So much for China’s willingness to tolerate financial innovation. Regulators have barred the country’s banks from trading bitcoin, while denying the pseudo-money legal status and cracking down on anonymous users. Though China has stopped short of an outright ban, the move dashes hopes the country might allow start-up currencies to exist alongside the official renminbi.
China’s crackdown is by far the most decisive by the world’s financial regulators to date. That’s probably because enthusiasm for bitcoin appears to have been greater there than in any other single country. Data from online exchanges suggests that China has in recent weeks accounted for around a third of global trading volume. For a while, Chinese bitcoin buyers were also paying a significantly higher price for their virtual stash than users outside the Middle Kingdom.
Though China has not made bitcoin illegal, the directive from the People’s Bank of China severely limits its potential uses. It is a “virtual good” without legal status. Financial institutions are banned from trading it – a significant step in a country where banks will accept copper and rubber as collateral for loans. Moreover, the PBOC has taken steps to limit the anonymity that makes bitcoin appealing as a means of exchange in illicit deals – or as a way around China’s capital controls.
The regulatory assault undermines the narrative that bitcoin is in the vanguard of a global shift toward new, computer-generated forms of money. With that new monetary age paradigm looking shaky, the virtual asset has lost a good portion of its speculative appeal. The price of bitcoin on BTC China, the country’s leading exchange, fell by about 20 percent following the ruling.
Devotees will still insist that government restrictions cannot undermine an asset which was devised as an alternative to state-controlled fiat currencies. It also remains to be seen whether other countries will adopt the same hard line. Nevertheless, bitcoin’s true believers are having their faith tested.
Peter Thal Larsen is Asia Editor of Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.