China’s crackdown on bitcoin is a done deal, with the digital currency effectively made useless within its borders.
Bitcoin, its value already tanking on news earlier this month that banned Chinese banks from trading in the virtual currency, can no longer be used in commercial transactions of any kind after Lunar New Year in late January.
The People’s Bank of China issued a new ban on third-party payment processors like Alipay from doing business with bitcoin exchanges on Tuesday.
The announcement puts the whammy on legitimate uses in China — cheap, secure and efficient payments in the world’s second largest e-commerce market, with estimated 2012 revenue of US$210 billion.
The biggest impact, however, will be on Chinese “investors” who use Bitcoin to evade currency controls and anonymously move their funds out of the country. Bitcoin payment systems are accessible around the globe via the internet and feature irrevocable transactions.
WealthInsight estimates current illicit offshore assets of wealthy Chinese at more than US$650 billion.
After Lunar New Year, people in China can still own and trade bitcoin but they will only be able to buy and sell it for renminbi on a small scale by meeting up with people for one-on-one exchanges.
It’s China’s loss, said Adam Pasick at Quartz. “By shunning bitcoin, China, home to innovative e-commerce companies like Alibaba and an underdeveloped consumer banking sector, may be passing up the chance to leapfrog the rest of the world by fostering the growth of bitcoin-esque digital currencies and the secure, efficient payments that they may enable.”
For the uninitiated, bitcoin is an open source, peer-to-peer payment network and digital currency that is supposed to be used to pay for products and services. Merchants worldwide have an incentive to accept the currency because transaction fees are lower than the 2 to 3 percent typically imposed by credit card processors.
That said, commercial use of bitcoin is small compared to its use by speculators — the digital currency recently hit a high of US$1,240, up from US$13 a year ago, an increase of more than 9,000 percent. A single bitcoin today retails for about US$850, its price dropping US$200 overnight on China’s announcement.
Trading volume today at BTC China, China’s largest bitcoin exchange, topped world market share as Chinese speculators started to cash in before the holiday deadline.
Elsewhere, bitcoin is receiving mixed reaction.
In the US, Ben Bernanke, chairman of the Federal Reserve, said last month that virtual currencies like bitcoin offer potential as a cheaper alternative to the current system for transferring money around the world. The main use for bitcoins, as of November 2013, was for international money transfers, according to the Los Angeles Times.
Despite the Fed’s outstanding testimonial, many countries are wary. This past weekend, for example, Norway became the latest nation to officially weigh in on bitcoin, refusing to recognize it as real money and classifying it instead as an asset — like gold or stock shares — that is subject to capital gains tax.
Germany, South Korea and Thailand have also rejected bitcoin as legitimate currency while Switzerland and France are heading in that direction.
“Virtual currencies, perhaps most notably bitcoin, have captured the imagination of some, struck fear among others and confused the heck out of the rest of us, including me,” said US Senator Thomas R. Carper, chairman of the Senate Homeland Security and Governmental Affairs Committee.
Interestingly, JP Morgan, the world’s largest investment bank, has taken a step towards creating a bitcoin-style currency of its own, according to the Telegraph. Last week, it filed a lengthy patent for an electronic currency that experts hailed as a potential “bitcoin killer”. The document does not make any explicit references to bitcoin, the similarities are apparent. JP Morgan’s currency proposal would be “a new paradigm for effectuating electronic payments”, the bank said.
Although JP Morgan’s plan would be a threat to bitcoin, the fact that the bank is engaging in this battle at all is a hat tip to bitcoin’s increasing momentum.
Personally, I like the notion of bitcoin, perhaps best described before it even existed by Nobel laureate Milton Friedman in 1999.
Talking about the internet and what it could someday become, Friedman said that one ingredient was missing. He called it a “reliable e-cash”.
What was required, he said, was e-cash that enabled you to “transfer funds from A to B, without A knowing B or B knowing A — the way in which I can take a $20 bill and hand it over to you and there’s no record of where it came from. And you may get that without knowing who I am.”
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