5 December 2013, 15:58

China warns banks against bitcoin transactions

China warns banks against bitcoin transactions

China's government has banned financial institutions from trading in bitcoin on Thursday, in what analysts said was a restrained first step towards regulating the digital currency that has exploded in popularity in China and soared in value in recent months. A statement by the central bank and four other agencies said that, while the computer-generated currency does not yet pose a threat to China's financial system, it carries risks. It did not, however, curtail the use of bitcoin by individuals.

The value of bitcoins on Chinese exchanges fell after the announcement, however, with one expert predicting the price could halve in the short-term. Digital currencies are generally highly volatile.

Bitcoins have seen their value, relative to the dollar, skyrocket by some 800 percent in the past two months as speculators have piled into the currency, according to bitcoinity.org.

While no official data is available, bitcoin market operators say Chinese nationals are major participants in the market and hold an outsized share of the total number of bitcoins in circulation. Shanghai-based BTC China has recently become the world's largest bitcoin exchange by volume.

A statement on the website of the People's Bank of China (PBOC) said that the government would act to prevent money laundering risks from bitcoin, which is not backed by a government or central bank.

The PBOC may have cause to be concerned about bitcoins, which are anonymous, untraceable, and can be carried on memory sticks or transmitted electronically, because they represent a potential hole in the country's capital controls.

However, analysts point out that, given the tiny value of the total bitcoins in circulation relative to other currencies, it is unlikely to have much impact on the wider economy.

More cause for worry is the way these digital currencies have engendered a new wave of creative criminality focused on hacking online platforms and stealing bitcoins stored there, and their potential for use in money laundering, bribery and purchases of illicit products such as drugs and weapons.

The government will require trading platforms that deal in virtual currencies such as bitcoin to register with telecommunications authorities, it said.

The notice was issued jointly by the PBOC, the Ministry of Industry and Information Technology, the China Banking Regulatory Commission and the China Securities Regulatory Commission and China Insurance Regulatory Commission.

"This is an industry that will need to be governed or regulated. The safety and the well-being of the common user has to be taken into consideration. All this is expected," said Ron Cao, Managine Director at Lightspeet Venture Partners, which recently invested $5 million in BTC China.

"'We've got a long way to go. This thing needs to be regulated at some point. We're studying it. Don't jump into it.' My read is that's the tone of the message."

Bitcoin traders sold on the Chinese government's announcement.

'Enormous ecommerce opportunity': Bitcoin fever spreads to Silicon Valley

Bitcoin has been making headlines in recent weeks, as the value of the virtual currency skyrockets beyond US$1000 each. Bitcoin fever has now spread to Silicon Valley. In recent weeks, digital currency firms have received venture capital funding in early rounds. Some of the firms include Circle Internet Financial which is headed by media technology industry entrepreneur Jeremy Allaire and Ripple Labs founded by Chris Larsen who also established Prosper, a peer-to-peer lending firm.

Prominent investors who have been drawn to the field include Jim Breyer, a partner at Accel an early backer of Facebook, as well as Google’s venture capital arm, which has invested in Ripple and Buttercoin, a Bitcoin exchange.

Fans argue that Bitcoin’s shared protocols and common technology standards, on which it is based, echo the open technologies that lie at the heart of the internet. That could make it the foundation for a low-cost, standards-based financial system independent of traditional banking .

Entrepreneurs such as Mr Allaire at Circle say this gives merchants a strong incentive to adopt the virtual currency, in that they would escape charges from payment card companies.

For consumers, using currencies like Bitcoin could present a way round fees and foreign exchange costs, which consume up to 10 percent of international remittances, said Mr Larsen. Also Bitcoin makes it easier to buy online.

However, Silicon Valley faces a number of hurdles if it wants to take a lead in the creation of a virtual financial system. Regulators in the US have been more cautious than in other countries, making banks nervous about setting up accounts for Bitcoin companies and putting a chill over investment in the new field.

Brazil, Germany and Russia took a more open stance, contributing to a wave of Bitcoin exchanges and other virtual currency start-ups in those countries, said Micky Malka of Ribbit Capital, a Silicon Valley investor in financial services.

Voice of Russia, Financial Times, RT, Reuters

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