A closer look at the ramifications of China’s bitcoin ban

Bitcoin has been on nothing short of a meteoric rise in recent years – especially in the last few months. After passing an exchange rate of $1,000 (£612) per Bitcoin last month, people have been speculating about a big drop. Now it’s possible that China will be the one to pop the Bitcoin bubble. On Wednesday, the country’s central bank banned financial institutions from trading in Bitcoins, or even from processing Bitcoin transactions.

The value of a single Bitcoin began the day at an average of over $1,200 (£735), but a sell-off started after the announcement started making the rounds. It was short lived, but the exchange rate did dip briefly below the $1,000 (£612) mark, and while it recovered, it is still down slightly today. So is this the beginning of a justifiable panic, or just a hiccup?

It’s not surprising the Chinese central bank would be wary of letting Bitcoin become more widely used – China is famous for its strict monetary controls. By keeping its currency from increasing in value, it makes exports cheaper and can more easily grow its economy by manufacturing iPhones and other electronic gadgets. Bitcoin, by contrast, has increased in value by orders of magnitude in the last few years.

The government also voiced concerns that the supply of Bitcoins is limited by design, but didn’t expand on why that’s an issue. We can, however, speculate that it could make Bitcoin harder to control as the Chinese central bank is used to doing with the traditional economy.

Bitcoin can also be used completely anonymously, which has led to fears of money laundering in many nations – not just in China.

The new restrictions stop short of banning Bitcoin entirely in China, but it will definitely put a damper on adoption of the cryptocurrency. Banks are not permitted to get into the Bitcoin game, but payment processors are also not permitted to take any payments in Bitcoin. Individual people are allowed to use Bitcoins, at least for now, but they take on the risks themselves.

However, a separate government posting warned people that many unregulated Bitcoin sites lack sufficient security safeguards, which is definitely not spin or propaganda; Bitcoins are stolen frequently and the victims have little recourse.

Recent events surrounding Bitcoin, like the infiltration of Tor-based Freedom Hosting and the arrest of Silk Road owner Ross Ulbricht, have managed to put short-term dents in the value of the cryptocurrency, but it’s always rebounded. Perhaps the only thing that can actually bring the value down long-term is regulation, but how do you regulate a completely decentralised system? Even China must be struggling with that one.

For more on the Bitcoin, see our article which looks at the Bitcoin value surge, and how long it could last.