability after a surge in trading this year made the country the world’s biggest trader of Bitcoin, according to exchange operator BTC China. Bitcoin’s price jumped more than ninefold in the past two months alone, prompting former Federal Reserve Chairman Alan Greenspan to call it a “bubble.”

“The concern is that it interferes with normal monetary policy operation,” said Hao Hong, head of China 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.”

Bitcoin prices plunged to $875 at 6:02 p.m. Shanghai time on BitStamp, an Internet-based exchange where the currency is traded for dollars, euros and other currencies. They closed at a record high of $1,132.01 yesterday. On the Mt.Gox exchange, the currency traded at $901, down from today’s high of $1,240. Prices dropped to as low as 4,521.1 yuan on BTC China, after rising as high as 7,050 yuan.

Bitcoin Rules

The People’s Bank of China said financial institutions and payment companies can’t give pricing in Bitcoin, buy and sell the virtual currency or insure Bitcoin-linked products, according to a statement on the central bank’s website.

PBOC, China Banking Regulatory Commission and other regulators have held discussions about drafting rules for trading platforms that facilitate the buying and selling of the virtual money, two people with direct knowledge of the matter said. They were not authorized to speak because the information is not public.

“We’re happy to see the government start regulating the Bitcoin exchanges,” Chief Executive Officer Bobby Lee of BTC China, the largest Bitcoin exchange in the country, said in a phone interview before the PBOC announcement. Regulations would be for “the good of the consumer,” he said. BTC is seeking recognition of the currency so it can be used to buy goods and services instead of being used for speculation, he said.

‘Unsustainably High’

New rules for Bitcoin may not clarify Bitcoin’s legal status as regulators are divided over the issue, the people said. People are free to trade Bitcoin even as China refrains from recognizing it as a currency in the short term, PBOC’s Deputy Governor Yi Gang was cited by the 21st Century Business Herald as saying last month.

Bitcoin prices are unsustainably high and the virtual money isn’t currency, Greenspan said in a Bloomberg Television interview from Washington yesterday.

“It’s a bubble,” said Greenspan. “It has to have intrinsic value. You have to really stretch your imagination to infer what the intrinsic value of Bitcoin is. I haven’t been able to do it. Maybe somebody else can.”

A Justice Department official said Nov. 18 Bitcoins can be “legal means of exchange” at a U.S. Senate committee hearing, boosting prospects for wider acceptance of the virtual currency. Fed Chairman Ben S. Bernanke told the Senate committee the U.S. central bank has no plans to regulate the currency.

Fraudulent Sites

A local branch of China Telecom Corp. is accepting Bitcoins as deposits for a new Samsung Electronics Co. (005930) handset. Phone buyers can pay 0.1 Bitcoin to book a Samsung W2014 mobile phone for pickup starting Dec. 20, according to a statement posted on the internal website of China Telecom’s Jiangsu branch and confirmed by a customer service representative.

The growth of Bitcoin in China has come amid speculation that regulators may halt trading after police arrested three people on suspicion of stealing money from investors through a fake online exchange.

GBL, a Bitcoin trading platform that began operating in May and had 4,493 registered users at the end of September, abruptly closed on Oct. 26, the official Xinhua News Agency reported Dec. 3., citing police in eastern Zhejiang privince’s Dongyang city.

One investor who reported the case to the police claimed a loss of 90,000 yuan ($14,774), Xinhua reported, saying the total amount of money stolen was unclear. The Hong Kong Standard reported on Nov. 11 that investors may have lost as much as 25 million yuan after the site closed.

Regulators Concern

There are about 12 million Bitcoins in circulation, according to Bitcoincharts, a website that tracks activity across various exchanges. Bitcoin was introduced in 2008 by a programmer or group of programmers going under the name of Satoshi Nakamoto.

“The scale of the Bitcoin market isn’t significant enough to disrupt China’s financial system, but its growth has been very strong,” said Peter Pak, head of trading of BOCI Securities Ltd. in Hong Kong by phone. “Regulators might be worried that this could get out of control in one to two years if they don’t do something.”

To contact Bloomberg News staff for this story: Steven Yang in Beijing at kyang74@bloomberg.net; Simon Lee in Hong Kong at slee936@bloomberg.net

To contact the editor responsible for this story: Gregory Turk at gturk2@bloomberg.net